A May 2025 High Court judgment found that a guarantor who failed to reject a second call on an on-demand performance guarantee within five days was bound to honour the demand. The terms of the guarantee incorporated the Uniform Rules for Demand Guarantees (the URDG) which precluded the guarantor from later disputing the demand on the basis of non-compliance if the demand was not rejected within the stipulated five day period after it was made.
The beneficiary was the beneficiary of an on-demand performance bank guarantee issued by the bank as the guarantor to secure the contractor’s obligations under a construction contract. The beneficiary terminated the construction contract and called on the guarantee for the full amount (R32million) on 10 June 2020. The guarantor rejected the demand, for non-compliance with signatory conditions. The beneficiary made a second demand on 19 June 2020 for a reduced amount (R22 million), on the day the guarantee was due to expire. The guarantor neither rejected this second demand nor made payment. Instead, the bank treated the second demand as merely a renewal of the earlier 10 June 2020 demand, which had already been rejected.
The court disagreed. It held that the two demands were distinct and that the guarantor was required to respond to each, separately. Although both demands were technically non-compliant with the conditions of the guarantee, the guarantor had only rejected the first demand. The URDG provides that if the guarantor does not reject a guarantee for non-compliance within five days of demand, it is precluded from relying later on the defects in the demand. The guarantor’s silence on the second demand meant that it was bound to honour it.
The guarantor also argued that enforcing the demand would be unconscionable. The court rejected this argument holding that unconscionability is not a recognised defence to an otherwise effective demand, and the beneficiary’s conduct was reasonable throughout.
The guarantor was ordered to pay the amount of the second demand (R22 million).
This judgment is another example of the strict nature of on-demand guarantees and why parties must ensure strict compliance with their terms