учебный год 2023 / Drobnig, Principles of European Law of Personal Security

Chapter 2: Dependent Personal Security (Suretyship Guarantees)

under a hire-purchase agreement, cf. Chatterton v. McLean [1951] 1 AllER 761 (CFI)), and rights wrongfully obtained by the creditor (Andrews and Millett no. 11-023). It is doubtful whether the security provider can be subrogated into floating charges (cf. the discussion in Andrews and Millett no. 11-022 and O’Donovan and Phillips nos. 12-319 s.). Under SCOTS law the security provider is entitled to demand transfer of all security rights held by the creditor over the principal debtor’s estate and in relation to co-pro- viders of security against whom there is a right of relief (Thow’s Trustee v. Young 1910 SC 588 (CA); Scott v. Young 1909 1 SLT 47 (CFI); Stair/Clark no. 930).

VI. Reimbursement from an Incapable Debtor

36.According to ITALIAN CC art. 1950 para 4 a recourse against the incapable debtor is admitted only if and insofar it has benefited from the security provider’s payment. A similar view is held in FRANCE (Simler no. 224). According to GREEK literature, the security provider may have a claim for reimbursement; however, it may not be subrogated to the claim of the creditor, because this claim is against a minor and is, hence, void. Furthermore, since the security remains valid, the security provider may not

reclaim its performance according to the principles of unjust enrichment (ErmAK/Zepos art. 850 nos. 11-12). It is unclear whether under ENGLISH law the security provider has a right to be indemnified from a minor debtor; this question is not dealt with in the Minors Contracts Act 1987; the Law Commission suggested that there should be a right to be indemnified if the minor could have been sued by the creditor under the common law rules (Law Commission Report on Minors’ Contracts, Law Commission 134). In other cases where the security provider could not rely on having assumed the liability at the request of the debtor, e.g. for lack of authority of the person acting for the company debtor, the security provider was held to have neither a contractual claim for reimbursement nor a restitutionary claim against the debtor (Re Cleadon Trust [1939] 1 Ch 286 (CFI); Andrews and Millett no. 10-009).

(Lebon; Dr. Poulsen)

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Chapter 3:

Independent Personal Security

(Indemnities/Independent Guarantees)

Introduction

1.The Institution

As the variety of national terms indicates (infra no. 2) and the dearth of statutory provisions confirms (infra no. 3), the independent personal security is for most member states a relatively, or even a very, recent phenomenon. However, in the latter part of the 20th century it has become very popular in commerce in general and in international trade and investment in particular.

2.Terminology

a.The Institution

The term independent security, or an equivalent in the national language, is used in

ITALY, PORTUGAL and SPAIN, as well as in FRANCE, BELGIUM and LUXEMBOURG. In these countries qualifying words like independent, abstract or autonomous stress the nonancillary character of this contract, as distinct from the dependent personal security.

By contrast, the GREEK term used – security letter – does not contain any such indication. In ENGLAND the term indemnity is used. In its broader meaning it describes every obligation imposed on a person by operation of law or by contract to make good a loss suffered by another person – i.e. inter alia insurance, security (cf. Halsbury/Salter para 345). In a narrower meaning the expression contract of indemnity describes a promise to indemnify another person by way of security. Countries with Germanic languages, i.e.

AUSTRIA and GERMANY as well as DENMARK, SWEDEN and the NETHERLANDS use a special, essentially uniform term for the independent personal security (AUSTRIA and GERMANY: Garantie, DENMARK and SWEDEN: garanti, NETHERLANDS: garantie).

b.The Persons

Even more controversial than the term for the institution are the names of the persons involved in an independent personal security, i.e. the person assuming the obligation under the security, the person for whose benefit the obligation is assumed, and a third

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Chapter 3: Independent Personal Security (Indemnities/Independent Guarantees)

person on whose instructions the security is assumed and who typically owes an obligation towards the person benefiting form the security.

(i) Most controversial is especially the name of the third person. The term “(principal) debtor” which corresponds to that of the debtor under a dependent security is in most countries rather rarely used – probably both for historical reasons (the independent security often originating in special – banking – practices) and in order to emphasize the distinction from a dependent security. Instead, the terms “principal” or “instructing party” (and their linguistic equivalents) are most often used. Characteristic for the unsettled terminology are the multiple choices offered by art. 2 (2) (a) and (b) of the UN Convention on Independent Guarantees of 1995 (infra no. 4): “customer (“principal/ applicant”)”; “instructing party”.

After careful consideration of the alternatives, it was decided to use the term “debtor”. This choice emphasizes the basic structural bond between dependent and independent security; they differ by degree rather by essence. Most frequently, an independent security is in some respects similar to a dependent security intended to secure an underlying obligation. Independence merely means that the security obligation is more or less immune from defences or objections derived from the secured obligation. Despite conceptual differences the economic effects of an independent security are thus closely resembling those of a dependent security.

(ii)The UN Convention on Independent Guarantees uses the double term “guarantor/ issuer” for the person who assumes an independent guarantee (cf. arts. 2 (1) and (2) (a), 4 (1), 6 (b), 7 (1) etc.). For the purposes of the present Part and for reasons corresponding to those given in preceding no. (i), these Rules use the general term “security provider” which clearly characterises the function of that person.

(iii)Also the term “beneficiary” which is used in the UN Convention on Independent Guarantees of 1995 (art. 2 (1) and (4), 4 (1) etc.) has been replaced by the term “creditor”. Again, this deviation from the specialised terminology employed by the UN Convention is based upon the general considerations set out supra sub no. (i).

3.National Laws

There is no comprehensive statutory regime for independent personal security in the different countries, so that in all member states the rules on independent personal security have been developed by case law. An early statutory general clause for an independent personal security offers AUSTRIAN CC § 880a (introduced in 1915). In FRANCE a recent amendment of the Civil Code now recognizes the institution of the independent personal security (CC art. 2321 in the new Book IV title I chapter 2, as inserted in 2006) and regulates three essential aspects. Formerly, there were already a few dispersed provisions on first demand guarantees (garanties a` premie`re demande) in the Code on public contracts (code des marche´s publics) arts. 131 ss. of 1992 and models for first demand guarantees were set up by the government regulation of 10 December 1993. BELGIUM and the NETHERLANDS have a few provisions protecting consumers who assume a

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4. International Instruments

personal security, including an independent personal security (BELGIAN Law on consumer credit of 12 June 1991 arts. 34-36, 38, 97; DUTCH CC art. 7:863 juncto arts. 7:857- 7:862). Also the few statutory provisions in DENMARK, e.g. in the AB 92 (Almindelige betingelser for arbejde og leverancer inden for byggeog anlægsvirksomhed) §§ 6, 7, relate to personal security, which has to be given in connection with the erection of a public or a publicly supported building (Pedersen, Bankgarantier 34).

By contrast, in ENGLAND such a primary undertaking is known since the early eighteenth century (Birkmeyr v. Darnell (1704) 1 Salk 27 (CFI)). In GERMANY the independent personal security – as a contract “sui generis”, based on freedom of contract – is known at least since the late nineteenth century.

In other countries independent security has been recognised only in the last 25 years, by the SPANISH Supreme Court not before 1992 (TS 27 Oct. 1992, RA 1992 no. 8584), in BELGIUM they first appeared in case law in 1981 (CA Brussels 18 Dec. 1981, BankFin 1982, 99, JT 1982, 358), in ITALY their full admission leads back to Cass. 1 Oct. 1987, plenary decision, no. 7341, Giur. it. 1988 I 1204 and Cass. 6 Oct. 1989 no. 4006, BBTC 1990 II 553.

Similarly in GREECE, independent personal security is regarded as a sui generis contract – a variation of the dependent security – excluding the non-cogent CC arts. 853-855. The remaining provisions on the dependent security are hence applied directly (A.P. 585/ 1989, EED 41, 233, and 593/1989, EED 42, 416 ss.; CA Athens 2023/1988, EED 39, 596, and 3181/1987, EED 39, 598 ss.) or “by analogy” (CA Athens 8320/1989, EED 42, 45 ss., and 4533/1987, EED 39, 44 ss.), without taking fully into consideration the autonomous character of the provider’s promise.

In SWEDEN there is some confusion regarding the expression “security”. Bergstro¨m 12 thinks that a security – e.g. a bank security – is in fact a dependent security, and the rules on the latter are applied.

4.International Instruments

Since independent personal security is very frequently granted by professional providers of security, especially banks and insurance companies, and is often used in the context of specific types of transactions, those professional security providers or their organizations have developed special contract forms. Some of these have obtained the sanction of bodies like the International Chamber of Commerce and are very widely used in practice. This is especially true of the Uniform Customs and Practice for Documentary Credits 1993 Revision – UCP 500 (1993) (letters of credit). In addition, two sets of uniform rules for independent personal security were elaborated by the International Chamber of Commerce, the Uniform Rules for Contract Guarantees of 1978 and the Uniform Rules for Demand Guarantees of 1991. The essential difference between the two sets of rules is the method by which the creditor has to prove that the condition(s) for the security to become due are fulfilled. According to the rules of 1978, the creditor must present a court judgment, an arbitral award or a declaration by its contracting party (art. 9); by contrast,

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Chapter 3: Independent Personal Security (Indemnities/Independent Guarantees)

under the rules of 1991 an express statement by the creditor suffices (art. 20). Depending on the economic strengths of the parties to an underlying contract, the one or the other of these two sets of rules is being used. On the whole, recourse to the rules of 1991 is much more frequent than to the rules of 1978.

In 1998, the International Standby Practices (ISP98) were issued which had been formulated jointly by The Institute of International Banking Law & Practice and a Commission of the International Chamber of Commerce, Paris (ICC publication 590). The ISP98 are very similar to the UCP 500 (1993), but they reflect those special features which evolved in the application of the UCP to stand-bys. UCP 500 (1993) can still be applied to stand-bys, if the parties so desire. The commercial volume of stand-bys greatly exceeds the amounts of commercial letters of credit.

There is even an international instrument with binding force, i.e. the UN Convention on Independent Guarantees and Stand-by Letters of Credit of 1995, which entered into force on 1 January 2000. However, only eight rather small states have so far ratified the Convention (Belarus, Ecuador, El Salvador, Gabon, Kuwait, Liberia, Panama and Tunisia). Furthermore, it only applies to “international undertakings” (art. 4).

Article 3:101: Scope

(1)The independence of a security is not prejudiced by a mere general reference to an underlying obligation (including a personal security).

(2)The provisions of this Chapter also apply to stand-by letters of credit.

Comments

A.General Remark

1. Due to the independence of the independent personal security from any underlying obligation, the rules applying to them are much simpler and can be less numerous than the corresponding rules on the dependent personal security. The latter have to spell out the extent and limits of dependence upon the secured obligation and the technical devices with whose help that dependency is realized. That, obviously, is not necessary for independent personal security since this stands largely on its own feet.

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Article 3:101: Scope

B.Definition

2.The independence from any other agreement, especially an underlying contract between the creditor and the debtor, is laid down and specified in Article 1:101 (b); cf. also Comments on Article 1:101 nos. 28-35. In particular it is irrelevant for the security provider’s obligation whether the underlying obligation (such as a seller’s obligation to deliver or a buyer’s obligation to pay the price under a contract of sale or for services) is valid or not, which terms it contains and the extent of the debtor’s obligations. The same independence exists with respect to the contract by which the debtor of the underlying contract instructs the security provider to assume the independent personal security (usually a mandate). The UN Convention on Independent Guarantees of 1995 defines the “Independence of undertaking” in a similarly broad manner (art. 3).

3.On the other hand, the validity of the security provider’s undertaking itself is an indispensable condition for the security provider’s obligation to honour its security. Thus it must have full capacity and its undertaking must have been created without any defects of consent which might give rise to a right of avoidance under PECL Chapter 4.

4.The independent character of an independent security must be “expressly or impliedly agreed”. This rule dovetails with Article 2:101 (1) which establishes a presumption for any security being a dependent security, “unless the creditor shows that it was agreed otherwise.” For letters of credit and stand-by letters of credit, UCP 500 (1993) art. 3 and 4 explicitly and broadly emphasize the independence of the “credit” from underlying contracts or the objects of those contracts, such as goods, services and other performances. More succinctly in the same sense is UN Convention on Independent Guaranties art. 3.

C.General Reference to Underlying Obligation Innocuous

5. Paragraph (1) serves to specify the independent character of a security. Usually, an independent security refers to an underlying contract (e.g., of sale or services) or another security (e.g., a “confirming” security to the security given by the bank opening a letter of credit; or a “counter security” to the security issued by the security provider on the instruction of the issuer of the counter security) in order to specify the event upon the occurrence (or non-occurrence) of which performance of the security may be demanded by the creditor. Any such general reference to an underlying obligation does not affect the independent character of a security. The decisive point is that the security provider’s obligation to perform is independent of the obligation(s) of the principal as debtor of the underlying contract with the creditor.

D.Stand-by Letters of Credit

6. According to para (2), Chapter 3 applies to stand-by letters of credit. This clarification appears to be useful since the name of this instrument does not reveal its legal character as security. However, the “stand-by” letter of credit at least hints to the security

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Chapter 3: Independent Personal Security (Indemnities/Independent Guarantees)

function which letters of credit may fulfill and which, originally for reasons of AMERICAN internal banking law, this kind of letter of credit does fulfill. This is confirmed by the fact that stand-by letters of credit are also covered by the UN Convention on Independent Guaranties and “Stand-by Letters of Credit” of 1995. Functionally, the same is true for the “genuine” letter of credit, as used in international contract practice, since it secures claims for payment arising from various types of contract; the fact that in practice the security obligation represented by the letter of credit assumes the role of the primary obligation of a means of payment does not detract from its legal function as a mere security. The idea of independence of the security covers even cases where no preceding demand under the underlying contract has been made. Cf. also preceding Comment no. 5.

E.Independent Security of a Consumer

7. According to Article 4:106 (c), a consumer’s “agreement purporting to create an independent security is considered as creating a dependent security, provided the requirements of the latter are met.” For details, cf. the Comments on that provision.

National Notes

I. Legal Sources

1.While the dependent security is broadly regulated in all Civil Codes of the CONTINENTAL countries, there is almost no legislation on independent security. An “early” exception is AUSTRIAN CC § 880a sent. 2 (enacted in 1916) according to which a security provider is fully liable if the promised performance of a third person is not rendered by the latter. Much more explicit is the new FRENCH regulation of 2006, enacting CC art. 2321 which in four paragraphs deals with essential elements of the independent security.

2.In view of the dearth of legislation, case law and writings are of prime importance everywhere. This is even true for AUSTRIA and FRANCE: for the former country because of the abstract character of the legislative provision; and for FRANCE because of the very recent date of its legislation.

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Article 3:101: Scope

II. Qualification of Instrument as ‘‘Independent Security’’

A.Generally

3.It is common opinion that the denomination of an agreement as “dependent security” or “independent security” is not conclusive. In all countries, any case of doubt has to be resolved by interpretation of the contract. However, in ENGLAND the designation “indemnity” or “independent guarantee”, especially if frequently repeated or used in the heading, indicates the independent character of that security (cf. Goulston Discount Co Ltd v. Clark [1967] 2 QB 493 at 498 (CA), per Danckwerts LJ; Western Credit Ltd v. Alberry [1964] 2 AllER 938 at 940 (CA), per Davies LJ; Heald v. O’Connor [1971] 2 AllER 1105 at 1110 (CFI); O’Donovan and Phillips no. 1-94). The true construction of the contract as a whole, however, may lead to a different conclusion (Stadium Finance Co Ltd v. Helm (1965) 109 SJ 471 (CA)). In this respect, it has been said that especially the following factors should be regarded as arguments against interpreting a contract of security as a dependent security: (i) the contract relates to an underlying transaction between parties in different jurisdictions; (ii) the security is issued by a bank; (iii) the security contains an undertaking to pay “on demand” (whether or not “on first demand” or “on written demand”); and (iv) the security does not contain clauses excluding or limiting the defences available to the security provider (Gold Coast Ltd v. Caja de Ahorros del Mediterranneo [2002] EWCA Civ 1806 (CA); Hapgood 731). While the first three of these factors relate to the factual situations of international commerce in which the independent security is the preferred method of security, the rationale of no. (iv) appears to be as follows: in the case of an independent personal security, the security provider’s possibility to avail itself of any defences against the creditor’s claim are rather limited in comparison to the situation of a dependent personal security. It is therefore typically the latter situation where the creditor might see a practical need for the exclusion of defences of the security provider.

4.CONTINENTAL legal systems start from the general notion, that the legal nature of a contract is to be determined upon the parties’ intention and not by the terms the latter may, often mistakenly, have used (AUSTRIAN CC § 914; FRENCH and BELGIAN CC art. 1156; GERMAN CC §§ 133, 157; GREEK CC art. 173; ITALIAN CC art. 1362; PORTUGUESE CC arts. 236, 238; SPANISH CC art. 1268).

5.In BELGIUM (overview: Simont/Bruyneel; Wymeersch/Dambre/Troch no. 56, p. 18351837), some aspects of a contract for personal security may indicate the independence of that security: the internationality of the contract and the professional acting of the contractors (Vliegen nos. 175-193). The question whether a personal security is a unilateral obligation of the security provider or a bilateral agreement, is not yet solved. In the first case, only the intention of the security provider needs to be revealed, in the latter case, the intention of all parties involved. It cannot be denied, however, that the intentions of the creditor will always have to be taken into account, because the exact wording of the personal security will almost always be the result of negotiations between security provider and creditor (Vliegen no. 172; Simont 102-103).

6.Under GERMAN law the wording of the agreement is not decisive. Nevertheless, it is at least an important indication (CA Hamburg 18 Dec. 1981, WM 1983, 188, 189; Canaris, Bankvertragsrecht no. 1124). The use of legal terms even by persons familiar with those terms merely creates a rebuttable presumption (BGH 5 March 1975, WM 1975, 348).

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Chapter 3: Independent Personal Security (Indemnities/Independent Guarantees)

Finally, the motivation and interest of the security provider to assume an independent security is relevant (Hadding, Ha¨user, Welter 702). A major indication for the security provider’s intention to assume an independent personal security is the security provider’s own economic interest in the transaction (BGH 22 Feb. 1962, WM 1962, 577). If there remains any doubt, the contract is considered to be a dependent personal security in order to protect the security provider (RG 28 Sep. 1917, RGZ 90, 415, 417; BGH 5 March 1975, WM 1975, 348, 349). Similarly in FRANCE, where, in case of doubt, the courts qualify an agreement – even if expressly declared to be independent – as a dependent personal security. Since even a dependent personal security must not be presumed (FRENCH CC art. 2015: since 2006, CC art. 2292), there is even less a presumption for an independent personal security (CA Paris 17 Dec. 1992, JCP E 1993 I no. 243 (39)).

7.AUSTRIAN and PORTUGUESE courts and writers rely on the independent character of a personal security as the decisive criterion for assuming an independent personal security. Personal securities indicating that the security provider waives all objections rooted in the underlying contract are regarded as independent personal securities (AUS-

TRIA: OGH: 24 Oct. 2000, JBl. 2001, 380; 24 June 1999, BA 2000, 322, 323; 9 Nov. 1993, SZ 66 no. 140 p. 327 and 4 May 1977, SZ 50 no. 66 p. 324; Schwimann/Apathy § 880a no. 5; Avancini/Iro/Koziol II no. 3/26-3/27; PORTUGAL: CA Lisboa 18 Oct. 1988, CJ XIII, IV-129; CA Porto 13 Nov. 1990, CJ XV, V-187; STJ 1 June 2000, 316/ 00 www.dgsi.pt; Galva˜o Telles 285; Ferrer Correia 252). In other cases, the interests of the parties are considered; an independent personal security is assumed if the creditor was to obtain a strong and secure position (AUSTRIA: OGH 14 July 1992, SZ 65 no. 109 p. 6869, and 10 April 1991, JZ 1991, 595 no. 134) and especially if the security provider is a bank (OGH 24 June 1999, supra this note).

B.Particular Case of First Demand Securities

8.In BELGIUM, the “on first demand clause” can be considered as a rebuttable presumption of independence (Romain 33-40; Simon/Bruyneel 523); some authors think that the clause cannot validly be added to dependent personal securities (Van Ransbeek nos. 1523; contra Wymeersch/Dambre/Troch 1836). Also in FRANCE a personal security on first demand (for payment) is regarded as an independent personal security (Simler no. 894). Similarly in DENMARK: “If a personal security is expressed as a personal security on first demand, it is supposed to be an independent personal security” (Pedersen, Bankgarantier

140). Also in AUSTRIA, a first-demand clause is a strong indication for an independent guarantee, especially if it is supplemented by a waiver of all defences and exceptions (OGH 26 Aug. 1999, BA 2000, 328).

9.In ITALY, the NETHERLANDS and SPAIN the demand clause does not per se define the nature of the contract as independent personal security, therefore the clause needs to be interpreted with the rest of the contract in order to determine the real will of the parties (ITALY: Cass. 20 April 2004 no. 7502, Giust.civ.Mass. 2004, 912; Cass. 25 Feb. 2002 no. 2742, BBTC 2002 II 653; Cass. 23 June 2000 no. 8540, Foro pad. 2001 I 242; Cass. 21 April 1999 no. 3964, Arch. civ. 2000, 222; Cass. 14 July 1994 no. 6604, BBTC 1995 II 422 and 1 July 1995 no. 7345, Giur.it. 1996 I 1 620; Portale, Le garanzie bancarie 6; SPAIN: Carrasco Perera, Las nuevas garant%as 688; Sa´nchez-Calero, El contrato aut+nomo 145). Although ITALIAN case law often regarded the demand clause as a very stark

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Article 3:101: Scope

presumption of non-ancillarity of the contract, legal doctrine quite unanimously considers the clause compatible both with dependent and independent security contracts (Bonelli, Le garanzie contrattuali 205-208). Sometimes ITALIAN case law requires express contractual terms barring the possibility for the security provider to invoke exceptions arising from the underlying relationship (Cass. 7 Jan. 2004 no. 52, BBTC 2004 II 497 ss.). DUTCH writers attach great weight to a “first demand”-clause, especially if it is accompanied by terms indicating that the security provider’s duty of performance is independent from any underlying transaction or from any approval by the obligor of that transaction (Boll 82-84, Croiset van Uchelen 10, both with references to and quotations from case law). However, in one recent case, the Supreme Court denied that a bank guarantee on first demand gave a personal security an independent character (HR 25 Sept. 1998, NJB 1998 no. 892 at p. 5153).

10.In ENGLISH as well as GERMAN law demand clauses are mainly used in independent personal securities; they have, however, been held legally effective in dependent personal securities as well (ENGLAND: Bradford Old Bank v. Sutcliffe [1918] 2 KB (CA); Andrews and Millett no. 1-011; GERMANY: BGH 2 May 1979, BGHZ 74, 244 for dependent and BGH 12 March 1984, BGHZ 90, 287 for independent personal securities) and are usually stipulated for in bank personal security forms (ENGLAND: Cresswell, Blair, Hill, Hooley, Phillips and Wood I E 2068). At least in relation to securities given by security providers other than banks, demand clauses should not necessarily lead to the conclusion that the parties intended to create an independent security if this would be inconsistent with other provisions of the security (ENGLAND: Marubeni Hong Kong and South China v. Mongolian Government [2005] 1 WLR 2497 (CA)).

11.According to SWEDISH doctrine personal securities on first demand are considered to be dependent personal securities (Dalman 182). According to the FINNISH government’s proposition (RP 189/1998 rd 17), the LDepGuar shall be used in many legal matters, so e.g. for bank personal securities. However, personal securities on first demand are not covered by the Law (RP 189/1998 rd 29).

12.In GREECE it is accepted that the term “on first demand” may be irrelevant if there are other countervailing terms (Georgiades § 6 no. 43).

III. Autonomous Undertaking

13.See national notes on Art. 1:101 sub III D.

IV. Reference to Underlying Obligation

14.A mere reference to an underlying obligation does not prejudice the independence of a personal security. Since the occurrence (or non-occurrence) of the event, which justifies the creditor’s demand, is usually rooted in the relationship between creditor and debtor, a general reference to that relationship is almost unavoidable. In practice it is the rule; in GREECE (Georgakopoulos 256; Psychomanis 371; Gouskou 104) and FRANCE (CA

BesanÅon 11 April 1991, JCP E 1991, I no. 90 p. 466) it is even obligatory. FRENCH law goes even further and holds valid personal securities with reducible clause (garanties glissantes: Cass.com. 5 Dec. 1989, RD banc 1990, 139): The amount of the garantie glissante is progressively reduced with the performance of the main contract; it is nevertheless independent, because it constitutes a mere modality of computation. Also in

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