By: Hetti Lump and Pirkka-Marja Põldvere
Advokaadibüroo Aivar Pilv, Estonia
On 22 September 2009 a co-author of this article, Hetti Lump, published an article titled "A bank guarantee – another risk for the debtor?" in the English language newsletter of Aivar Pilv Law Office. The purpose of that
article was to point out that the usage of bank guarantees is not always without problems. The dispute between the debtor and the creditor on whether the guarantee event has arrived or not, i.e. on whether the creditor has the right to demand the payment of the guarantee amount and whether the bank has the payment obligation, are rather common in practice.
As brought out in the referred article, the guarantee event has not occurred if:
(a) the event described in the bank guarantee has obviously not occurred or the risk for which the bank guarantee has been set up has not materialised;
(b) the obligation secured by the guarantee has been deemed void by either a court or arbitral tribunal, except if that risk has been secured by the guarantee as well;
(c) the obligation which the independent guarantee was to secure has been clearly and duly fulfilled etc.
It was noted that there was no regulation or court practice in Estonia that would deal with the suspension of the payment of the guarantee amount in cases where the debtor and the creditor have a dispute over whether the guarantee event has occurred or not. Hetti Lump conceded that, due to the nature of bank guarantees, the payment of the guarantee sum cannot, as a rule, be suspended by the debtor.
The author explained, however, that, in theory, there is one possible way for the debtor to hinder the payment of the guarantee sum to the creditor – i.e. interim measures. If the debtor finds that the creditor has requested payment from the guarantor in a situation where the guarantee event has not occurred, then the debtor can, immediately after having learned of such a claim, file to court for the application of interim measures. The debtor should then ask the court to forbid the payment by the bank to the creditor.
By now the Estonian Supreme Court has also affirmed that, by way of applying provisional legal protection, the suspension of the payment of a guarantee amount is possible. The Supreme Court noted that while deciding whether to grant such an application, the court must consider the facts of each case and assess whether the interim measure is necessary and reasonable.
On 27 October 2010 the Supreme Court stated (case No.3-2-1-74-10): "It is essentially possible to forbid, by securing an action, a third person guarantor from paying out a guarantee sum to the defendant. This would be an interim measure set forth in Section 388(1)4 of the Code of Civil Procedure. Upon its implementation active obligations cannot be placed on third persons (i.e. to demand payment) but one can forbid the payment to the defendant and oblige the payment e.g. to a bailiff or to a court’s deposit account." However the court differentiated between securing a monetary claim and securing an ascertaining (establishment) claim.
With respect to monetary claims, the Supreme Court stated: "The grounds for securing an action with a monetary claim are provided in Section 377(1) Code of Civil Procedure, by which the court may secure an action at the request of the plaintiff if there is reason to believe that the failure to secure the action may render compliance with the judgment difficult or impossible. This provision has the purpose of making it easier to enforce the judgment, which satisfies the claim. In cases of a monetary claim, the forbidding of a third person to pay to the defendant does not simplify the enforcement of the judgment. The securing of such an action basically creates a situation, where the defendant would have less assets than when the request for securing the claim is dismissed, i.e. the enforcement of the judgment that seeks to demand payment from the defendant would rather be made more difficult than easier."
Based on the above, the Supreme Court is of the position that even if there is are grounds for securing a monetary claim by way of suspending the payment of the guarantee amount, then this would not be a proper measure to secure a monetary claim. As it is a well-established principle in practice that an interim measure should be proper (suitable), then it could be concluded that an application to secure a monetary claim by suspension of guarantee amount should be dismissed.
The conclusions of the Supreme Court have been somewhat different with respect to securing an ascertaining/establishment action (tuvastushagi; i.e. an action where the claimant asks the court to establish that the defendant does not have the right to demand the payment of the guarantee sum). The Supreme Court stated: “When securing an establishment action one must be guided by Section 377(2) of the Code of Civil Procedure pursuant to which, at the request of the claimant, a court may, when securing an action that has no monetary claim against the defendant, preliminarily regulate the disputed legal relationship […]. The chamber finds that in a situation where the court has been asked to establish that the defendants do not have the right to demand payment of the guarantee sum, the interim measure requested by the claimant, basically fits under the preliminary regulation of the disputed legal relationship. The court finds that it is essentially possible to suspend the payment of a guarantee amount for the duration of the dispute in which it would be determined whether the defendants have the right to demand the payment of the guarantee amount, i.e. contractual amounts in the extent of the guarantee, or not.”
However, the Supreme Court has clearly emphasized that it might not always be reasonable to forbid the guarantor to make payments under the guarantee by way of interim measure. The court explained that: “This might be reasonable if the guarantee has a close connection to the dispute at hand (if the claims at dispute are secured by it), the payment of the guarantee amount would cause significant expenditures to the claimant and the suspension of the payment would not be disproportionate to the interests of the defendant, i.a. when it is secured that the defendants would not lose the actual possibility to successfully claim the guarantee amount, should the action be denied.”
Thus the Supreme Court has considered it possible to forbid the guarantee payment by way of interim measure but this only if the above criteria are met. Unfortunately the Supreme Court has not explained which debtor’s expenditures are relevant and in which cases the suspension of the payment of the guarantee amount would be disproportionate to the interests of the creditor. Thus, to this day the Supreme Court has not specified in which cases the suspension of the payment of the guarantee amount is necessary and justified and in which not.
As, in practice, there is a tendency for debtors to abuse their procedural possibilities that allow the suspension of the payment of the guarantee amount (filing groundless applications to court and requesting interim measures), then, in view of the authors, the courts shall very carefully deliberate on when to apply such interim measure and when not. There is a risk that the suspension of the guarantee payment by way of provisional legal protection might start to disproportionally damage the effective functioning of bank guarantees. This danger is most clear with respect to the so-called first demand guarantees, where – in principle – the only criterion for payment should be the filing of a written claim to the guarantor that fits the criteria stipulated in the guarantee contract.
It has been explained both in legal theory and in (international) court practice what are the actions that a debtor shall take in order for the court to satisfy its request for the suspension of the guarantee payment. International law and practice has also brought the aspects which the court should keep in mind when deciding on such request. The authors are of opinion that – at least until as long as there is no clear standpoint by the Estonian Supreme Court, one should reasonably follow the guidelines established in international theory and practice.
In order for the court to grant debtor’s application to suspend the payment of the guarantee amount, the debtor shall present to the court proof establishing the likelihood that the debtor would be able to prove in substantive proceedings that the creditor does not have the right to claim the payment of the guarantee amount. The debtor shall also prove to the court that the failure to apply the interim measure would result in irreparable damage to the debtor. It has been emphasized both in legal literature as well as in international court practice that the suspension of the guarantee payment is justified only if it is manifest, clear and without doubt that the creditor’s claim has no conceivable basis, and if the debtor has immediately submitted strong evidence proving it. Furthermore, in some countries (e.g. Germany) it has been found that the suspension of the guarantee payment by interim measure is not allowed even if the debtor can convincingly prove that the guarantee event has not occurred. Since the Estonian civil law system has adopted a lot from the German civil law system, it might be reasonable to also follow the German example regarding the suspension of first-demand bank guarantees.
It is important to note that the debtor shall be able to prove these abovementioned facts to the court in reasonable time – which, according to international practice, is before the guarantor is obligated to make a decision about the payment of the guarantee amount.
In practice it might be rather complicated, if not impossible, for the debtor to meet these criteria, as often the banks shall make the payment to the creditor within 3-5 days from receiving the claim. Thus it has been discussed in legal literature of whether the guarantor should wait with its payment decision until the court has ruled on the application of the interim measure. However, it has been rather found that the guarantor cannot be expected to adhere to such an obligation when the evidence supplied by the debtor is weak and the creditor has claimed the immediate payment of the guaranteed sum.
In sum, it is good that the Supreme Court has taken a clear view on the fact that, in principle, the payment of guarantee amount can be suspended by way of interim measures. However, to this day the Estonian Supreme Court has not brought out any clear guidelines as to in which circumstances the suspension of guarantee payment as interim measure might be reasonable. In the opinion of the authors of this article, such cases should remain very exceptional – so that the effective functioning of the bank guarantees would not be hindered. However, the approach taken by the Supreme Court remains to be seen.