This blog was co-authored by Adriaan Lourens, Candidate Attorney.
In July 2025, the high court again confirmed the well-established principle that demand guarantees are independent of the underlying contract. A guarantor must pay upon receipt of a valid demand, even if disputes exist between the parties to the underlying agreement. This obligation can only be set aside if fraud is proven.
The dispute arose from a sale agreement between a buyer and a seller involving a complex deferred payment arrangement, secured by demand guarantees issued by two banks in favour of the seller. The buyer paid the first instalment, but a dispute developed between the buyer and the seller over the outstanding amount, which was referred to arbitration.
Pending the arbitration, the seller demanded payment from the guarantors based on its own calculations, without disclosing the prior payment it received from the buyer. On learning of this, the buyer sought an urgent interdict, alleging that the omission rendered the demand fraudulent and was a bad faith attempt to circumvent arbitration.
The seller contended that the guarantees created self-standing obligations, enforceable upon presentation of a demand. It denied any fraudulent conduct and argued that it had acted in accordance with its interpretation of the terms of the guarantees, which only required that the final amount demanded be stated.
In its judgment, the court reaffirmed that a demand guarantee is an autonomous contract, separate from the underlying sale agreement. Guarantors must pay upon a valid demand regardless of disputes between the underlying parties. The only exception is a clear case of fraud.
The court emphasised the high standard for proving the elements of fraud in this context. Fraud requires wilful and malicious intent to deceive by knowingly presenting material misrepresentations of fact. It is insufficient to show the seller’s claim was incorrect or based on a misunderstanding.
The court found the buyer failed to meet this threshold. The seller’s actions could reasonably be explained as an accounting error or a good-faith dispute over the interpretation of the terms of the guarantees. While contested, the seller’s interpretation was not so implausible as to infer fraud. The court also noted the seller’s transparency in copying the buyer on correspondence with the guarantors and providing clarifying information to the guarantors worked against a finding of fraud.
The court held the buyer had adequate alternative remedies. The dispute was already subject to international arbitration, and the buyer could recover any overpayment from the seller, especially since the sale agreement still required future payments. The buyer’s concern over recovering overpaid funds was dismissed as lacking merit.
The court found the buyer had no clear right to interfere with the contractual relationship between the seller and the guarantors. It was for the guarantors to interpret the guarantees and decide the payable amount. The buyer could not impose terms on this separate contract.
This case is important for all parties to commercial agreements secured by guarantees, confirming that demand guarantees are independent contracts requiring payment upon a valid demand, regardless of disputes between the underlying parties. The only ground to refuse payment is proven fraud. The transparent practice of the beneficiary copying its contractual counterparty on all correspondence with the guarantor is a sound one.
The full judgment can be accessed here: