The High Court has knocked back an attempt to prevent payment by an insurer under a chain of demand guarantees intended to facilitate a Tanzanian construction project.

The second applicant (EPCM Tanzania) contracted with the fourth respondent (TSK) and agreed to construct two bagasse boilers. The first applicant (EPCM SA) concluded indemnity agreements, in terms of which an insurer would issue counter-guarantees for the performance of the construction agreement.

The insurer issued a performance guarantee and an advance payment guarantee, payable on first demand to the second respondent (Standard Chartered Bank (SCB) SA). There were several back-to-back guarantees issued with other parties due to insurance licensing requirements across borders (the parties operated in both South Africa and Tanzania). The obligations under the guarantees were to be triggered as follows: The contractor, TSK, would make a demand on SCB Tanzania. SCB Tanzania would then make a demand on SCB SA. SCB SA would make a demand on the insurer. The insurer in turn would look to EPCM SA under the indemnity agreements.

The guarantees were called on, and the applicants sought to interdict demand and payment by the insurer under the guarantees, alleging that the guarantees TSK called on had expired and that the demands were fraudulently made by TSK.

The court dismissed the application because the evidence showed that the guarantees had not expired, and there was insufficient evidence to ground an allegation of fraud. The court also found that the maxim that “fraud unravels all” does not extend up a chain of contracts: the fraud must be committed by, or known to, the party sought to be restrained. The insurer was not alleged to have acted fraudulently, nor to have knowledge of any fraudulent act. The fraud was alleged on the part of TSK, and could not interfere in the contractual obligations of the insurer, which were solely with SCB SA and EPCM SA.

The requirements of an interdict had not been met. Further, there was no contract between the applicant (a Tanzanian company) and the insurer (a South African insurer) due to the chain of contracts that existed between the various parties, leaving the applicant without a direct right to enforce their guarantee against the insurer. The applicant could continue to pursue their alternative remedy (arbitration under the construction contract) to resolve the dispute.

The case makes clear that an applicant seeking to prevent payment under a demand guarantee faces an uphill battle. So long as the demand itself is validly made, the underlying reason for the demand will not be grounds for refusing payment except on proven fraud on the part of, or to the knowledge of, the party being restrained will suffice.

EPCM Consultants SA (Pty) Ltd and Another v Guardrisk Insurance Co Ltd and Others