Unconscionability and a breach of a negative stipulation in the underlying contract as exceptions to the autonomy principle of demand guarantees in South Africa

Abstract

Demand guarantees are an established part of international trade and construction. They are traditionally simple instruments under which the obligation to pay a beneficiary a fixed or up to maximum sum arises merely upon presenting a demand in the prescribed form, sometimes with supporting documents if required thereunder. The autonomy/independence principle, which mandates non-interference with the obligation to pay under a demand guarantee on any ground extraneous to the demand guarantee itself, is a fundamental cornerstone of demand guarantees. It is complemented by their documentary nature which requires the determination of whether a demand is compliant and triggers a payment obligation to be based on the presented documents alone, as appraised against the requirements in the demand guarantee. Over time a limited number of exceptions to the autonomy principle, e.g., fraud and illegality in the underlying contract, have gained recognition, including under South African law. Whether further exceptions should be recognised is a pertinent question and has arisen before South African courts, the answer to which is devoid of consensus. Recognising further exceptions to the autonomy principle carries significant consequences. Going too far in one direction would erode the autonomy principle and, consequently, the nature and utility of demand guarantees. Leaning too far in the opposite direction and doggedly applying the autonomy principle may promote abuse and undermine demand guarantees. This thesis will examine how well (or not) the breach of negative stipulation and unconscionability exceptions are developed, their pros and cons and what further developments could enhance clarity regarding their position under South African law. Jurisdictions with more mature and established positions in respect of demand guarantees and exceptions, particularly Australia, and England which has historically influenced aspects of South African law, are useful sources of guidance. International rules/standards, the UNCITRAL Convention and any guidance they may offer will also be considered. How they address the two exceptions and what South Africa can learn will be examined. This thesis is intended to be a comprehensive resource and original contribution to crafting a clear South African law position in this regard.