Demand Guarantees in the Construction Industry: Recent Developments in the Law Relating to the Fraud Exception to the Independence Principle

• Jurisdiction: South Africa
• Author: Lupton, C.
• Published date: 20 September 2020
• Date: 20 September 2020
• Citation: (2019) 31 SA Merc LJ 399
• Pages: 399-416

DEMAND GUARANTEES IN THE

CONSTRUCTION INDUSTRY: RECENT

DEVELOPMENTS IN THE LAW RELATING

TO THE FRAUD EXCEPTION TO THE

INDEPENDENCE PRINCIPLE

CAYLE LUPTON*

Assistant lecturer in Mercantile Law, University of Johannesburg

Abstract

Over the last decade or so, South African courts have had to decide

many cases relating to demand guarantees. This article is, however,

concerned with recent case law that dealt with fraudulent calls on

demand guarantees in construction disputes. In dealing with this

development, the article explores, in the first instance, the construction

context and the main legal features of demand guarantees

(documentary compliance and independence). It then deals with the

fraud exception to the independence principle. Against this

background, recent South African case law (

Phenix Construction

and

Group Five

) that explored the parameters and standard of proof of

this exception, is evaluated. Then the principle of documentary

compliance and bad or good faith on the part of the beneficiary is

evaluated with regard to their respective relations to the fraud

exception. In this respect, attention is paid to the judgments of the

High Court and the Supreme Court of Appeal in

Raubex

Construction v Bryte Insurance.

The article concludes with a brief

reflection on the principles analysed in the case law, and confirms that

the recent developments in the law relating to fraud are in alignment

with international trends.

IINTRODUCTION

In short, a demand guarantee can be characterised as a strong security

instrument.

1

The International Chamber of Commerce def‌ines a

demand guarantee in article 2 of its 2010 Uniform Rules for Demand

*LLB LLM (UJ); Attorney of the High Court of South Africa.

1

Also known as independent undertakings, performance bonds/guarantees, tender

bonds/guarantees, independent guarantees, bank guarantees, and default undertakings. See

399

(2019) 31 SA Merc LJ 399

© Juta and Company (Pty) Ltd

Guarantees (‘URDG 758’)

2

as ‘any signed undertaking, however named

or described, providing for payment on presentation of a complying

demand’. In contradistinction, a letter of credit is a strong payment

instrument.

3

As a result of the many forms encountered, letters of credit

are best described in general terms.

4

Goode, for example, suggests that ‘a

documentary credit is in essence a banker’s assurance of payment

against presentment of specif‌ied documents’.

5

Over the years both

instruments have secured a strong presence in international commerce.

6

To this end, English courts have aptly described these instruments as the

‘lifeblood of commerce’.

7

This is only natural as both demand guaran-

tees and letters of credit satisfy their purpose by ensuring that the

commercial transaction, particularly in terms of payment with regard to

letters of credit, is secure. Given their similarity in function and the legal

principles that demand guarantees and letters of credit share, cases

dealing with the one instrument are regularly referred to in cases relating

to the other.

Over the last decade or so, demand guarantees, particularly in a

construction context, have received much attention in South African

case law. This article concerns recent South African case law that dealt

with fraudulent calls on demand guarantees in construction disputes.

Attention is given to the judgments of Opperman J in Phenix Construc-

tion Technology Ltd & another v Hollard Insurance Company Ltd,

8

Van

der Linde J in Group Five Power International (Pty) Ltd v Cenpower

Generation Company Ltd & others,

9

Fisher JinBryte Insurance Company

Kelly-Louw, Selective Legal Aspects of Bank Demand Guarantees (unpublished LLD thesis,

University of South Africa, 2009) 1.

2

See ICC Publication No 758, Paris (2010).

3

Letters of credit are also commonly referred to as documentary credits and bankers’

irrevocable credits. For a detailed treatment, see Hugo, The Law Relating to Documentary

Credits from a South African Perspective with Special Reference to the Legal Position of the Issuing

and Confirming Banks (unpublished LLD thesis, University of Stellenbosch, 1996).

4

Hugo, ‘Payment in and Financing of International Sale Transactions’, in Sharrock (ed),

The Law of Banking and Payment in South Africa (Juta 2016) 394 at 403.

5

McKendrick, Goode on Commercial Law 5 ed (Penguin 2017) 14–16.

6

Horowitz, Letters of Credit and Demand Guarantees: Defences to Payment (Oxford

University Press 2010) paras 1.05–1.06; Kelly-Louw, ‘Construction of Demand Guarantees

Gone Awry: Minister of Transport and Public Works v Zanbuild Construction’ (2013) 25(3) SA

Merc LJ 404 at 410.

7

RD Harbottle (Mercantile) Ltd v National Westminster Bank Ltd 1977 (2) All ER 862 (QB)

870b. The phrase was repeated, inter alia,inEdward Owen Engineering Ltd v Barclays Bank

International Ltd [1978] 1 All ER 976 (CA) 983; Intraco Ltd v Notis Shipping Corporation (the

Bhoja Trader)[1981] 2 Lloyd’s Rep 256 (CA) 257; and, in South Africa, Loomcraft Fabrics CC

v Landmark Holdings (Pty) Ltd 1996 (1) SA 812 (A) 816E and I.

8

(10995/2015) [2017] ZAGPJHC 174 (4 May 2017).

9

(41068/2008) [2018] ZAGPJHC 663 (16 November 2018).

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