On-Demand Bonds: Is Substantial Compliance Enough?

The Supreme Court of Appeal has also, on several occasions, articulated the guarantor's obligation to make payment in terms of a letter of credit or on-demand bond.

Thus in Lombard Insurance Co. Limited v Landmark Holdings (Pty) Limited 2010 (2) SA 86 (SCA), the Supreme Court of Appeal described an on-demand bond as:

... not unlike irrevocable letters of credit issued by banks and used in international trade, the essential feature of which is the establishment of a contractual obligation on the part of a bank to pay the beneficiary (seller). ... The bank undertakes to pay provided only that the conditions specified in the credit are met. The only basis upon which the bank can escape liability is proof of fraud on the part of the beneficiary.

The importance of on-demand bonds was previously emphasised by the full bench of the Supreme Court of Appeal in Loomcraft Frabrics CC v Nedbank Ltd and Another 1996 (1) SA 812 (A). The Appeal Court quoted the following from the English decision of Intraco Ltd v Notis Shipping Corporation (The Bhoja Trader) [1981] 2 Lloyd's Rep 256 (CA):

Irrevocable letters of credit and bank on-demand bonds given in the circumstances such as that they are the equivalent of an irrevocable letter of credit have been said to be the lifeblood of commerce. Thrombosis will occur if, unless fraud is involved, the Courts intervene and thereby disturb the mercantile practice of treating rights thereunder as being the equivalent of cash in hand.

In another decision of our Appeal court, in OK Bazaars (1929) Ltd v Standard Bank of South Africa Ltd 2002 (3) SA 688 (SCA), the following was said about letters of credit:

The documents that are to be presented (which invariably include documents of title to the goods in question) are stipulated by the customer and the issuing bank generally has no interest in their nature or in their terms ... It's interest is confined to ensuring that the documents that are present conform with its client's instructions (as reflected in the letter of credit) in which event the issuing bank is obliged to pay the beneficiary. If the presented documents do not conform with the terms of the letter of credit the issuing bank is neither obliged nor entitled to pay the beneficiary without the customer's consent.

Guarantors have, in practice, relied on the English law doctrine of strict compliance when assessing their risk in issuing on-demand bonds, and will only make payment in terms of an on-demand bond if...