Bank guarantees in international trade – legal protection from the guarantee creditor’s perspective (part 2)

The guarantee creditor, in the above case A-Ltd, wants to ensure that the guaranteed sum is paid as quickly and smoothly as possible when calling upon the bank guarantee. The guarantee creditor should therefore make strategic considerations before asserting guarantee claims and be aware of the options for legal protection:

I. Actions against the guarantee debtor

Before asserting any guarantee claims, A-Ltd should check whether the guarantee case actually exists and whether it also has a claim under the supply contract, so that it can avoid a costly recovery process for the guaranteed sum paid. If A-Ltd concludes that the guarantee case does exist, it should act swiftly – without an advance notice to B-plc – and request that C-bank pay the guaranteed sum. Otherwise, B-plc could prepare a motion for a preliminary injunction against C-bank or A-Ltd.

To reduce the risk of a court prohibiting A-Ltd from calling upon the guarantee by means of a preliminary injunction, it may be advisable to file a protective brief with the electronic protective brief register (“Schutzschriftenregister”). This brief acts as a precautionary submission to the competent court. If the court receives a motion for a preliminary injunction from B-plc, the judge has to consider the arguments in the protective brief filed by A-Ltd and will not decide on the motion solely based on B-plc’s account if – as an exception – no oral hearing takes place. This increases the chances of the motion for a preliminary injunction being prevented.

In addition to the action under the guarantee agreement, A-Ltd is free to claim damages from B-plc for failure to fulfil the delivery in accordance with the contract.

II. Actions against the guarantee bank

If C-bank refuses to make the payment, A-Ltd could file an action for payment against C-bank. Such an action will be successful if the claim under the guarantee is not considered abusive and C-bank is not entitled to refuse payment under the provisions of the guarantee agreement. In the case of a guarantee on “first demand,” C-bank cannot counter A-Ltd’s request for payment with any (material) objections arising from the supply contract with B-plc.

A motion for a preliminary injunction against C-bank targeting the payment of the guaranteed sum can only be considered in rare, exceptional cases if A-Ltd would be unable to obtain effective legal protection without the preliminary injunction and its existence would be threatened. This will usually require particular urgency.​​​​​​​

III. Conclusion and considerations of expedience

Although an action against the refusing guarantee bank costs time and money, such actions are usually decided quickly due to the limited review carried out in the case of a guarantee payable on “first demand.” In comparison, an action against the debtor for non-performance will generally take longer, as the court must review all objections arising from this contractual relationship. In addition, if the guarantee debtor is at risk of insolvency, it may be appropriate to take action against the guarantee bank.

The guarantee creditor can counter the risk of the guarantee debtor reclaiming the guaranteed sum by comprehensively checking – before calling upon the guarantee – both whether the guarantee case exists under the guarantee agreement and whether the requirements of the underlying secured contract have been fulfilled.