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Bank guarantees: all depends on how they’re worded! 
20-04-2015

In issuing a bank guarantee, a bank undertakes to pay an agreed maximum amount of money to a beneficiary during the lifetime of the guarantee, provided that certain conditions are met. So if, in your capacity as a debtor, you provide a creditor with a bank guarantee as part of a contract for the supply of certain services or works, the creditor may subsequently be entitled to call in or ‘invoke’ the guarantee, regardless of whether or not you are satisfied with the quality of the services of works supplied. Having paid the amount of the guarantee, your bank will then seek the recover the amount in question from you. If you’re not satisfied with the services or works supplied by your creditor, you will be obliged to bring a claim against it if you wish to recover your money. In other words, the basic principle underlying a bank guarantee is ‘pay first, then talk’. There are, however, two exceptions to this rule.

The wording of a bank guarantee can make all the difference

First, all depends on the wording of the bank guarantee. Not every guarantee is an ‘abstract’ guarantee, i.e. couched only in general terms and without any detailed conditions. For example, you can include one or more provisions setting out conditions that need to be satisfied in order for payment to be made. These may stipulate, for example, that:

  • the value of the bank guarantee depends on the value of an underlying claim
  • you must accept the existence or size of this claim, and/or;
  • the creditor and/or the beneficiary either may not previously have been declared bankrupt or, as the case may be, must have previously been declared bankrupt.

Obviously, requirements such as these must be clearly formulated in the bank guarantee. If not, it will probably constitute an ‘abstract guarantee’, which means that payment will not require compliance with any detailed conditions.

What if you suspect that your counterparty is being fraudulent or deceitful in invoking a bank guarantee? Contact your bank immediately and provide evidence for your suspicions!

The second exception involves cases of fraud or deception. The Supreme Court of the Netherlands recently ruled that a particular bank guarantee was an ‘abstract guarantee’ and that the obligation to pay under the guarantee was an ‘independent obligation’ – unless the creditor had acted in a fraudulent manner. In previous rulings, the Supreme Court had indicated that there was a certain degree of dependency between the bank guarantee and the underlying legal relationship between the creditor and the debtor. In this case, the Supreme Court decided that the bank’s refusal to pay because ‘the amount claimed was obviously wrong’ did not constitute a sufficiently detailed rebuttal. Even though sufficient evidence was later provided to substantiate the allegation that the guarantee claim was fraudulent, the bank was nonetheless obliged to pay the beneficiary.

What if you suspect that a guarantee claim is fraudulent?

If so, get in touch with your bank straightaway, explaining clearly why they should refuse to pay the beneficiary under the terms of the guarantee. If you allow the bank to pay out, the bank will seek to recover the payment from you. However, if the creditor has already been declared bankrupt at that point, as indeed happened in the case that was the subject of the Supreme Court ruling, you will have no more than a standard creditor’s claim against the bankrupt estate – for the amount ‘wrongly’ disbursed by the bank. The chance of you actually receiving any money is very small, particularly as you’re not classified as a preferential or secured creditor. Only around 5% of such ‘ordinary’ (i.e. unsecured) claims against bankrupt estates prove successful, and then only to a very limited degree.

Bank guarantees in general

Apart from charging a fee for the guarantee (not just a one-off fee, but a regularly recurring fee throughout the life of the guarantee), your bank will often lower your credit limit by the value of the guarantee for the latter’s duration. Alternatively, it may decide to freeze the balance on one of your accounts or press for an extra right of pledge or mortgage. And don’t forget: whatever the bank pays under the guarantee, it will seek to recover from you.

Two tips

Here are two points to bear in mind if you’re planning to offer your counterparty a bank guarantee or if you’ve already provided a bank guarantee:

  1. Try and reach an agreement with your counterparty that the bank guarantee will not be an ‘abstract guarantee’, but one under which payment may be made only if certain strictly formulated conditions are met.
  2. If you suspect that your counterparty is making a fraudulent claim under the guarantee, ask your bank as soon as possible (preferably in writing) not to pay out and given them all the evidence you have to show why they should refuse to pay.

Interested in more information about bank guarantees?

If you’re planning to provide your counterparty with a bank guarantee, or if you’d like to know more about the scope of a bank guarantee you have either already provided or received, feel free to get in touch with me or one of our other specialist insolvency lawyers.

© 2021 RWV