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Bank guarantees under Italian law



Antonio Braggion



 (Excerpt from “International Pacific Bar Association Journal”, 2004, 35)



 

The notion of 'independent guarantee contract' 

A bank guarantee at first demand is defined under Italian law as 'independent
guarantee contract'
. Even though such a contract is not expressly regulated
by the Civil Code, it has been admitted by the case law as falling within the
category of the so-called 'atypical contracts', which are an expression of the
principle of freedom of contract [1].

The distinction between an independent guarantee and a suretyship [2] (in French: 'cautionnement', in German: 'Bürgschaft') is sometimes quite difficult.

The difference is that a suretyship entitles the guarantor to raise the same
objections against the beneficiary, as the principal debtor would have. This
provision does not apply to an independent guarantee, since the obligation of
the bank is considered 'autonomous' and entirely independent from the
underlying main contract.

As a consequence, in case of a dispute regarding the payment of a bank guarantee
opened by an Italian bank, the party that has asked for the opening of the
guarantee, or the bank itself, often claims that the guarantee should be
regarded as a suretyship.

It is said that the existence of an independent guarantee rather than a suretyship
consists in the use of such expressions as 'at first demand', 'unconditionally', 'with no exceptions' and the like, to describe the bank's obligation of payment. It has also been observed [3] that 'the inclusion of a clause contemplating a payment «upon first demand» means that the contract shall be considered as an independent guarantee, such a clause being inapplicable to the kind of agreement the law describes as suretyship'.

Even though the aforementioned clause providing for first-demand payment cannot be
regarded as unquestionable evidence of the existence of an independent
guarantee, it is nevertheless a strong assumption thereto. Moreover, when the
nature of a guarantee cannot be easily inferred from the text of the document,
the interpretation, which will be the least burdensome for the debtor, shall be
preferred. Thus, considering the fact that ordinarily a guarantee is issued by
a bank, the bank primarily needs not to avoid paying the guarantee, but to avoid being involved in any disputes concerning the main contract. Such a need is obviously best met, in doubt, by regarding the guarantee as 'independent'.
In fact, not only a guarantee must be interpreted according to the usual practice (independent guarantees are by far the most widely used in international trade), but the interests of the beneficiary must also be taken into account, and such interests are best met only through an 'independent' guarantee [4].

In this regard it has been noted that 'the use of a «first-demand» clause' although not sufficient alone to prove with certainty that the parties meant to enter into an independent contract 'supports the assumption, which is both serious and consistent with a well-known practice in international trade, that this kind of guarantee was intended. As a consequence, in the absence of any specific elements to the contrary, it must be assumed that the parties intended to enter into an independent guarantee
contract
' [5].

By its own nature, an 'independent guarantee' is independent not only from the
underlying agreement ('main contract') but also from any possible counter
guarantees. This aspect has been stressed by the case law: 'An «independent guarantee», also known as «first-demand guarantee», which is the expression of freedom of contract granted to the parties by art. 1322, paragraph 2, Civil Code, is a three- or four-party relationship between the beneficiary of the guarantee, the guarantor (usually a foreign bank), the counter guarantor (non-compulsory party, which is usually a national bank securing the guarantee issued by the foreign bank) and the debtor. A fundamental characteristic of this contract, whereby it differs from a
suretyship as per art. 1936 and following of
the Civil Code, lies in the lack of accessory conditions: the guarantor is obliged to pay the beneficiary who has called the guarantee without raising any objections either about the validity or the enforceability of the main contract. The counter guarantor has similarly undertaken a corresponding obligation in favor of the guarantor' [6] .

On the other hand, in international transactions the parties normally try to
protect each other by issuing guarantees to secure their respective
obligations. The seller will therefore ask for a guarantee to secure payment of
the price (normally a letter of credit), whereas the buyer will ask for a
guarantee to secure the restitution of any down payment, and/or for a
'performance bond'. Actually, the purpose of a 'performance bond' is not only
to secure the absence of any defects, but also that the agreement be performed
in accordance with the implementation schedule [7].

 

On the abstract nature of an independent guarantee and its limits 

As stated above, the fundamental distinction between an independent guarantee and
a suretyship lies in the lack of ancillary conditions, so that the guarantor
undertakes to pay the beneficiary as soon as the latter asks for the payment of
the guarantee, with the exclusion of any objections about the validity or
fulfillment of the main contract. This characteristic has however a limit in
the possibility (or better: the duty) for the bank to refuse to pay by raising
the exception of fraud (so called: 'exceptio doli').

The above remedy is a consequence of the independent nature of the guarantee,
because a bank commits itself to fulfill its own obligation; without raising
any objections regarding a possible breach of the main contract.

Normally, an interim measure is requested to prevent the payment on the basis of the exceptio doli, i.e. claiming that the payment of the guarantee on the part of the bank would be unlawful, because the request of payment is prima facie fraudulent. The competence of Italian courts to issue an interim measure exists [8] whenever an interim measure must be executed in Italy, irrespective of the fact that a foreign court may have exclusive competence to decide on the merits of the claim (i.e. whether the call of the guarantee is unlawful).

The exceptio doli about the willful misconduct of the beneficiary who claims the payment of a guarantee must be proven „prima facie, in a clear and indisputable way“ [9]. It was also stated [10] that: „In an independent guarantee (an abstract form of guarantee of payment upon first demand), the agreement relating to the
guarantee is independent from the main contract and the creditor will be
entitled to claim the payment of the guarantee on the basis of a simple
declaration that the principal debtor failed to fulfill its obligations, and
the debtor shall prove that such allegation is unjustified. For the purpose of
avoiding any abuse and fraud... the debtor is entitled to challenge the claim
of the beneficiary of a first-demand guarantee by raising the exceptio doli,
which must be based on strong and clear evidence, in the event the behavior of
the creditor constitutes a breach of the commonly agreed principles of fair
practice and good faith
".

Usually, it is the client (i.e. the party ordering the bank to issue the guarantee) who
files a judicial request for an interim measure to enjoy payment on the part of
the bank.

If the transaction has been organized in accordance with the scheme previously
indicated ('four parties relationship'), evidence of the fraud is even more
difficult, because if the client intends to raise the exceptio doli to prevent the payment of the guarantee of first degree, he will have to prove in a rigorous way that (also) the bank of first degree has behaved fraudulently [11]. Only few decisions exist on this issue [12].

A logical consequence of this is that the client (i.e. the party ordering the
bank to issue the counter guarantee) has very limited possibility to raise
objections about the fulfillment of the main contract, while any objection is
banned concerning the relationship between the first-degree guarantor and the
beneficiary.

In this regard it was held [13] that: 'In the event of a counter guarantee, the
bank acting as counter guarantor undertakes before the bank acting as guarantor
an obligation having the same nature
' i.e. an abstract guarantee 'and
content is the same as the bank acting as guarantor undertakes before the
beneficiary. Such obligation will be performed by the simple fact that the
guarantee issued by the bank acting as guarantor has been called. The bank
acting as counter guarantor does not undertake any obligations in respect of
the beneficiary, so that the debtor cannot sue the bank acting as counter
guarantor about such matters as whether the guarantee is not valid, whether the
counter guarantor has no obligations before the beneficiary and therefore
whether any claim of the counter guarantor against the debtor himself is lawful
'.

Nevertheless, even though the guarantor is obliged to pay the guarantee in accordance with the terms of the contract and therefore upon a simple request of the
beneficiary, in case of evident breach of the main contract, the guarantor must
protect the debtor's rights, by raising the exceptio doli against the beneficiary, if the latter submits strong and objective evidence thereof [14].
 

 

Mechanism and evidence of the exceptio doli 

When raising the exceptio doli, the fraud of the beneficiary who has asked for the payment of a guarantee must be proven 'prima facie' through strong and indisputable evidence [15]. This excludes the possibility that evidence be acquired through any kind of discovery activity such as witnesses or a technical expertise. The case law
[16] has observed on this point: 'The exceptio doli can only be legitimately raised in the event of an objectively abnormal use of the beneficiary's right and if prima
facie evidence of such an abuse is offered; in fact, the specific function of an independent guarantee is not compatible with a simple assumption of evidence about the objection raised to paralyze it, which needs to be formed during the proceeding itself'.

Therefore, whenever a dispute arises between the parties of the main contract about the fulfillment of said contract, the request of payment of the guarantee cannot be
qualified as malicious or fraudulent, and therefore cannot be prevented through
a judicial order [17].

More complicated appears to be the case when the debtor (i.e. the party ordering the
bank to issue the guarantee) invokes the impossibility to perform his obligation because of 'force majeure'. The typical situation is war, social unrest, embargo or other administrative or governmental acts preventing the fulfillment of the contract (so called 'factum principis').
According to the case law, the occurrence of a force majeure event cannot be invoked, to avoid liability for breach of contract, if the debtor at the time the agreement was signed was aware that such risk was likely to occur. It was noted [18] that "a debtor must be considered in default and cannot invoke force majeure in respect of an event which was to be expected at the time the contract was
stipulated
". Therefore, "to escape liability for breach of contract, a party cannot invoke the impossibility to fulfill his obligations, not even on grounds of factum principis, when the possible emergence of a particular risk, which may hinder the fulfillment of the contract was contemplated in the contract itself and the party voluntarily accepted such risk" [19]. If factum principis is admitted, as an event entirely extraneous to the will of a debtor, it is still to be verified to what extent the debtor was 'reasonably' capable of foreseeing such event at the time of the stipulation of the contract [20].

After the limits of exceptio doli have been specified, it is clear that the proceeding concerning the existence of the exceptio doli is something different
from the proceeding concerning the possible breach of the main contract. In
fact, the scope of the former can only consist in ascertaining whether the call
of the guarantee on the part of the beneficiary is prima facie fraudulent, and whether the payment of the guarantee should be enjoyed [21].

The two proceedings are in fact different in terms of the parties involved (the
client - i.e. the party ordering the bank to issue the guarantee - and the bank
in the former; the client - i.e. the party ordering the bank to issue the
guarantee - and the creditor in the latter); in terms of the agreement under
dispute (a mandate agreement between the client and the bank in the former; the
main agreement in the latter); and in terms of petitum (a judgment about the validity of the obligation to pay a guarantee in the former; the disputes on the main agreement and its fulfillment in the latter).

The difference was pointed out by the Tribunal of Udine [22], that has clarified that the scope of a proceeding in respect of the call of a guarantee at first demand is limited to the specific content of the obligation undertaken by the bank, and therefore to the objections the bank itself is entitled to raise.

 

Choice of law and international jurisdiction 

The law applicable to a bank guarantee must be determined pursuant to the rules of
conflict laid down by the Act 31 May 1995, no. 218. Article 57, concerning
contractual obligations, refers to the Convention of Rome of 19 June 1980,
concerning the law applicable to contractual obligations.

Article 4 of the Convention of Rome prescribes that in case the parties fail to make
the choice of law applicable to their contract, the law that has the closest
connection to such contract shall be applicable. According to the convention,
it is assumed that a contract is more closely connected to the country where
the party that commits to execute a specific obligation has its place of
business at the time of the stipulation of the contract.

An independent guarantee involves obligations for the bank only, so that the
contract is considered stipulated at the time and at the place where the
beneficiary of the guarantee has received the offer from the bank [23]. As a
consequence, unless otherwise contemplated in the text of the guarantee, the
applicable law is usually the law of the country where the bank has its place
of business.

Concerning international jurisdiction, according to article 3 of the Act 31 May 1995 no.
218, mentioned above, the criteria for asserting jurisdiction laid down by the
Brussels Convention of 27 September 1968 'concerning jurisdiction and the
enforcement of decisions in civil and commercial matters' are extended also to
any party which is not domiciled in the territory of a contracting state in
respect of any case falling within the field of application of the Convention itself.

Unless the parties have granted exclusive competence to a specific court, according to
article 2 of the same convention, the parties domiciled in the territory of a
contracting state can be summoned before the courts of such state, regardless
of their nationality. Article 5 no. 1, concerning special jurisdictions,
prescribes an alternative option, i.e. a party domiciled in the territory of a
contracting state may be summoned before the court of the place where the
obligation which is the object of the claim was fulfilled or must be fulfilled.

In the case of a bank guarantee, the place of fulfillment is the one where the
guarantee must be paid. If the guarantee itself does not specify any place of
payment, such place will be fixed according to the law applicable to the
guarantee. If the applicable law is Italian law, on the basis of the rules of
conflict previously mentioned, the place of fulfillment of the obligation will
be the creditor's domicile.

In fact, it has been pointed out [24]: 'In the case of guarantee at first
demand the amount due by the bank acting as guarantor is fixed within a certain
maximum amount and in accordance with the other terms contemplated in the
guarantee itself. The bank's obligation shall therefore be fulfilled at the
domicile of the creditor, pursuant to article 1182, paragraph 3 of the Civil
Code. As a consequence, if the beneficiary is domiciled in Italy, Italian
courts do have jurisdiction over a foreign defendant pursuant to article 5 no.1
of the Brussels Convention
'.

It should be observed that according to the new Italian international private law
(Act 31 May 1995 no. 218), jurisdiction cannot longer be based on the
connection existing with a case in respect of which Italian courts do have
jurisdiction. As a consequence, in the event the main agreement falls within
the competence of Italian courts, jurisdiction over a foreign beneficiary
cannot be based on the connection existing with the first case. This is also
true in the event the client (i.e. the party that had ordered the bank to issue
the guarantee) has in the meantime been declared bankrupt.

With regard to this point, it has been pointed out [25] that article 1 paragraph no.
1 of the Brussels Convention, excluding from the field of application of the
convention itself bankruptcy, composition and similar procedures, must be
construed restrictively, in the sense that such restriction only refers to
bankruptcy proceedings stricto sensu and cannot be extended to any kind of dispute a bankruptcy can be part of, i.e. beyond the limits of what Italian law assigns ratione materiae to the exclusive competence of bankruptcy courts.

 

* * * *

 

[1] The principle of freedom of contract is embodied in article 1322 of the Civil
Code whereby the parties can freely decide the contents of their agreement
within the limits laid down by the law, and even enter into any contract which
is not specifically contemplated by the Civil Code, provided that the aim of
the contract deserves protection according to the law.

[2] Under article 1936 of the Civil Code, a suretyship is defined as a contract,
whereby the guarantor secures the fulfillment of the obligation of someone
else, through a personal obligation in respect of the creditor.

[3] Court of Cassation, judgment 6 April 1998, no. 3552, in Giur. it. 1999, 502.

[4] In this regard: Bonelli, Le garanzie bancarie a
prima domanda nel commercio internazionale
, 1991, 43.

[5] Tribunal of Udine, judgment 9 November 1999 no. 989 ('Vogt et al.' vs. 'Banca Popolare Udinese'), published in the German review „Recht der
internationalen Wirtschaft
“ 2000, 638, with a comment of Braggion, 'Internationale
Zuständigkeit bei Bankgarantien
'.
Also, according to the Court of Appeal of Genoa, judgment 8 May 2003 ('Finmeccanica Co., Armamenti & Aerospazio Co. v. Banca di Roma, Bank Markazi, Bank Melli'), in Giur. merito 2003, 2362, with a comment of
Belfiore, 'Garanzia autonoma e litisconsorzio non necessario': 'the
utilization in the text of a guarantee of expressions such as
«at first
demand» or «unconditionally», even though it is not sufficient per se
to establish a first demand guarantee contract, is nevertheless a reasonable
assumption thereof
'.

[6] Court of Cassation, judgment 11 February 1998, no. 1420, in Banca borsa tit.
cred.
, 1999, II, 265.

[7] In this regard see Vigone, Contratti atipici, 1998, 197.

[8] Act 31 May 1995, no. 218, article 10. According to Tribunal of Udine, order 10
December 2003 ('PeRT Co. v. Credifriuli Bank, Iccrea Bank et al.'), the
aforementioned provision should be construed in such a way as to include any
situation in which the possible non fulfillment of tan interim measure would
immediately and negatively affect a party domiciled in Italy. It was therefore
considered that jurisdiction existed on the basis of the fact that both the
bank that had opened a guarantee in favor of a foreign beneficiary and the bank
that had opened the counter guarantee were resident in Italy. It seems quite
difficult that the same requirement could apply in the more frequent case in
which the guarantee of first degree has been opened by a foreign bank, not domiciled
in Italy: in such a case the jurisdiction for the purpose of an interim measure
could not be exercised on the foreign bank.

[9] Court of Cassation, 6 October 1989, no. 4006.

[10] Magistrate's Court of Milan, order 13 March 1989, in Banca borsa tit.
cred
.,1990, II, 4. According to Court of Appeal of Genoa, judgment 8 May 2003 (supra no. 5), 'the autonomy of a first demand guarantee is not absolute, because the disparity between the different relationships is balanced by the actions of regress, as
well as by the possibility of raising the
exceptio doli against a fraud made by a party that did not disclose any subsequent situation negatively affecting the original right, pertaining to the main contract'.

[11] Calderale, 'Garanzie autonome in Italia, revisione delle norme uniformi per le garanzie contrattuali e riforma dell'art. 5 dell'U.C.C.', in Banca borsa tit. cred., 1991, II, 655: 'In the case of indirect guarantees, to inhibit the payment by the
counter guarantor objective evidence must be offered to prove not only the
fraud of the beneficiary against the guarantor, but also the fraud of the
first-degree guarantor
'.

[12] According to Magistrate's Court of Rome, judgment 24 March 1986, in Banca borsa tit. cred., 1987, II, 56: 'an interim measure as per art. 700 of the
Code of Civil Procedure whereby a guarantor is entitled to legitimately refuse
to pay a
«performance bond», can be granted in the presence of
strong and objective evidence of the fraud by the beneficiary and/or of the
fraud of the foreign bank acting as a mediator
'.

[13] Tribunal of Milan, judgment 14 September 1987, in Banca borsa tit. cred., 1988, II, 5.

[14] In this sense: Massironi, comment to Tribunal of Alba, judgment 22 June 1998,
in Giur. it. 1999, 1004.

[15] Court of Cassation, judgment 6 October 1989 no. 4006, in Giur. Comm.
1991, II, 5.

[16] Tribunal of Milan, judgment 13 December 1990, in Banca borsa tit. cred., 1991, II, 589.

[17] In this sense: Bonelli, op. cit., 105.

[18] Court of Cassation, judgment 7 January 1970, no. 44.

[19] Court of Cassation, judgment 9 November 1960, no. 2979.

[20] Bonelli, "Force majeure e hardship nel diritto uniforme della vendita
internazionale
", in Dir. Comm. Int. 1990, 556.

[21] Bonelli, op. cit., 151-152.

[22] Tribunal of Udine, judgment 27 March 2002 ('Keilholz GmbH v. Banca Popolare Friuladria et al.'), published in MiittBl. DAV Int. Rechtsverkehr 2003, II, 109, with a comment of Braggion.

[23] Court of Appeal of Milan, 12 June 1991, in Banca borsa tit. cred. 1992,
II, 675.

[24] Court of Appeal of Milan, supra no. 27.

[25] Tribunal of Udine, judgment 27 March 2002 (supra no. 22).

 

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