Demand Bonds - A Pound Of Flesh

The good news for the beneficiary of an on-demand bond or guarantee, also known as a performance bond, advance payment bonds, tender bond and letter of credit or irreversible documentary credit1, is that the surety's liability is triggered more often than not upon the mere demand or call by the creditor, provided the call is expressed in accordance with any requirements of form which are to be inferred from the wording of the bond.2

In those cases the occurrence of the event or document or the making of the demand in the appropriate form will over-ride any need to establish the accuracy or justification of any facts or alleged facts, such as the failure of due performance under the principal contract on which the bond or guarantee may have been nominally conditioned.3

Demand bonds are forms of guarantees with the distinctive characteristic that the guarantee can be called irrespective of the true state of affairs between the debtor and the creditor, provided a demand which complies with the terms of the bond is made.4

Demand bonds are a means of ensuring performance of the contractor's obligations. Commonly, bonds are now provided at a fixed percentage of the contract price. The employer can then call down the bond by asserting a breach of contract without having to prove the breach to the bank. The bank is then required to pay, apart from fraud, if the demand is in proper form and is not entitled to investigate the true position.

Established fraud on the part of the beneficiary is the exception to the rule that no regard should be had to the underlying transactions.

"Ö (Where) the seller, for the purposes of drawing on the credit, fraudulently presents to the conforming bank documents that may contain, expressed or by implication, material representations of fact that to his (the seller's) knowledge are untrue."5

In such an instance, the fraud must be brought to the attention of the bank before payment to the beneficiary is made.

The beneficiary of credit who is knowingly a party to forged documents or documents that otherwise facilitated the perpetration of a fraud in the transaction, would acquire no rights to any of the future proceeds contemplated by the credit.6

The onus of establishing fraud is the ordinary civil one, that is the balance of probabilities, but as in other instances where fraud is alleged, it will not be lightly inferred.7

The representation of the irregularity in regard to the transaction continues up to the moment of payment. Accordingly where the beneficiary's claim against the ultimate debtor is discharged before payment in terms of the documentary credit, the beneficiary is equally guilty of fraud where it persists in its efforts to obtain payment in terms of the documentary credit.

The essential feature of an irrevocable documentary credit is the establishment of a contractual obligation on the part of the bank to pay the...