How conditional is a performance guarantee?

15 November 2021 470
“Our company recently had to provide a performance guarantee to guarantee work we have to do on a large civil project we have been contracted for. There have been a number of labour and environmental issues which have affected our ability to deliver with the contracted timeframes on the work, and the client is threatening to enforce our performance bond. Surely, this enforcement of the bond must be subject to reasonableness?”

A performance guarantee or bond is exactly what it implies – a promise by a party to complete certain work undertaken with a financial guarantee standing as backing to that promise. Most performance guarantees are accordingly underwritten by a financial institution or insurer that undertakes to pay when an entitled party calls on the guarantee in accordance with its terms.

The question is whether such a call on a performance guarantee is subject to conditions or can be made on any instance of non-performance of the work contractually secured by the guarantee. 

Recently our Supreme Court of Appeal had occasion to consider this position in the matter of South African National Roads Agency SOC Limited v Fountain Civil Engineering (Pty) Ltd and another. In this case Fountain Civil Engineering (FCE) approached the High Court for an interdict restraining South African National Roads Agency (SANRAL) to make any claim in terms of the performance guarantee that was issued by FCE, pending the outcome of dispute resolution proceedings between FCE and SANRAL. 

FCE succeeded in its initial application to the High Court, but the Supreme Court of Appeal overturned this decision, reasoning that “…the purpose of the performance guarantee ‘undoubtedly was to secure SANRAL’s position in the event of a dispute and pending the resolution thereof’; that the guarantee was unconditional…” Accordingly it was held that SANRAL could therefore call on the guarantee despite the fact that there was a pending dispute between the parties, as the guarantee was unconditional and not subject to the outcome of the dispute.

That said, performance guarantees are not always unconditional and may be linked to certain conditions or terms establishing when the guarantee may be called upon. Once these conditions or terms are however met, the performance guarantee can be called upon irrespective of whether there are other determining factors which a party feels should be considered before the guarantee is called upon. 

This makes the wording of any guarantee the vital element to establishing when and under which conditions the performance guarantee can be called on. In your case, it would therefore be advisable that you consult with your attorney and review the conditions of your main contract and performance guarantee to establish if and when the client may validly call on the guarantee.
Related Sectors: Construction