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V. Kranjc, J. Prostor. Provisional court measure sunder independent guarantee
party of the underlying contract, who demanded such a security to secure its
claim (for example for finishing the work in time, for eliminating defects, for
payment). The party of the underlying contract is considered as a beneficiary
of the guarantee in relation to the independent bank guarantee. An independent bank guarantee protects the interests of the creditor (the beneficiary of the
independent bank guarantee), because the creditor easily fulfils the requirement
that needs to be met for the bank to pay out the amount – the requirement
of a written demand for payment. The beneficiary should only actualize the
guarantee in case the underlying contract has been breached. The beneficiary
breaks its obligation from the underlying contract if he actualizes the security
(demands payment from the bank) without the requirements of the underlying
contracts being breached (that means that the underlying contract has not
been breached). In those cases the party of the underlying contract who is
also a beneficiary from the independent bank guarantee needs to reimburse
the amount paid out by the guarantor. The reimbursement amount can be
made voluntarily right away or mandatory after it has been established in a
legal proceeding that the party was not entitled to demand and receive the
amount from the bank guarantee, because the obligation from the underlying
contract has not been breached. Until then, the paid out amount is at the
party’s disposal. There is very often no chance to recover the payment from
the beneficiary, if it is in a foreign country under a foreign jurisdiction with
a very different political and legal climate1.
The non-accessory, abstract or independent nature of the bank guarantee
puts the beneficiary (the creditor from the underlying contract) in a better
position. Even though the guarantee secures the obligation that originates
from the underlying contract, there is no formal legal connection between
the underlying contract and the guarantee as a security instrument. The bank
guarantor obliges itself to pay the guaranteed amount under the requirements
from the bank guarantee and not under the requirement of a breach of the
underlying contract. If the parties do not wish a security that can be actualized under requirements that are not connected to the underlying contract,
they could choose another possibility – for example a security with a bank
surety. The advantage of the bank guarantee in comparison to the bank surety
is that the bank guarantor cannot withhold the payment from the guarantee
because of reasons originating from the underlying contract.
An independent bank guarantee is a modern instrument for securing contract obligations. But it has not been developed by the business
1
N. Horn in: Horn N. (Ed.). German Banking Law and Practice in International Perspec-
tive. Berlin; New York: De Gruyter, 1999. P. 201.
301
II. Enforcement procedure in foreign countries
practice so that beneficiaries could enforce their rights regardless the
breaches of underlying contracts. The independent bank guarantee has
been developed and recognized so that objections from the underlying contract do not enable any delays of the payment of the guaranteed amount.
Objections from the underlying contract are not possible in a bank guarantee because of its abstract nature that makes it independent from the
underlying contract. That allows for the independent bank guarantee to
be actualized even if it is disputed whether the underlying contract has
been breached or not.
For instance, a contractor finishes building works after the deadline that
was set in the contract. He denies the reproaches of his responsibility, stating
that there were extensive and urgent but unpredicted works that needed to
be done. Urgent unpredicted works are the works that the contractor could
not predict at the time of conclusion of the contract, but they urgently need
to be done. There is a dispute between the parties whether the works were
actually unpredictable and also if they were extensive enough to justify the
breach of the contractual deadline and could therefore exclude the contractor’s responsibility for the breach of contract. In the event that the contractors
obligation to finish the works was not secured with an independent security
(if it was for example with contractual penalty), the contractor could object
with objections from the underlying contract and the court would have to
determine the scope of the works and their urgent and unpredictable nature.
If it is an independent bank guarantee that secures the obligation of the contractor to finish the works in time, the guarantee can be realized even though
there is a dispute over the breach of contract, because the requirements for
cashing in the bank guarantee are not tied up to the underlying contract and
objections from the underlying contract are not allowed.
The question to be posed is whether the independent bank guarantee
should enable the payment under the bank guarantee in cases, where it is
clear, that there has been no breach of the underlying contract. For example,
when concluding the contract, the contractor provides an independent bank
guarantee for finishing the works in time. A month after the conclusion of
the contract and a whole year before the deadline for finishing the works the
investor (who is also the beneficiary) makes a written demand to the bank
guarantor for the payment of the bank guarantee. The requirement from the
bank guarantee is met (the requirement is the beneficiaries’ written demand
for payment), but it is beyond doubt that the underlying contract has not
been breached.
This article tries to answer the questions of unfair calling for payment
in cases of independent bank guarantees. It deals with situations, where re-
302
V. Kranjc, J. Prostor. Provisional court measure sunder independent guarantee
quirements from bank guarantees are met and the bank guarantor therefore
should pay out the guaranteed amount, but it is at the same time clear that
the underlying contract has not been breached and the beneficiary was not
entitled to demand the payment under the bank guarantee. In case of unfair
calling we have valid documents and a formally correct payment demand
in strict conformity with the documentary requirements in bank guarantee;
however, it can be easily ascertain that the risk covered by the guarantee has
not occurred1. Even though a bank guarantee is a means of security, separated
from the underlying contract, this does not mean that obligations from the
underlying contracts are separated from the bank guarantee as a mean of
security as well. As previously stated, a party of the underlying contract (the
beneficiary) is entitled to actualize the bank guarantee only if the underlying contract has been breached. That means when it is undisputable that
the underlying contract has been breached, but also when it is a least likely
that there was a breach of the underlying contract. If it is undisputable that
the underlying contract has not been breached or that the obligation from
that contract, secured with an independent bank guarantee, has not been
breached, the party of the underlying contract (the beneficiary) should not
actualize this instrument of security.
The article from now on uses the term bank guarantee meaning an independent bank guarantee.
2. Unfair calling under independent guarantee
A calling or demand for payment made when it is certain, that the underlying contract has not been breached or there are no indications that there
was a breach, is without a doubt unfair. Most frequently used term for such
a calling is unfair calling. A calling is not unfair if a breach of the secured
obligation has been shown.
Since a bank guarantee determines the requirements for cashing in the
guarantee and these requirements can also be met in cases of unfair calling
for payment (mostly the requirement is only a written demand for payment
made by the beneficiary) it is questionable, how the parties, affected by the
unfair calling, should act. The affected parties are usually the applicant
and also the bank guarantor. This question is of great importance since a
bank guarantee is a security that should be actualized independently from
the underlying contract and is intended for protecting the interests of the
creditor.
1
N. Horn in: Horn N. (Ed.). Op. cit. P. 200.
303
II. Enforcement procedure in foreign countries
Unfair calling is not explicitly forbidden in the bank guarantee itself. Such
a restriction in a bank guarantee and most of all the requirement of proving
the fairness or unfairness of the calling would violate the main purpose of
the bank guarantee and its independent nature.
Autonomous rules of the International Chamber of Commerce (ICC),
especially The Uniform Rules for Demand Guarantees (Publication 758
from the year 2010)1, regulate independent bank guarantees or a first demand
guarantees in details2. These rules can be used when they are specifically
mentioned in a bank guarantee. However, they do not deal with questions
relating to unfair calling. Certainly the experts, who were preparing the rules,
must have been aware of the problems relating to unfair callings or in other
words, cases, where a calling has been made even though it is certain that the
secured obligation has not been breached. The Uniform Rules for Demand
Guarantees do not regulate the rights and duties of the bank guarantor, since
it is highly questionable what are the bank’s duties.
United Nations Convention on Independent Guarantees and Stand-by
Letters of Credit3 has been adopted in 1995 and has since been ratified by
8 countries4. The Convention regulates the cases, where the payment can
be denied or stopped despite the fulfilment of requirements set in the bank
guarantee (art. 19 and 20).
Slovenian law is among national legislations one of the rare exceptions that
regulates bank guarantees with special rules5. However, the special regulations
for bank guarantees are short and non-descriptive and contain no regulations regarding the rights and duties in cases of unfair callings for payment.
In Slovenian theory6 and case law7 there is a generally accepted view that an
unfair calling can be considered as an abuse of rights8. The instrument of the
1
ICC Uniform Rules for Demand Guarantees (RDG). 2010. Publication N 758.
2
The Rules issued in 2010 have replaced the rules from year 1991.
3
United Nations Convention on independent guarantees and stand-by letters of credit. URL:
http://www.uncitral.org/pdf/english/texts/payments/guarantees/guarantees.pdf
4
Slovenia and Russia are not among them. URL: http://www.uncitral.org/uncitral/en/
uncitral_texts/payments/1995Convention_guarantees_status.html
5
Art. 1083–1087 of the Code of Obligations (ZOR; Ur. l. SFRJ, št. 29/1978, 3/1985 and
57/1989).
6
Sekolec J. “Plačaj takoj, ugovarjaj kasneje”: neodvisna bančna garancija in stand-by akreditiv. Pravna praksa, Vol. 3/1997. Enclosure, P. V; Kranjc V. Gospodarsko pogodbeno pravo.
Ljubljana: GV Založba in Univerza v Mariboru, Pravna fakulteta, 2006. P. 204; Jus M. Bančne
garancije in sorodni instrumenti financiranja trgovine // Uradni list RS. Ljubljana, 2010. P. 469.
7
E.g. VSL Sklep I Cpg 1458/2010.
8
Art. 7 (prohibition of abuse of rights) of the Slovenian Obligations Code (OZ, Ur. l. RS,
št. 83/01 and 40/07), which repealed most of the provisions of the old ZOR, except the provisions on banking transactions.
304
V. Kranjc, J. Prostor. Provisional court measure sunder independent guarantee
abuse of rights among other things prohibits acts that appear to be an allowed
action or right of the party, but are actually an action that contradicts the
purpose for which a certain right has been established1. The prohibition of
an unfair calling could also be based on the principle of conscientiousness
and fairness2. However, the abuse of rights represents a more specific legal
ground in cases of unfair calling. Nevertheless, the courts have mentioned
both standards in specific cases, i.e. the principle of conscientiousness and
fairness as well as the prohibition of abuse of rights.
The opinions of foreign case law and comparative law are similar. Unfair
calling under independent bank guarantee is commonly an example of misuse
of formal legal position and is against the principle of good faith, whereas
the exception of fraud forms part of the Civil Law and the Common Law
tradition3. “In German law the ground for opposing payments under a bank
guarantee is the rechtmissbräuliche Inanspruchnahme which seems to be a
wider concept than fraud in English law, since such abuse of rights would cover
not only fraud, but also bad faith of the beneficiaries’ performance”4. Despite
the fact that national laws do not have any express regulations regarding the
unfair calling under independent bank guarantee or the prohibition of it, in
instances where a breach of the underlying contract has not been proven, they
still limit beneficiaries of the bank guarantees on the basis of general legal
standards, also e.g. the standard of performance in good faith in German law
(“Treu und Glauben”, art. 242 BGB)5.
An independent bank guarantee is an instrument meant to enable the
beneficiary to get the guaranteed amount if the other party breaches their
1
Art. 7 OZ: (1) The rights deriving from obligational relationships shall be limited by the
equal rights of others. It shall be necessary to exercise them in accordance with the basic principles of the present code and their purpose. (2) When exercising their rights participants in an
obligational relationship must refrain from action by which the performance of the obligations
of other participants would be rendered more difficult. (3) Any action by which the holder of a
right acts with the sole or clear intention of harming another shall be deemed the sham exercise
of the right.
2
Art. 5 OZ.
3
N. Horn in: Horn N. (Ed.). Op. cit. P. 200.
4
Vukmir B. in: Voskuil C.A., Parać Z., Wade J.A. (Editors). Hague-Zagreb Essays 6 on
the Law of International Trade, Credit and Guarantee Financing Transfer of Technology.
The Hague: T.M.C. Asser Instituut, Martinus Nijhoff Publishers, 1987. P. 58–59. cites
Kozolchyk.
5
More about the solutions in comparative law of EU countries in: Drobnig U. (ur.). Personal
Security / edited by Study Group on a European Civil Code. Munich: Sellier. (European Law
Publishers). P. 347–352; Bürgerliches Gesetzbuch in der Fassung der Bekanntmachung vom
2. Januar 2002 (BGBl. I S. 42, 2909; 2003 I S. 738), das durch Artikel 1 des Gesetzes vom 21.
April 2015 (BGBl. I S. 610) geändert worden ist.
305
II. Enforcement procedure in foreign countries
contract. The purpose of the independent bank guarantee is not to enable
getting the payment of the guaranteed amount in cases where the other
party has not breached the contract and fulfils their contractual obligations,
but to secure the obligation from the underlying contract. If the secured
obligation is not in danger or it is fulfilled, the medium of security should
not be actualized. An independent nature of the bank guarantee is not
determined to allow the beneficiary to demand the payment regardless the
underlying contract, but to enable the beneficiary to demand the payment
right away or even before it has been proven that the other party breached
the underlying contract. If the beneficiary asserts his rights from the bank
guarantee in cases, where it has been shown that the opposing party performed
its obligations without any mistakes and it is beyond doubt that the opposing
party is performing its obligations, he does not assert his right in line with the
purpose behind the bank guarantee. Unfair calling under independent bank
guarantee is prohibited as a prohibited acting of rights.
Whereas the legal ground for the prohibition of unfair calling under independent guarantee is not disputable, it is questionable, which are the circumstances under which a calling or a demand for payment can be considered
unfair. United Nations Convention on Independent Guarantees and Standby Letters of Credit has not been ratified by many countries. Nonetheless,
even if some country ratified the Convention and all the requirements for its
application would not be met in a particular situation (for example, the lack
of an international element) the explanations in the convention can serve as
a guideline when determining unfair callings for payment. Irrespective of its
official recognition, the text of the Convention may be used by the parties
as general conditions of the contract or by the reference in the guarantee
or can serve as a guide in the international interpretation and application
of bank guarantees, since its provisions form part of the lex mercatoria of
international trade1.
The United Nations Convention on Independent Guarantees and Standby Letters of Credit does not use the term unfair calling but a reasonably
similar wording “the demand has no conceivable basis”. The wording itself
already explains when a calling can be considered as unfair.
Article 19/2 of the United Nations Convention on Independent Guarantees and Stand-by Letters of Credit states that there is no conceivable basis
for payment in situations where:
a) the contingency or risk against which the undertaking was designed to
secure the beneficiary has undoubtedly not materialized;
1
N. Horn in Horn N. (Ed.). Op. cit. P. 202–203.
306
V. Kranjc, J. Prostor. Provisional court measure sunder independent guarantee
b) the underlying obligation of the applicant has been declared invalid by
a court or arbitral tribunal, unless the undertaking indicates that such
contingency falls within the risk to be covered by the undertaking;
c) the underlying obligation has undoubtedly been fulfiled to the
satisfaction of the beneficiary;
d) fulfilment of the underlying obligation has clearly been prevented by
wilful misconduct of the beneficiary;
e) in the case of a demand under a counter-guarantee, the beneficiary of
the counter-guarantee has made payment in bad faith as guarantor/
issuer of the undertaking to which the counter-guarantee relates.
This article does not deal with counter-guarantees (art. 19/2/e). All
other situations need the relevant factual background to be displayed with a
high level of material truth. The relevant facts need to be proven without a
shadow of a doubt or even with an order from a court or an arbitral tribunal.1
Therefore, the calling for payment is considered unfair and not allowed if it
is proved beyond a shadow of a doubt that there has been no breach of the
contractual obligation or that the fulfilment of the underlying obligation has
clearly been prevented by wilful misconduct of the beneficiary.
The United Nations Convention on Independent Guarantees and Standby Letters of Credit also determines other situations where the bank guarantor
can deny the payment of the guaranteed amount (in art. 19/1, in addition the
situations in art. 19/2, where a calling for payment has no ground). These are
the situations in which it is manifest and clear that:
a) any document is not genuine or has been falsified;
b) no payment is due on the basis asserted in the demand and the
supporting documents.
These examples from the convention actualize the terms of unfair calling
for payment or fraudulent demand.
Theory and case law do not consider situations where a beneficiary makes
a demand for payment after the deadline for demanding payment that was
set in bank guarantee has passed or the beneficiary does not submit all the
documents demanded in bank guarantee as a requirement for payment, as
abuses of bank guarantees. In these situations no other legal ground is needed
for the bank to deny the payment since the basic requirements set by the
guarantor are not met. In situations that can be considered as abuse of rights
1
The decision of the court or an arbitral tribunal about the validity of the underlying contract
is only taken into account if that is expressly stated in the bank guarantee – if a bank guarantee
expressly secures the risk of invalidity of the underlying contract.
307
II. Enforcement procedure in foreign countries
in connection with a bank guarantee or at least an unfair calling for payment
under a bank guarantee the requirements from the bank guarantee are met,
but it is at the same time undoubtedly clear that the secured obligation was
not breached.
3. Possibility, right or duty of the bank to deny payment
The bank guarantor has the right and duty to deny the demand for payment whenever the requirements from the bank guarantee are not met. But
the answer to the question how should the bank guarantor act in situations
where the requirements from the bank guarantee are met but there is an abuse
of rights, is more controversial.
The bank guarantor usually cannot determine on its own whether the
beneficiary abused his rights. Since in practice the bank guarantor notifies
the applicant of the demand for payment, the applicant is given the chance
to present all the relevant facts and proofs to the bank. It is in the interest
of the applicant that the bank does not pay the guaranteed amount in these
situations. Considering that a bank guarantee is actually a statement from
the bank that it will pay out the agreed amount to the determined person
under the determined requirements, the applicant is not justified to prohibit
the bank to make the payment, since he is not a party of that legal relation.
The rights of the applicant in cases of unfair callings are presented in the next
chapter of this article.
The answer to the question what are the rights and duties of bank guarantors when presented with an unfair calling is sensitive for different reasons.
Among other things, the bank needs to determine that a calling has been
made unfairly or unjustifiably before denying the demand for payment. Seeing that the bank is not a party to the underlying contract it is harder for it to
determine what are the real circumstances of the situation and is tied up to
the facts and proofs that are presented by the applicant. Theory cautions us
that the denial of payment by the bank guarantor can affect the reputation
of the bank even if the calling is unfair1. That is the reason for banks not to
deny payment or enforce their potential rights.
Another reason for banks not to deny payment is also the bank guarantor’s
right to demand reimbursement of the paid out amount from the applicant.
The bank’s rights become more relevant in cases of unfair callings where it is
1
More about the economic interests of bank guarantors in Bertrams F. Bank Guarantees in
International Trade. Paris; New York: ICC Publishing S.A., Kluwer Law International, 2004.
P. 83–90.
308
V. Kranjc, J. Prostor. Provisional court measure sunder independent guarantee
certain, that the bank will not be able to collect the guaranteed amount from
the applicant1. For instance, the applicants are insolvent or even under threat
of bankruptcy and potential rights of banks are not properly secured. These
circumstances are among others the reason for banks to more frequently
search for reasons to deny the payment of the guaranteed amount.
Considering that national legislations do not regulate unfair callings, they
also do not expressly explain what the appropriate action of a bank is. This
question is also not regulated in Uniform Rules for Demand Guarantees.
However, the United Nations Convention on Independent Guarantees and
Stand-by Letters of Credit grants the bank guarantor the right to withhold
payment to the beneficiary in its art. 19 (the guarantor, acting in good faith,
has a right against the beneficiary, to withhold payment). According to the
Convention the bank guarantor has a right and not a duty to deny payment2.
Consequently the bank might still demand recourse from the applicant in
cases where the bank pays out the guaranteed amount regardless the abuse
of rights made by the beneficiary.
“In German law it is for instance recognized that a bank confronted with
an unfair calling has the duty (not only the authority) towards its costumer
(applicant – A/N) not to pay on this demand, provided however that the
unfair calling can be proven, and that its costumer furnishes suitable evidence
to this effect”3. The proof of fraud, which must be provided only by the applicant, must be clear (in German law crystal clear, final and without doubt)
and there may not be another explanation which excludes fraud4.
Under the rules of United Nations Convention on Independent Guarantees and Stand-by Letters of Credit the bank guarantor does not breach
its obligations if it withholds payment of the guaranteed amount in cases of
abuse. In theory and practice there is generally accepted agreement that fraud
cannot be protected and that it gives a ground to lift the veil of abstractness5.
1
In recent years there is plenty of case law with situations like that in Slovenia.
2
Sekolec J.P. Op. cit. VIII., Davidson A. Fraud and the UN Convention on Independent
Guarantees and Standby Letters of Credit // George Mason journal of international commercial
law. 2010. Vol. 1, Issue 1. P. 44, cites UNCITRAL Explanatory Note by the UNCITRAL Secretariat on the United Nations Convention on Independent Guarantees and Stand-by Letters
of Credit. URL: http://www.his.com/~dlevy/english/texts/payments/guarantees.htm. Cmt. 48.
3
N. Horn in: Horn N. (Ed.). Op. cit. P. 201–202 (“<…> the bank is contractually obliged to
safeguard the interests of its costumer in the best possible way”). “In German law it is considered
that the banks have a duty not to pay in cases of “unzulässige Rechtausübung” on the basis of
the contractual relationship which they have with their costumer”. Vukmir B. in: Voskuil C.A.,
Parać Z., Wade J.A. (Editors). Op. cit. P. 59, cites Stockmayer and Bieberstein.
4
Vukmir B. in: Voskuil C.A., Parać Z., Wade J.A. (Editors). P. 60, cites Schmitthoff and
Westphalen.
5
Vukmir B. in: Voskuil C.A., Parać Z., Wade J.A. (Editors). P. 57.
309
II. Enforcement procedure in foreign countries
The abuse of rights needs to be clear and obvious and without any doubt
that the beneficiary abused his position. The bank is not justified to deny the
payment to the beneficiary, when it is not crystal clear, that the calling was
made unfairly. Article 19 of the Convention enables the bank guarantor to
deny the payment of the guaranteed amount to the beneficiary in cases where
the requirements of the guarantee are met, but it is obvious and clear, that
the submitted documents are not genuine or have been falsified, that there
is no payment due on the basis asserted in the demand and the supporting
documents, and that judging by the type and purpose of the undertaking, the
demand has no conceivable basis1.
Article 20 of the United Nations Convention on Independent Guarantees and Stand-by Letters of Credit regulates the situations where the abuse
(which is determined in art. 19) is not shown obviously, clearly and without
a doubt and it is only highly probable that the calling has been made unfair.
If there is only a high probability of abuse or of the circumstances determined
in art. 19 of the Convention, the bank guarantor (as well as the applicant) is
entitled to apply for a provisional order from the court. With this provisional
order the court temporarily prohibits the payment of the guaranteed amount
or prohibits the beneficiary to dispose of the already paid out amount (considering that it is probable that the applicant would suffer serious harm in
the absence of this provisional measure). Therefore, in cases where abuse of
rights is not showed obviously, clearly and without any doubt, but only with
a high probability, the bank guarantor does not have the right to deny the
payment of the guaranteed amount. If there is a high probability that there
was an abuse, the guarantor can demand the court to issue (after determining required facts) a provisional order prohibiting payment to the bank or
prohibiting the beneficiary from disposing the paid out amount.
However, the bank guarantor does not have the duty to suggest a provisional measure in cases of obvious and undoubtedly clear abuse. According
to the art. 20 of the Convention the applicant is entitled to start proper court
proceedings. The court issues a provisional measure after receiving an application for a provisional measure if there is immediately available strong
evidence that the calling has been made unfair. Article 20 reflects a common
understanding of court measures necessary and suitable to protect international commerce against unfair calling.2 The bank guarantor can therefore also
apply for a provisional court measure in cases of obvious and undoubtedly
1
In Slovenia there are cases where banks autonomously deny the payment of the guaranteed
amount in situations with unfair callings and abuses.
2
N. Horn in: Horn N. (Ed.). Op. cit. P. 202.
310
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