Elasah ruling on guarantees sounds a wake-up call for South Africa’s construction market

The judgment in Elasah Risk Consultants (Pty) Ltd and Another v National Credit Regulator and Others is a significant development for South Africa’s construction and infrastructure market. It makes it clear that, where a construction guarantee operates in substance as a mechanism for the transfer and assumption of risk, it is likely to fall within the definition of non-life insurance under the Insurance Act 18 of 2017 (‘Insurance Act’).

For issuers, employers, contractors and funders, it is important to keep in mind that guarantees can no longer be treated as a peripheral compliance issue. They now sit squarely within transaction risk, regulatory exposure and enforceability strategy.

Why construction guarantees matter

Construction guarantees are not just administrative formalities; they are sometimes gatekeepers to participation in construction projects. These types of guarantees are specialised, typically non-cancellable financial instruments designed to protect employers against contractor default. In South Africa, they are not merely commercial conveniences, they are often a prerequisite for participation in both private sector developments and public procurement.

These instruments in substance usually take the form of a written undertaking by a bank or insurer to pay a specified amount to the beneficiary, typically the employer, upon the occurrence of a defined default by the contractor or principal. While they function like insurance – as seen from their pricing and the fact that they absorb risk – they have often been structured and marketed as credit products.

That tension has created a regulatory grey area between the National Credit Act and the Insurance Act, leaving issuers, employers and contractors operating at times in a space of uncertainty.

What the court decided

That uncertainty was directly addressed in the Elasah case.

The applicants sought declaratory relief that the Insurance Act does not apply to construction guarantees; that issuers of such guarantees do not require a licence under section 5(1); and that the provision of the guarantees does not amount to the conduct of insurance business.

Meanwhile, the respondents countered by seeking a declaration that the guarantees constituted non-life insurance, that their issue amounted to the conduct of insurance business as defined in s1 of the Insurance Act and that the applicants were acting unlawfully by doing so without the required licence.

The court emphasised the continuity of the legislative framework, observing that the Insurance Act does not materially depart from the earlier Short-Term Insurance Act in relation to guarantee-type policies.

The main for the court question was whether the instruments in issue fell within the statutory definition of non-life insurance, specifically guarantee policies contemplated in schedule 2, table 2 of the Insurance Act. The court confirmed that classification depends on substance rather than form. If an instrument meets the statutory definition, it is insurance irrespective of the label attached to it or the way it is marketed.

Why the judgment matters

The decision closes the door on regulatory positioning arguments. Providers can no longer rely on structuring or labelling to avoid the Insurance Act. If the product operates as risk indemnification, it will be treated as insurance.

Rather than treating the dispute as a technical question of classification, the court declared the applicants’ conduct unlawful and granted interdictory relief. That moves the issue beyond academic debate and into the realm of immediate enforcement risk.  

For providers, there are several factors to be considered:

• there is a real risk of being found to be conducting unlicensed insurance business
• the Insurance Act imposes far heavier obligations such as prudential capital requirements, governance structures, and conduct regulation
• existing business models may no longer be viable without licensing, restructuring or withdrawal.

Providers will therefore need to assess whether their products involve features such as defined risk transfer, indemnity-type obligations and premium-like pricing. Where those features are present, continued operation may require licensing, restructuring or withdrawal from the market.

For employers and contractors, the risk is operational: can you rely on your guarantee when it matters?

The decision introduces real enforceability risk. While non-compliance does not automatically invalidate a guarantee, it creates a clear opening for issuers to resist payment by arguing regulatory illegality. Even if that defence ultimately fails, there may be undue delays, litigation costs, and uncertainty – all of which undermine the very purpose of a guarantee as quick, reliable security. Counterparty risk is also materially increased.

Providers facing regulatory scrutiny or enforcement action may be restricted from issuing guarantees or may struggle to honour existing ones. The fact that the court granted interdictory relief shows that these risks are not theoretical: they can materialise suddenly and disrupt projects in real time. Clients should therefore carry out more robust due diligence on both the regulatory status and the financial resilience of guarantee providers.

From a transactional perspective, this changes the baseline. It is no longer enough to have a guarantee in place. There should also be consideration around whether it has been issued by a properly licensed and compliant entity. That requires deeper due diligence, tighter contractual protections, and a more deliberate approach to risk allocation.

A wider market impact

This judgment will impact the market. Providers will either move firmly into the insurance regulatory framework or restructure their products to avoid it altogether. Hybrid instruments sitting in the grey area between credit and insurance will need to be reviewed and addressed.

For all market participants, the message is clear: existing guarantees must be stress-tested. That means checking licensing status, assessing enforceability risk, and identifying fallback security if a guarantee is challenged or fails. 

Going forward, in addition to considerations around whether a guarantee provides suitable security and complies with the contractual requirements, there will also need to be considerations around regulatory compliance. As a result, providers, employers, contractors and funders should now take the opportunity to reassess their guarantee products and counterparties.

Co-written by Chantell Magakoe of Pinsent Masons