A Case in Point | Understanding On-demand Guarantees | October 2026

A CASE IN POINT – OCTOBER 2026

UNDERSTANDING ON-DEMAND GUARANTEES
IN LIGHT OF THE SET SQUARE AND INVULA ROADS JUDGMENTS

In the construction industry, few instruments are more powerful and more misunderstood than the on-demand guarantee (ODG).  Two recent judgements, one by the Supreme Court of Appeal – Set Square Developments (Pty) Ltd v Power Guarantees^[1] – and the other by the Johannesburg High Court – Imvula Roads and Civils (Pty) Ltd v The Hollard Insurance Co Ltd^[2] – remind us of a principle that is as commercially important as it is legally settled:

WHEN AN ODG IS CALLED UP, IT MUST BE PAID
– NO “IFS” NOR “BUTS”, AND VIRTUALLY NO EXCEPTIONS.

WHAT IS AN ODG?

An ODG is:

1. Not an insurance contract;
2. Not a conditional guarantee;
3. Is a unique type of contract, a financial instrument in a class of its own.

An ODG, also referred to as a “performance bond” or a “call bond”, is a financial instrument issued by a guarantor (typically a bank, insurer or other financial institution) in favour of a beneficiary (usually an employer in terms of a construction contract).  The guarantor undertakes an unconditional, primary obligation to pay to the beneficiary a specified sum upon presentation of a written demand, which complies with the terms stipulated in the ODG, in the event of a contractor being in breach of the construction contract concluded between the employer and the contractor.  All that is required from the employer/beneficiary is to deliver a demand to the guarantor in accordance with the terms and in the manner as agreed upon in the ODG.  As a rule, the demand must contain an allegation that the contractor is in breach of the construction contract.

The principal commercial purpose of an ODG is to place the employer in funds to complete the works in the event of breach by the contractor.

One of the consequences of an ODG is that it normally contains a claw-back provision: the guarantor may reclaim from the contractor what it had paid to the employer in terms of the ODG.  It is for this reason that a demand in terms of an ODG very often becomes the subject matter of litigation in the sense that contractors resist the validity of such a demand for obvious reasons – once the guarantor pays the employer, the contractor’s proverbial neck will be on the block to compensate the guarantor for what it has paid to the employer.  Other reasons for a demand in terms of an ODG resulting in litigation include that the guarantor resists payment to the employer for any number of reasons, including that the employer’s demand does not comply with the terms of the ODG.

THE AUTONOMY PRINCIPLE

The essential character of an ODG lies in its autonomy.  An ODG constitutes a separate and independent contractual obligation on the guarantor to make payment to the employer, divorced from the underlying construction contract that gave rise to it.  The only link between the ODG and the construction contract is that the demand must contain an allegation to the effect that the contractor is in breach of the construction contract.  That will normally trigger the employer’s right to deliver a demand for payment in terms of the ODG.

It was already settled more than 15 years ago by the Supreme Court of Appeal in Lombard Insurance Co Ltd v Landmark Holdings (Pty) Ltd^[3] that the guarantor’s obligation is absolute, primary and independent.  The beneficiary (usually the employer) does not have to prove that the contractor actually breached the underlying agreement.  Formal compliance with the demand requirements in the instrument itself is all that is required and nothing more.

The foundational authority of the autonomy principle is Loomcraft Fabrics CC v Nedbank Ltd^[4] in which the Supreme Court of Appeal held that a guarantor is contractually obliged to honour a compliant demand without inquiring into the underlying transaction (the construction contract). Courts will not interfere with that obligation, save in the most exceptional circumstances. Those exceptional circumstances will be dealt with below.

The autonomy principle has become entrenched through a clear line of judgments by the Supreme Court of Appeal:

• Dormell Properties 282 CC v Renasa Insurance Co Ltd;^[5]
• Guardrisk Insurance Co Ltd v Kentz (Pty) Ltd;^[6]
• Coface South Africa Insurance Co Ltd v East London Own Haven;^[7]
• Joint Venture between Aveng (Africa) (Pty) Ltd / Strabag International GMGH v South African National Roads Agency (SoC) Ltd,^[8]

and more recently, the judgement in Set Square referred to above.

The autonomy principle has been expressed and applied consistently.  As the Supreme Court of Appeal stated in Guardrisk, on-demand guarantees function as commercial instruments comparable with irrevocable letters of credit.  The guarantor must honour the demand according to its terms, without reference to or reliance on the merits of any dispute related to or arising from the underlying contract that gave rise to an autonomous ODG.

Pay now, argue later.  Any entitlement to recover a payment, which might ultimately turn out to have been unwarranted, is resolved through subsequent accounting between employer and contractor, after the ODG has been honoured.  Allowing Courts to investigate or determine underlying disputes first would undermine commercial certainty and the very efficacy of ODGs.

FRAUD: THE ONLY EXCEPTION

There is only one recognised exception to the autonomy principle, namely fraud.  Even in the case of fraud, the exception is construed narrowly.  In terms of the judgments in Loomcraft and Guardrisk, the fraud exception applies only where the beneficiary, in presenting its demand to the guarantor in bad faith/mala fide, makes a material representation of fact that it knows to be false.

Therefore, to successfully resist compliance with the terms of an ODG, the party seeking absolution from it would be required, on a balance of probability, to prove both knowledge of falsity and subjective bad faith/mala fides.  Error, misunderstanding, an incorrect interpretation of contractual rights and the like do not constitute fraud in this context.  As the Supreme Court of Appeal has held in Set Square, the party alleging fraud bears the ordinary civil onus.  In the context of an ODG this is not an onus which is easily satisfied.

SET SQUARE AND IMVULA ROADS

The judgments in Set Square and Imvula Roads both had their origin in construction contracts where proper performance formed the essential grounds of dispute.  In both, the contractors resisted payment by the guarantor in terms of the respective ODGs by challenging the validity of the employers’ termination of the construction contracts.  In other words, in both instances, the contractors disputed that they were in breach of the construction contracts.

Natural and understandable judicial instinct dictates that, when the facts suggest that an employer might have acted unfairly, it feels wrong to enforce payment without scrutinising what actually happened.  Prima facie, this appears to fly in the face of universally accepted concepts of procedural fairness, including the audi alteram partem principle.

In Set Square the Pretoria High Court initially refused payment on two of three ODGs.  On one ODG it held that the contractor had terminated the construction contract first, making the employer’s demand border on fraud.  On the other it held that the employer’s failure to provide proper site access made the demand unconscionable.  The Pretoria High Court’s judgement in Set Square reflected a natural tendency towards sympathy for the contractor’s position but it was, with respect, clearly wrong and not in line with the legal nature of an on-demand guarantee.  The aforesaid two aspects of the Pretoria High Court’s judgment in Set Square were both set aside by the Supreme Court of Appeal.

In Imvula Roads the contractor argued that its delays were excusable, that the employer had failed to follow contractually dictated procedures before terminating the construction contract, and that the employer’s demand in terms of the ODG was therefore fraudulent.  The Johannesburg High Court, in paragraph 66 of its judgment, re-iterated the established principle that whatever disputes may arise between the employer and the contractor is of no consequence insofar as the guarantor’s obligation to pay is concerned.  The guarantor’s liability is to honour the ODG when a compliant demand is made.  In paragraphs 67 and 68 of the judgment the Johannesburg High Court held that, in this instance, there was no proof of fraud.  In paragraph 71 of the judgment, the Johannesburg High Court also re-iterated the established principle that fraud is never lightly presumed, it needs to be proved and there has to be clear factual evidence of fraud.  There needs to be relevant fraud and there has to be mala fide dishonesty with the intention to defraud.  A bona fide belief in one’s right to terminate a contract, even if that belief turns out to be incorrect, does not constitute fraud.  The outcome was that the Johannesburg High Court declined to refuse payment by the guarantor in terms of the ODG.

The lesson to be learnt from the judgments in Set Square and Imvula Roads is that, when dealing with an ODG, one should actively guard against conflating a bona fide contractual dispute with the narrow legal concept of fraud.  South African law does not permit Courts to determine who was right and who was wrong before payment has to be made in consequence of a compliant demand arising from an ODG.

Determination of the question regarding who was right and who was wrong comes at a later stage, either by means of alternative dispute resolution such as arbitration, or by means of litigation, but only after the guarantor has paid the beneficiary in terms of the ODG.

UNCONSCIONABILITY IS NOT AN EXCEPTION IN SOUTH AFRICAN LAW

In the Johannesburg High Court judgment, Joint Venture comprising Gorogang Plant and Razz Civils v Infiniti Insurance Limited^[9],  a contractor facing devastating financial consequences argued that the employer’s call on the applicable ODG was unconscionable.  The contractor argued that the guaranteed sum was excessive, that the employer had caused the very delays it complained of, and that calling on the ODG under these circumstances was an unconscionable abuse of contractual power.

The Johannesburg High Court was unmoved by the contractor’s unconscionability argument.  It held that recognising an unconscionability exception would effectively convert ODGs into conditional bonds, imposing an unwarranted higher threshold and undermining the basic commercial purpose of the instrument.  The existing fraud exception already provides adequate safeguards against potential abuse and everything else, however unfortunate, must be resolved later.

In dismissing the contractor’s reliance on unconscionability as an exception to payment in terms of an ODG, the Johannesburg High Court’s judgment in Gorogang aligns with the Supreme Court of Appeal’s judgment in Set Square to the effect that there is no precedent in South African law for recognising unconscionability as an exception for escaping liability in terms of an ODG.

SHOULD THE COMMON LAW BE DEVELOPED?

There are calls for common law development to include unconscionability as an exception for escaping liability in terms of an ODG.  There may or may not be merit in such calls.  Critics argue that strict application of the autonomy principle allows employers to weaponize guarantees, calling on them even when the employer’s own conduct caused the contractor’s default or when termination of the construction contract was procedurally defective.  The potentially devastating financial impact on contractors of a strict application of the autonomy principle in the context of an ODG is self-evident.

The judgment of the Singapore High Court in Sulzer Pumps Spain SA v Hyflux Membrane Manufacturing (S) Pte Ltd^[10], explained that the unconscionability exception exists to address situations where the beneficiary’s conduct is so objectionable that allowing a successful call on an ODG would be inequitable.

The proposition in support of an unconscionability exception was argued in both Set Square and Imvula Roads.  In both instances the Courts dismissed the arguments.

Consequently, for now, the position in South African law remains that unconscionability is not recognised as an exception to a demand in terms. of an ODG.  A call on an ODG can only be resisted through reliance on fraud.

Against the call for common law development, the commercial argument for maintaining the status quo is compelling.  An ODG derives its value precisely from its unconditional character.  If this value is eroded by, for example, allowing an enquiry into underlying disputes before enforcing liability in terms of ODGs, they will become conditional bonds in all but name.  Lenders, employers and project financiers price risk on the basis that a compliant demand will be honoured and that Courts will enforce compliance.  Uncertain and subjective concepts like unconscionability would undermine the instrument’s commercial value and would, ultimately, harm the construction industry.  The Constitutional Court’s guidance in Beadica 231 CC v Trustees for the Time Being of the Oregon Trust^[11] re-inforces this position, which is rooted in the principle that contracts must be honoured/pacta sunt servanda est.

In short, parties who agree to include an ODG in their commercial relationship, are deemed to do so with full knowledge of the unconditional effect thereof and must be prepared to give full effect thereto, irrespective of the consequences.

CONCLUSION

The message from Set Square and Imvula Roads is clear: when a compliant demand is made in terms of an ODG the guarantor is obliged to pay.  Courts will not look behind the instrument and the demand and it will not adjudicate any underlying dispute.  Unconscionability, commercial hardship, a disputed cancellation?  These are not exceptions.  The single gateway to relief is fraud and even that gateway is extremely narrow, for good commercial reasons.

The commercial certainty provided by ODGs is their very lifeblood, not only for employers, contractors and financiers but for the construction industry as a whole.

Parties to construction contracts would be well advised to seek guidance from the judgments referred to above before they agree to the inclusion of an ODG in their commercial relationship with an employer.  The consequences of doing so without professional advice could be disastrous.  A wise approach would include careful negotiation and meticulous drafting from the start such as, for example, requiring adjudication before a demand may be made, limiting the circumstances under which a demand may be made, or capping the amount that may be demanded.  As is evident from the judgments referred to above, South African Courts are bound by the principles laid down by the Supreme Court of Appeal.  It will serve no purpose to argue otherwise once an ODG is concluded and a demand is delivered in terms thereof.

 

Adv Simphiwe Madima

The Maisels Group

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