Issuance of independent guarantees by insurance companies

Abstract

Independent, or demand, guarantees are strong securityinstruments. They are designed to secure the properperformance of contractual obligations in commercialtransactions. In South Africa, independent guaranteesare a common feature of construction projects where theinterests of any of the main parties (that is, the contractoror the employer) may conceivably be secured. Essentially,independent guarantees constitute an undertaking by theissuer of the guarantee to pay a stipulated sum of moneyto the beneficiary of the guarantee upon the presentationof conforming documents. The question of payment is,therefore, to be determined with reference only to thedocuments, and not to facts outside of the documents.Consequently, payment under an independent guaranteeis expected to be made expeditiously, provided conformingdocuments are tendered. It is clear, therefore, that theproper functioning of the independent guarantee requiresthe use of a strong and reliable financier. Internationally,banks can probably be regarded as the dominant issuersof independent guarantees. This much is apparent ininternational jurisprudence, specifically in case lawand academic writing. In South Africa, however, banksdo not enjoy that status, since the guarantee marketis competitively shared between banks and insurancecompanies, the latter having recently emerged as equallycoveted issuers of independent guarantees. This can beevidenced by the significant number of case law involvingan insurance company as issuer, rather than a bank. Thisarticle focuses on this development in South African law. Itseeks to analyse and ultimately provide a rationale for theincreasing use of insurance companies in independent-guarantee transactions. The analysis reveals the followingfactors as the main contributors to this growing practice:the favourable security requirements of insurancecompanies, the significance of the premium attachedto guarantee policies, and the increasing flexibility ofinsurance companies in the formulation of guarantees.