Set Square Developments (Pty) Ltd v Power Guarantees (Pty) Ltd and Another and a related matter (099/2023 and 150/24) [2025] ZASCA 64 (20 May 2025)

An unfortunate recurring theme in construction industry news is that of contractors/subcontractors being placed in business rescue or liquidation. 

To safeguard against the associated financial risks and minimise potential financial exposure, most standard form construction contracts require the contractor (or subcontractor) to put up security in the form of an on-demand performance guarantee.

The legal principles surrounding on-demand performance guarantees were recently considered by the Supreme Court of Appeal in the case of Set Square Developments (Pty) Ltd v Power Guarantees (Pty) Ltd and Another and a related matter (099/2023 and 150/24) [2025] ZASCA 64 (20 May 2025). 
The facts of this case were simple. Set Square (the employer) took on a large, low-cost residential development, which included the necessary infrastructure. 

The employer awarded certain portions of the work to the contractor in respect of phases 2, 2.2, and 3 of the projects. Separate construction contracts were concluded in respect of the works for phases 2, 2.2 and 3, and Power Guarantees (the guarantor) issued on-demand guarantees.

Disputes arose between the parties regarding progress, and after various acceleration and default notices by the employer, the contracts were eventually cancelled.

The employer called up the guarantees in respect of each phase, purportedly complying with the guaranteed requirements. When the guarantor refused to make payment under any of the guarantees, the employer launched proceedings against the guarantor and the contractor in the court a quo, claiming payment under the guarantees.

Regarding the phase 2 guarantee, the contractor’s defence was that the employer had failed to make payment of one of its invoices when payment fell due. The court a quo rejected this defence and confirmed that all what was required for payment under the guarantee was for the employer to comply with its obligations in terms of the guarantee. 

Regarding the phase 2.2 guarantee, the court found that the contractor had terminated the underlying construction contract between itself and the employer. According to the court a quo, the subsequent termination of the same contract by the employer prevented the employer from claiming under the guarantee. 

Even if this wasn’t the case, the court a quo reasoned that the employer’s conduct bordered on fraud. The court found that the employer cannot claim under the guarantee in circumstances where the contractor had cancelled the contract due to the employer’s alleged breach. 

In respect of the phase 3 on-demand guarantee, the court held that the employer had failed to provide the contractor access to the site, which precluded the contractor from performing its obligations under the underlying construction contract. According to the court, the employer could not claim under the guarantee in circumstances where it had contributed to the contractor’s failure to perform. 

The matter went on appeal to the Supreme Court of Appeal. 

The Appeal Court reaffirmed that on-demand performance guarantees are autonomous and independent from the underlying construction contract. Payment under an on-demand performance guarantee is not concerned with the relationship between the employer and the contractor or whether either of the parties breached the underlying agreement. The only exception is a clear fraud. The wording of the guarantees, which is common is most on-demand performance guarantees, also prevented any defences based on the validity of the underlying agreements.

Applying these principles, the Supreme Court of Appeal held that the court a quo was wrong in preventing the employer from claiming under the second guarantee. In conflict with the well-established principles, the court a quo impermissibly scrutinised the contractual disputes between the employer and contractor. The Appeal court also dismissed the defences raised by the guarantor against payment under the guarantees.

Conclusion

This case reaffirms the fundamental principles surrounding on-demand performance guarantees. 
These guarantees are autonomous and independent from the underlying construction contract. Once a guarantor is presented with a written demand by the employer, provided there is compliance with the terms of the guarantee, the demand must be honoured. 

This applies regardless of whether there is a dispute between the employer and contractor in respect of the construction contract. 

Fraud remains the only exception however, the onus here is on the party alleging fraud to adduce sufficient evidence in support thereof.