Aspects of substantial compliance and strict compliance as applied to demand guarantees

Abstract

Demand guarantees are essential for purposes of commerce and are used to secure the performance of the contractor. South African courts have held that demand guarantees are akin to letters of credit. Despite the independent nature of demand guarantees to the underlying contract, in circumstances where the beneficiary has made a fraudulent claim, the guarantor may dishonour the demand or claim. South African courts have indicated that if the underlying contract is illegal, courts may intervene by granting an interdict to stop payment under the guarantee. The South African law recognises traditional guarantees (often called suretyship) where the beneficiary, when making a demand or claim, must demonstrate liability on the part of the contractor. There are instances where courts have held that guarantees were of a nature akin to suretyship. In South Africa, parties entering into a demand guarantee contract are subject to the common law of contract. The Uniform Rules for Demand Guarantees, adopted by the International Chamber of Commerce, are only applied by explicit reference in the demand guarantee failing which such rules do not apply. Non-implementation of these rules has resulted in rigorous litigation in the recent years on this subject-matter. A demand must be supported by documents and require strict conformity. However, strict compliance with the prerequisites of the demand guarantee has not been applied consistently in South Africa. South African courts have recently been applying substantial compliance, in certain circumstances finding that a term in a guarantee is just directory and not obligatory. Furthermore, on many occasions, courts have deviated from strict compliance holding that a term in a guarantee does not make commercial sense thus such term is not mandatory. In this way, courts apply the most business-sensible interpretation when interpreting demand guarantees.