13 June, 2019

How to prevent abuse of bank guarantee?

The unconditional, “first demand” bank guarantees are considered to be among the most secure forms of protection against various risks in business. By issuing the bank guarantee, the bank as a guarantor undertakes to make a payment to the recipient of guarantee (the beneficiary) in the event of non-performance of contractual obligations by a third party. When a demand is made to the guarantor and is in compliance with the terms of the guarantee, the guarantor (the bank) is under obligation to pay to the beneficiary regardless of the underlying relationship between the beneficiary and the grantor. However, due to their abstract nature and independence from the basic legal transaction, various abuses of bank guarantees may occur.

The courts will rarely interfere in the realization of the bank guarantee, and there are only a few circumstances where a grantor of bank guarantee can prevent the beneficiary from obtaining payment. According to Slovenian case law, the courts may intervene in case of abuse of bank guarantee where the beneficiary of the bank guarantee has acted fraudulently or in contrary with the principle of conscientiousness and fairness, namely by issuing an interim order preventing the guarantor (the bank) from honoring the guarantee. For example, the abuse of bank guarantee can be inferred from calling for payment under unconditional bank guarantee despite previous unambiguous statements by the beneficiary confirming complete performance of works or after early termination of underlying agreement and, furthermore, in case of obvious and clear breaches of underlying contract by the beneficiary.

In event of abuse of bank guarantee by the beneficiary, the grantor will need to act quickly and file a motion for an interim order (injunction) in order to prevent a bank from honoring the bank guarantee.

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