The limits of formality in bank guarantees
The recodification of private law in effect from 1 January 2014 was meant to bring a reduced level of formality in legal relations. Even this, however, has its limits, as shown by a recent decision of the Supreme Court. Discussing a case involving a bank guarantee, the court held that the omission of a single word in a creditor’s call to a bank to perform its duties may result in the creditor not receiving any performance.
According to the court, if a guarantee instrument prescribes the wording of a call, the creditor must fulfil all the formal requirements. Even one missing word (the word due was missing in this particular case) may result in the fact that the creditor’s right to a bank’s performance will not arise. Moreover, where the bank guarantee allows the creditor to request performance by the bank based on a creditor’s declaration that the debtor has not paid on time, the bank must provide the relevant performance even if such declaration is not true.
The case at hand involved the issue of a number of bank guarantees by one leading financial institution in favour of the creditor, a producer of metallurgical products. The guarantee instruments stated that the bank had obligated itself to make appropriate payments without examining a relevant legal relationship (purchase contracts in this case) and without any objections. The payment should have been performed without undue delay after receiving a written creditor’s call in which the creditor should have declared, inter alia, that the debtor “did not meet its due payment obligations connected with the supply of goods”.
After the debtor did not pay its debt, the creditor asked the bank for performance but forgot the word due in its call. The bank refused to perform, claiming formal deficiencies of the creditor’s call such as the call’s inconsistency with the guarantee instrument. The first instance court took the side of the creditor and held that the mere omission of one word in the text does not give grounds for rejecting performance where it is not clearly stated in the guarantee instruments that the wording of the call for performance must be identical with the text specified in the guarantee instruments. The appellate court, however, changed the first instance court’s decision and rejected the creditor’s motion.
The creditor filed an appeal against this decision arguing that the requirement to strictly follow the text specified in the guarantee instruments represents unjustified formalism unsupported by law. The Supreme Court, however, viewed it differently and held that the bank was not authorised to examine the maturity of receivables and the creditor was obligated to use the text specified in the guarantee instruments when calling for performance. The bank’s duty to perform was linked to the strict fulfilment of the call’s formal essentials. Since the creditor omitted one essential element, in this case just one word, the bank’s duty to perform in connection with the bank guarantee did not arise.