The Autonomy of On-demand Construction Guarantees: Why Payment Should Follow the Demand, not the Dispute

In the fast-paced world of construction and infrastructure development, on-demand construction guarantees are a vital cornerstone of financial security for an employer. These guarantees are designed to ensure that contractors meet their obligations, and when they don’t, employers can access funds to keep projects moving. But to truly understand their value, one must appreciate their defining feature: autonomy.

An on-demand construction guarantee is a standalone financial instrument, usually issued by an insurer or bank (as the guarantor), that provides assurance for a contractor’s obligations under a construction contract. Unlike other forms of security, it is not tied to the underlying contract. Its power lies in its independence. 

If contractual obligations are not met, whether due to incomplete work or breaching contractual terms, the employer can call on the guarantee. Importantly, the guarantor’s obligation to pay is triggered by submission of a valid written demand, and does not require proof of the contractor’s breach. This means that payment can be made promptly without jeopardising the project. 

Courts in South Africa have consistently upheld this principle, reinforcing the guarantee’s commercial utility: it provides immediate access to cash flow when it’s needed the most. Despite their autonomy, and based on an argument that underlying contractual disputes should delay or block payment, calls on these guarantees are occasionally challenged in urgent court proceedings. That sort of argument misconstrues the purpose of the guarantee and erroneously treats it as a type of security that can be withheld or contested pending final resolution of contractual disputes. 

But an on-demand guarantee is not a tool for rebalancing equities or resolving disputes. It is a financial safeguard. The proper time for debating issues like liability for delay, default, or defective workmanship is at a trial or arbitration on the merits and not when assessing the guarantor’s payment obligation following a valid demand on a guarantee. These legal challenges often lead to escalating legal costs, project delays, reputational damage, and strained relationships with guarantors and project partners. While outcomes may vary depending on the facts, these cases can be difficult to win, given the strength of well-established legal principles. The autonomy of the guarantee draws a clear line in the sand – challenging it, without proper grounds, is ill-advised. 

At the same time, guarantors often find themselves caught in the crossfire of substantive disputes between contractors and employers. However, the guarantors remain contractually bound to honour a valid demand on a guarantee. When a guarantor is prevented from making payment on a valid demand, it exposes them to legal risks as well as reputational harm, as their reliability and neutrality in the industry can be seen to be compromised.  

South African courts do recognise a narrow exception: fraud. If a demand is clearly fraudulent or made in bad faith, the courts may intervene. But proving fraud is a high bar to overcome. The employer’s demand must be shown to have been made fraudulently or in bad faith, not merely based on a difference in opinion between the employer and contractor. 

On-demand construction guarantees are not the battlefield for substantive disputes between the contractor and employer. They are the backbone of financial stability in construction contracts. Their independence ensures that employers can access funds quickly, keeping projects moving even when problems arise. Respecting their autonomy is essential for all stakeholders. While this may seem harsh, especially in the midst of an active dispute, the autonomous nature of on-demand construction guarantees is what makes them so valuable.