On-demand, irrevocable, unconditional, and independent from underlying agreements are some of the fundamental characteristics of performance guarantees in South African infrastructure, construction, and project-related landscapes. This was reaffirmed by the High Court judgment of Bombela Operating Co (Pty) Ltd v Nedbank Ltd and Others.
Performance guarantees include preferred contractor or bid bonds, advance payment guarantees, performance bonds, and warranty bonds. This form of security underpins contractual performance in the event of non-performance of contractual obligations by a counterparty. The value of the performance guarantees usually equates to a percentage of the total contract value (being the cause of extensive commercial debate), which the issuer of the guarantee will pay to the affected party when a demand for payment is made, and within a specified period. The obligation on the issuer to pay is isolated from any alleged disputes arising out of the underlying contract from which the guarantee was issued. This independence assists in avoiding payment delays that might result from extended factual disputes concerning the validity of an alleged breach.
In this case, the operator of the Gautrain applied to interdict the bank from paying an amount of about R206 million guaranteed by the performance bond to the operator’s employer. The employer calling for the payment of the guarantee after the operator had defaulted under the operator contract, was served with a default notice, and thereafter failed to rectify the default. In its attempt to interdict payment, the operator submitted to the court that the bond was not a standard bond but a conditional bond, and that the conditions for payment had not been met. It further contended that due to the bond being a conditional bond, the bank was required to make reasonable inquiries to determine if the bond caller was entitled to payment, as demanded. The court found that the “bond guarantee is independent of the underlying contract” and, that the employer, “has only to demonstrate that it has made a demand to be entitled to immediate payment”, thereby reiterating the unconditional nature of a performance guarantee. In such circumstances the issuer of the bond is obliged to make payment in accordance with the demand.
A fundamental feature of an on-demand guarantee is that the issuer’s liability is independent from the underlying contract. Once a conforming demand is made, the issuer must adhere to the demand made. The one exception to this position is fraud. While disputes about default should be pursued under the underlying contract, they cannot delay the issuer’s obligation to pay under a properly called guarantee, making precise wording and risk allocation at the outset essential to avoid unwelcome surprises later.
Bombela Operatin CO (Pty) Ltd v Nedbank Limited and Others (249754/2025) [2026] ZAGPJHC 9