Not all bank guarantees are created equal
Although the bank guarantee is a commonly used form for securing claims, it is one of the most controversial institutions in Polish law. In a dispute, it is essential to analyse thoroughly the documents establishing the bank guarantee.
A bank guarantee is an undertaking by a bank to pay out a specific amount of money to the beneficiary upon fulfilment of specific conditions. Typically a bank guarantee serves the function of securing claims. A bank guarantee is based on three separate legal relationships: one between the debtor and the creditor (the principal relationship), the second between the bank and its customer for whom the bank has issued the guarantee (the debtor in the principal relationship), and the third between the bank and the beneficiary of the guarantee (the creditor in the principal relationship).
The complicated legal arrangement underlying a bank guarantee, combined with its inadequate regulation under the Banking Law, makes the bank guarantee one of the most controversial institutions in Polish law. Practically every aspect of it is disputed: Whether it is a transaction for a fee or not; an ancillary undertaking (tied to the principal relationship) or an independent undertaking; abstract (detached) or causal; and even whether it is a unilateral act or an agreement between the beneficiary and the bank.
In one of our cases which ultimately reached the Supreme Court of Poland on a cassation appeal, a claim for repayment of a loan secured by a bank guarantee entered an arrangement proceeding in which the creditors agreed to write off 40% of the claims covered by the arrangement. (The arrangement proceeding was conducted under the Arrangement Proceedings Law of 24 October 1934, which is no longer in force.) Due to the opening of the arrangement proceeding and the prohibition against paying claims covered by the arrangement, the debtor ceased paying successive instalments of the loan. The creditor then demanded under the bank guarantee that the bank pay the instalments that were not paid by the debtor. The bank paid as demanded, during the period when the arrangement was in force, and then satisfied itself out of the debtor’s assets by enforcing liens on the assets established in favour of the bank.
In the guarantee agreement and in the guarantee letter, there was a reference to the actual indebtedness of the bank’s customer, and the bank undertook to pay the beneficiary the actual indebtedness under the loan agreement in the amounts and times indicated in the loan agreement.
The dispute between the parties concerned whether due to opening of the arrangement proceeding, the bank should pay the creditor 100% of the instalments not paid by the debtor (and then execute against the debtor 100% of the amount paid), or both of the claims (the beneficiary’s claim against the bank and the bank’s claim against its customer, i.e. the recourse claim) should be reduced by 40% pursuant to the arrangement.
From a legal point of view, this raised the question of whether a bank that pays the guarantee amount in whole or in part assumes the rights of the beneficiary as a satisfied creditor under the principal relationship secured by the bank guarantee, or does not assume such rights because it is only paying its own debt to the beneficiary, and then can pursue reimbursement from its customer of the entire amount paid to the creditor.
The court of first instance held that the recourse claim against the bank’s customer was a conditional claim that arose upon conclusion of the guarantee agreement, and thus it was covered by the arrangement proceeding and should be cut by 40%.
The appellate court disagreed, holding that the bank’s recourse claim was not a conditional claim but only a future claim, which because it arose after the opening of the arrangement proceeding was not subject to reduction under the arrangement. The appellate court also rejected the holding by the lower court that the bank had assumed the rights of the satisfied creditor, because in making the payment to the beneficiary it was discharging its own obligation and not the obligation of its customer.
The appellate court relied on Civil Code Art. 742, which provides that the principal issuing a mandate should reimburse the contractor accepting the mandate for expenditures which the contractor incurs for the purpose of properly carrying out the mandate. This would justify the bank’s execution of the entire amount paid out to the beneficiary.
The bank’s customer challenged this holding before the Supreme Court of Poland. It argued that paying the amount of the bank guarantee is the very essence of the action to be performed by the bank, and therefore cannot be regarded as an expenditure incurred for the purpose of carrying out the mandate. The customer also argued that in this specific instance, the bank guarantee was clearly ancillary in nature: Its purpose was to secure repayment of a specific loan, and the bank made payments to the beneficiary in the instalments and times provided in the loan agreement. This construction of a bank guarantee would make it similar to the institution of an ordinary third-party guarantee (poręczenie), which is the model construction of ancillary security. Under an ordinary guarantee, the guarantor assumes the rights of the satisfied creditor even though the guarantor has discharged its own obligation. In this specific situation, the result should be the same for the bank under the bank guarantee. Assuming the rights of the creditor would then mean that the recourse claim against the bank’s customer was also covered by the 40% write-off under the arrangement.
The bank’s customer also argued that holding otherwise could undermine the purpose of arrangement proceedings, which are designed to restructure the obligations of the debtor and protect it against bankruptcy. If all of its creditors were secured by bank guarantees, and the banks’ recourse claims were not subject to the write-off, the debtor would be unable to benefit from the write-off of its obligations and would have to pay them in full.
The Supreme Court of Poland upheld the position of the debtor, stressing that bank guarantees are regulated in the Banking Law in a general and insufficient fashion. Lacking a uniform pattern for the institution of the bank guarantee, this means that every dispute arising under a bank guarantee must be considered on a case-by-case basis, according to the provisions found in the documents establishing the bank guarantee.
Monika Hartung, Dispute Resolution & Arbitration Practice, Wardyński & Partners, and Justyna Zandberg-Malec, Litigation Portal