Even the smallest inaccuracy may render a guarantee invalid

A guarantee is one of the most frequently used securities. In the case law and in legal acts of Lithuania, 2 types of guarantees are distinguished: the conditional guarantee, where the guarantor is only liable if the debtor does not fulfil its obligation or fulfils it inappropriately (in such a case the guarantor bears secondary liability, i.e. to a degree not fulfilled by the debtor), and the demand guarantee, where the guarantor is liable to the creditor upon the creditor’s demand to pay the amount indicated in the guarantee irrespective of the fact (i.e. without trying to clarify) whether the secured obligation has been fulfilled. In the latter case, the guarantor undertakes to pay the amount specified in the guarantee without exploring the characteristics of the fulfilment of the obligation, such as whether the obligation has been at least partially fulfilled, whether it is still valid, etc.

The demand guarantee is regarded as a separate obligation and its validity is, in principle, restricted only by a certain time-period, but not the existence of the principal obligation. It is often believed that the guarantee, in particular where it is an irrevocable bank demand guarantee, is an especially safe security providing the creditor with a possibility to satisfy its demand if that cannot be done by the debtor. Unfortunately, the practice shows that even the guarantee does not always ensure the protection of the creditor’s rights, in particular where the creditor did not pay attention to its inaccuracies or its contradiction to other documents.

The question of payment according to the guarantee was raised in one of the most recent cases of the Supreme Court of Lithuania where a bank, which had issued an irrevocable bank guarantee, later on refused to pay upon the creditor’s demand substantiating this decision by saying that the agreement indicated in the guarantee, under which the guarantee had been issued, was different from the agreement specified in the creditor’s notification. The only difference quoted by the bank was different dates of conclusion of the agreement.

The creditor explained that the dates differed because at the time of issue of the guarantee the plan had been to sign the agreement on a certain date, while later on, actually, it was concluded on a different date, even though the guarantee conditions and the very guarantee still contained the original date. On the basis of the principle of separability of guarantee, the creditor tried to prove that the bank must pay the amount indicated in the guarantee without exploring the principal obligation or its validity, degree of its fulfilment or other circumstances, because the guarantor bears liability irrespective of the principal obligation. In its defence, the bank used an argument that the guarantee had been issued to secure a completely different obligation and refused to provide pre-contractual documents (applications for issue of a guarantee, documents in relation to the approval of agreements, etc.) – which the creditor wanted to use to prove the fact of the mistake – for the reason of confidentiality.

Even though the Court of Appeal of Lithuania adopted a decision favourable to the creditor and interpreted the bank’s refusal to provide information to the prejudice of the bank, the Supreme Court of Lithuania dismissed the creditor’s claim. According to the Supreme Court, the laws do not provide for an obligation to indicate in the bank guarantee the obligation, with regard to which the bank undertakes liability, and its legal basis, however, the laws do not provide against the parties agreeing and specifying in the guarantee such an obligation and its legal basis. This means that the bank (guarantor) and the debtor are free to agree and indicate in the guarantee not only the limits of the guarantee, but also the obligation, with regard to which the bank undertakes liability, and the legal basis for its emergence. Thus the circumstance that the parties directly specified the obligation in the guarantee enabled the bank to verify whether the creditor’s request was related to the indicated obligation and whether it was in compliance with the mandatory details of such an obligation.

While analysing the parties’ arguments which were used to explain the circumstances regarding different dates of the agreement, the Court stated that the evidence to the effect that the agreement had been concluded on the date indicated by the creditor did not deny a possibility that the parties could have also entered into another agreement precisely regarding the guarantee issued by the bank. The bank’s refusal to provide applications submitted for the issue of guarantee was recognized as reasonable by the Supreme Court of Lithuania and the rule of unfavourable presumption was not applied with regard to the bank.

This case law of the Supreme Court should draw the attention of business entities to the details while concluding several related transactions so that they draw up documents and texts of agreements more carefully, coordinate them with agreements signed in parallel, review all the transaction documentation following the signature of the transaction and adequately reflect in writing any subsequent amendments. In the case described above the creditor, acting as a cautious businessman, should have amended the guarantee, which had already been issued, and its conditions, and should have changed the indicated date of conclusion of the agreement, thus avoiding an unfavourable court decision.


Audrius Žvybas, Senior Associate, Law Firm GLIMSTEDT

The article was published on vz.lt website 

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