The term bank guarantee often generates confusion as this expression can refer to institutions that, although apparently similar and intended to perform the same function, may have different characteristics.
It is important, therefore, to understand the legal structure and the mandatory content as well as the modes of operation of a bank guarantee, in order to be able, on a case-by-case basis, to identify in which 'model' to frame the instrument used.
The classic example, as far as Italy is concerned, is the differences between bank surety and bank guarantee on first demand. Well, in Italy, thanks to a constant work of interpretation by the Court of Cassation, it could be said that the boundaries have been drawn and, consequently, with a minimum of knowledge and prudence it is now possible to disentangle the various guarantee figures and identify which instrument to use according to one's needs.
However, in international contexts, be they related to sale-purchase or contract transactions, the mandatory content of the guarantee provided and/or received from banks in other countries may not be clear, with often disastrous consequences that only become apparent when the relationship between the parties involved enters the pathological phase.
The focus must therefore be on finding an instrument that can be governed, by virtue of the principle of contractual autonomy, by a ad hoc legislation able to make the rules governing the guarantee clear and standardised. For several years the International Chamber of Commerce is engaged on this front and has prepared a publication of standards to regulate this institution. The publication in question is the URDG (Uniform Rules for Demand Guarantees) n. 758.
The Autonomous Guarantee Contract
The autonomous guarantee contract is a personal guarantee figure developed in the late 19th century by German doctrine, called Garantiewertragas opposed to the typical figure of the accessory guarantee of the surety type.
An Autonomous Guarantee Contract is a contract by which a party (usually a bank or an insurance company) guarantor undertakes to directly to a beneficiary the payment of a predetermined sum in the event of the occurrence of a certain event, i.e. the non-performance or defective performance of the principal debtor's obligation. Notwithstanding this, the mentioning of the principal relationship does not constitute a guarantee with the bond of accessoryity as in the case of suretyship but, on the contrary, the performance is totally untied, autonomous precisely, since the obligatory relationship arises directly between the guarantor and the beneficiary, and it is towards the latter that the obligatory bond is created.
On the basis of a simple request for payment made by the beneficiary to the guarantor, where the non-performance (or defective performance, or partial performance, as the case may be) becomes apparent, the guarantor will pay to the beneficiary the predetermined amount of the obligation previously assumed at the time of the issue.
As far as Italian law is concerned, unlike the surety bond, which is regulated directly in the Civil Code and is therefore a typical figure in our legal system, the recognition of the autonomous guarantee contract came about thanks to the constant work of recognition on the part of the jurisprudence (both of merit and above all of legitimacy) which, through a step-by-step process, recognised this figure as atypical contract pursuant to Article 1322(2) of the Civil Code.
The above-mentioned course of case law starts from the first rulings dating back to the mid-1960s (Court of Cassation no. 1966/2310) with which the Supreme Court timidly began to question the different nature of autonomous guarantees with respect to surety and then continued, albeit with contrasting rulings, in the 1970s and beyond up to the present day. The course of interpretation continued in the following years and other rulings followed over time. These include, among others: Cassation No. 4006/1989; Cassation No. 1996/2909; Cassation No. 1998/1420; Cassation No. 2005/27333.
The last few years have witnessed a new season of pronouncements by the jurisprudence of legitimacy (mention need only be made of the most recent rulings Cass. no. 2008/2377; Cass. no. 2009/5326) culminating with the most recent joint section ruling Cass., S.U., No. 2010/3947 which, once again reiterating in a precise and precise manner the differences between autonomous guarantees and surety-type guarantees, also clarified the differences with respect to the nature of insurance policies, reiterating how, unless the text clearly indicates otherwise, the latter are attributable to the case of the autonomous guarantee contract given their indemnity nature.
The International Context
With regard to the context of international transactions, whether arising from purely commercial transactions (sales) or more complex transactions such as international procurement contracts, a few considerations are in order.
Despite the tortuous path of interpretation in Italy, there has been official recognition, and consequently effective protection, of autonomous guarantees. In other countries, albeit in a different manner or in a more streamlined manner, as these figures were in some cases provided for by individual legal systems, the nature of these guarantee instruments is peaceful. However, there are still many jurisdictions that either do not recognise the figure of the autonomous guarantee contract or, despite recognising it, it is of little use in practice. It follows that, in such cases, if the differences examined above are not well understood, one runs the risk of receiving, as beneficiary, collateral of an ancillary nature and, as a consequence, not being able to enforce, or to enforce with considerable difficulty and cost, the guaranteed amount in the event of the counterparty's non-performance.
On the other hand, in cases where the beneficiary resides in such countries, and the guarantee (as we shall see more fully with reference to indirect guarantees) to it is issued by a local bank, there is a risk that the expiration of the guarantee will be extended in a manner similar to what happens in Italy under Art. 1957 of the Civil Code for suretyship.
However, in order to be able to guarantee certainty as to the applicable rules and above all to avoid the above-mentioned problems arising, it is recommended that these instruments be used by making sure that they are subject to the rules of the International Chamber of Commerce URDG, Publication No. 758 which expressly establish its autonomous nature.
Direct guarantees and indirect guarantees
International bank guarantees can be issued in two different forms, depending on how many banking entities are involved as obligors.
We will have the direct guarantees where the guarantor bank turns out to be the bank of the debtor or contractor that directly obligates itself to the beneficiary resident in another country.
If, on the other hand, the beneficiary claims, or at any rate requests, to be guaranteed by a local bank resident in his country, it will be necessary instead to proceed by issuing a indirect guaranteewhere the debtor's bank will instruct a local bank to issue a bank guarantee to the beneficiary (creditor or contractor as the case may be). In such a case, the debtor's bank (client or contractor) will play the role of counter-guarantor, i.e. an entity that will issue a counter-guarantee against the guarantor bank.
With the direct guarantee we will then have three subjects (originator, guarantor bank, beneficiary) actually obliged, while the bank in the beneficiary's country will only play the role of advising bank, assuming no obligation in this respect because there will be three contracts: the contract between the originator and the beneficiary, the contract between the originator and the guarantor bank, and finally the contract between the guarantor bank and the beneficiary. The role of the notifying bank is merely contingent, since the guarantor bank may notify the beneficiary directly of the issuance of the guarantee.
With the indirect guarantee instead the subjects involved from a compulsory point of view are necessarily four and the role of the originator's bank will be to identify, on behalf of the originator, a bank in the beneficiary's country willing to issue the guarantee to the beneficiary. Through the issuance of the counter-guarantee, the originator's bank will be obliged to make payment to the guarantor bank if the latter has made payment to the beneficiary.
It should be borne in mind that very often, in the case of indirect guarantees, the guarantor bank imposes both the text of the guarantee (to be issued vis-à-vis the beneficiary) and the text of the counter-guarantee (to be issued by the originator's bank vis-à-vis the guarantor bank). In such cases, the proposed texts should be carefully analysed, especially with regard to the applicability or non-applicability of the URDGs and, if they are applicable, the explicit exclusion or waiver of certain articles of the URDGs.
The risk of undue enforcement
Given the autonomous character discussed above, which entails that the guarantor bank cannot raise objections to the guaranteed relationship, the risk that the beneficiary of an autonomous guarantee unduly enforcing it is elevatedespecially whenever the security provides for enforcement upon first demand without the presentation of further documents (perhaps provided for the express purpose of providing evidence of the guarantor's non-performance). If the grantee in bad faith, despite knowing that the event envisaged by the guarantee has not occurred, wilfully requests the enforcement of the guarantee, the payment should be considered undue.
Case law (obviously referring here to Italian case law), by virtue of the Articles 1175 and 1375 of the Civil Code. (principles of fairness and good faith in the performance of contracts) has over time identified many cases of wrongful enforcement: the element to be identified in order for an enforcement request to be considered wrongful is the use of the security with the intention of obtaining an advantage other than that for which the security was given. This element allows for the objection that the conduct of the beneficiary (which, however, must be proved) would undermine the economic function of the autonomous security agreement and not, it should be noted, of the main agreement (the secured relationship).
According to case law therefore lundue and abusive excisionIf recognised, it allows, by way of derogation from the principle of autonomy, exceptions to be raised with respect to both the guarantee agreement and the guaranteed relationship. This protection was deemed necessary in order to protect both the guarantor and the warrantor.
As regards the protection granted to the parties involved in the autonomous guarantee contract, a distinction must be made between preventive protection (granted to the guarantor upon enforcement of the guarantee) and subsequent protectionrecognised instead to the originator.
With regard to the preventive protection granted to the guarantor, the latter, in addition to the literal and formal exceptions to which he is entitled regardless of the arbitrariness of the enforcement, may, by virtue of what has been said so far refusing the service through the so-called exceptio dolicontesting the beneficiary's fraudulent claim. In this regard, it is worth noting, among others, a recent ruling by the Court of Rome (22 March 2011), which affirmed that the autonomy of the guarantee contract, in harmony with the general principle of good faith and fair dealing in the performance of contracts, is not absolute and without limits, since the guarantor may refuse to pay the guarantee in the event of an abusive and fraudulent enforcement by the beneficiary, provided that the existence of the fraud or abnormal use of the right can be identified through immediate and certain documentary evidence.
The guarantor bank, however, may decide not to dispute the beneficiary's claim and, having satisfied the conditions for enforcement set out in the guarantee, make payment and then proceed to debit.
Such a choice, which is certainly easier for the guarantor bank, entails risks that should not be underestimated since the originator will be allowed, like the guarantor, to request the precautionary measure pursuant to Article 700 of the Code of Civil Procedure. As has already been pointed out, through such an emergency measure the originator could obtain an injunction to the bank not to pay the beneficiary and/or not to debit the originator.
Bibliographic and web references
Bibliography on International Payments
- Edited by Marco Tupponi 'Manuale di Diritto Commerciale Internazionale' - 3rd edition year 2019 - Edizioni Giappichelli.
- CCI Uniform Rules and Uses for Documentary Credits NUU600 (CCI Publication).
- Uniform International Banking Practice (Publication 745) of the ICC.
- URDG 758 ICC Uniform Rules for Guarantees on First Request (ICC publication).
- ICC Uniform Rules on Collections (Publication 522)
Note. ICC publications can only be found on the website ICC ITALY
Sitography on International Payments