GROUP 6

THE NATURE AND FUNCTIONS OF PERFORMANCE GUARANTEES

PROVIDED BY FINANCIAL INSTITUTIONS
MEANING OF PERFORMANCE
GUARANTEES
It is a written undertaking issued by a financial institution on behalf
of the seller and in favour of the buyer to guarantee the positive and
due execution of the contractual obligations(Indra Carr, 2014)
In case the principle fails to meet the obligations, the beneficiary can
make a claim against the guarantee and receive compensation for any
damages of losses incurred.
THE NATURE OF PERFORMANCE
GUARATEES
The seller or the contractor instruct the bank in his country to issue
the principle guarantee in favour of the buyer.
Where the seller has failed to duly execute his contractual
obligations, the buyer is entitled to make the demand from the bank
to compensate him according to the guarantee.
NATURE OF PERFORMANCE
GUARANTEE
Forms of performance guarantee
Principle guarantee
The guarantee that is offered in favour of the buyer by the bank in his
country.
Counter-guarantee
The guarantee offered in favour of the bank in the buyers country by
the bank in the sellers country
See the case of state bank of India v Denel SOC ltd
NATURE OF PERFORMANCE
GUARANTEE
• Performance guarantee in international trade
Bank in the Bank in the
Counter-
seller country buyers
guarantee
country

seller Goods buyer

CASE OF EXXAROL
Exxarol coal Mpumalanga ltd v TDS project construction and Newrak
mining ltd (2022)
 The applicant was the Exxaro Mpumalanga Limited.
 The first respondent was the TDS Projects Construction And Newrak
Mining JV Limited.
 The second respondent was the ABSA Bank Limited.
OVERVIEW OF THE CASE
 During 2018, Exxaro and TDS entered into a written agreement for
construction and engineering work on Exxaro’s Malta Coal Mine North West
access project
 TDS instructed ABSA to issue a principal performance guarantee for due
fulfilment of its obligation under contract and was subject to the following
material terms:
i. The guaranteed amount would be paid to Exxaro by ABSA on receipt of a
written demand stating that amount was due and payable, signed by an
authorized person.
ii. The guarantee would expire on 19th June 2020 and After the expiry date the
guarantee would lapse and demand received thereafter would be ineffective.
CASE OVERVIEW
Exxaro terminated the contract contending TDS has breached its
obligation and failed to remedy such breaches.
Exxarol demand to ABSA claiming the amount on guarantee, which
ABSA did not honour because it deemed unfit to process. Later Exxaro
retracted the proposal but made a new demand with lesser amount.
Subsiquentry TDS made an application to the High Court for an order
interdicting ABSA from making any payment on demand as in
connection with performance guarantee. TDS deemed the demands
as fraudulently since the terms governing the demands were not been
complied.
HIGH COURT DECISION
• The high court cited the case of state bank of India and another v
Denel SOC ltd and raised the issue of non compliance.
• The high court granted an interdict preventing ABSA from making any
payment on the guarantee
• In Frans Maas (uk) ltd v Habib Bank (2001) the court stated;
The question is, what was the promise which the bank made to the
beneficially, and did the beneficially avail himself of that promise?
• In Western cape & another v Zanbuild construction, the court said; all
that is required for payment is a demand by beneficially stated to be on
the basis of the event specified in the guarantee.
DECISION BY THE COURT OF APPEAL
• The court of appeal found that TDS did not show that it would sustain
any injury if ABSA honoured the guarantee when not obligated to do
so
• The non-compliance of the demand by Exxarol did not violate any
rights of TDS
• Therefor the court of appeal held the view that, the high court
errered in administering law and set aside its decision
• The court of appeal dismissed the application with cost
FUNCTIONS OF PERFORMANCE
GUARANTEES
 Risk mitigation; A performance guarantee helps mitigate the risk of
non performance or default by the seller, thereby reducing the risky
for the beneficiary.
 Assurance; The guarantee provides assurance to the beneficiary that
the seller will fulfil their contractual obligations.
Compliance; A performance guarantee ensures that the seller
complies with the terms and conditions of the contract.
Solve the problem of mutual trust between the contracting parties.
FUNCTIONS CON’T
Financial backing; A performance guarantee provides financial
support to the beneficiary, as the guarantee is usually backed by a
financial institutions that is financially stable and able to pay any
claims made against the guarantee.
THANK YOU
• AMOS CHABWERA (BCME/20/SS/006)
• LUCY KANDAYA (BCME/20/SS/022)
• TADALA JACKSON (BCME/20/SS/)
• PAULINE MANYERA (BCME/20/SS/037)
• HANEEF MBUTUKA (BCME/19/SS/042)