Emergence of Illegality in the Underlying Contract as an Exception to the Independence Principle of Demand Guarantees

It is questionable whether illegality in the underlying contract of a demand guarantee can or should constitute a valid exception to this instrument’s independence (autonomy) principle. From earlier English case law and scholarly discussions it appears that the acceptance of such an exception is contentious and, even if it is recognised, its extent remains uncertain. The English courts have previously indicated that they are open to accepting illegality in the underlying contract as an exception to the principle of independence of demand guarantees, but have not developed the exact parameters of such an exception. In the past, there were no South African court cases where illegality in the underlying contract was accepted, or even considered, as a possible exception to the independence principle of a demand guarantee. In a recent South African case, Mattress House (Proprietary) Ltd v Investec Property Fund Ltd, we find the first evidence of a South African High Court’s willingness to accept the possibility of illegality in the underlying contract as constituting a valid exception. In this article we discuss this South African case, which provides general guidance on the possibility of accepting such an exception under the South African law. South Africa is always persuasively influenced by English law in relation to demand guarantees.  Therefore, we also discuss the English law.