Should common law be developed to include unconscionability as a defence against guarantee payment?
Insights from the case of Imvula Roads and Civils (Pty) Ltd and Others v Holland Insurance Co. Ltd and Another (2024-104602) [2025] ZAGPJHC 12
The applicants sought urgent interdictory relief to prevent the second respondent from claiming performance guarantees from the first respondent. The dispute arose from two road rehabilitation contracts where the second respondent claimed the first applicant defaulted, leading to contract termination and subsequent demands on the guarantees.
The court examined whether the performance guarantees were conditional or on-demand. It also considered the principles of fraud and unconscionability in the context of performance guarantees.
Key legal precedents included cases like Lombard Insurance Co Ltd v Landmark Holdings and Dormell Properties 282 CC v Renasa Insurance Co Ltd.
The court found the guarantees to be on-demand, meaning the second respondent only needed to issue a written demand stating the contract was terminated due to the first applicant’s default. The court dismissed the applicants’ claims of fraud and unconscionability, stating there was no clear evidence of fraud and that the guarantees must be honoured as per their terms.
The applicants argued for the development of common law to include unconscionability as a defence against guarantee payment. They referenced the case of Sulzer Pumps Spain, SA v Hyflux Membrane Manufacturing (S) Pte Ltd, which outlines scenarios where unconscionability could be considered, such as calls for excessive sums or calls made for ulterior motives.
However, the court found that the existing common law, which includes the fraud exception, already provides necessary safeguards and that the applicants did not meet the lesser test for unconscionability.
What to take from the judgment:
- On-demand guarantees. These guarantees require payment upon demand without needing to prove the validity of the underlying contract termination.
- Fraud exception. Fraud must be clearly proven to prevent payment under an on-demand guarantee.
- Contractual autonomy. The guarantor’s obligation to pay is independent of the underlying contract disputes.
- Legal precedents. The judgment reinforces the principles established in previous cases, emphasising the autonomy of performance guarantees.
For advice relating to performance guarantees, contact Ricardo Pillay, Head of our Construction Team.
Article by Lonwabo Bhambatha and Ricardo Pillay