The Case For An Analytical Construction And Enforcement Of Demand Guarantees In Nigeria

Abstract

Demand guarantees are independent collateral undertakings that secure the
beneficiary against losses arising from the risk of default in an underlying
contract. However, unlike in a true guarantee, the surety’s liability in a demand
guarantee is insulated from disputes arising on the underlying contract as it
is triggered by the beneficiary’s mere demand for payment, without any need
to establish the principal’s default in the underlying contract. A review of
Nigerian law reveals a lack of clarity in the construction and enforcement of
demand guarantees, such that the courts have largely adopted a blanket
approach which erroneously conflates the principles that undergird true
guarantees and demand guarantees, and treats the payment obligation arising
in both categories of guarantee contracts as the same. The consequence of
this approach is to (a) open up the surety in a true guarantee to a primary
liability; or (b) impose an onerous obligation upon the beneficiary in a demand
guarantee to establish default in an underlying contract before the undertaking
may be enforced. This article discusses the need for an analytical approach
to the construction and enforcement of demand guarantees in Nigeria. It
examines the key normative strengths of this approach which includes the
‘pay now, argue later’ rule, and proposes practical legal reforms through
which the analytical approach could be better recognized by Nigerian courts
and in Nigerian laws.