Patrick Bracher, Norton Rose Fulbright
The Supreme Court of Appeal has again emphasised that a performance guarantee in terms of which the guarantor undertakes to pay an amount if the contractor fails to perform the required work is unconditional. The beneficiary of the guarantee is not obliged to prove an entitlement under the principal contract before it can make a demand on the guarantee. A claim on the guarantee was permissible regardless of disputes under the main contract. In this case, the performance guarantee had been granted on the basis that it was subject to the sole approval of the beneficiary.
The contractor sought to interdict payment under the guarantee alleging that it had lawfully terminated the main contract because of impossibility to perform its obligations. This allegation was disputed but it was irrelevant for the purposes of enforcement of the guarantee. An order by the lower court requiring the parties to go to arbitration was also impermissible because it would re-write the contract for the parties.
These attempts to convert unconditional guarantees into conditional guarantees almost invariably fail in the courts.
First published by: Financial Institutions Legal Snapshot
Get the latest issue of FAnews