Counter Guarantee: Legal Regulation and Problems of Application by Russian Banks
I. Mikheeva,
PhD in Law, Deputy Head ofthe Chair of
Banking Law, Kutafin State La University (MSAL),
practicing bank lawyer
D. Alexeeva,
Doctor of Law, Professor of the Chair of Banking
Law, practicing bank lawyer
Журнал "Kutafin University Law Review", N 2 (Volume 3), October 2016, р. 331-346.
In the paper the issues of legal regulation of counter guarantees (indirect guarantees) in Russia and the problems of their application by Russian banks are considered. On the basis of the conducted research of international instruments, the Russian legislation and court practice, authors explain the legal basis of counter guarantees, reveal legal risks in case of their use in banking practice, offer the ways of minimizing.
Table of contents
I. Introduction
II. The Concept and Legal Regulation of a Counter Guarantee
III. The Form of a Counter Guarantee
IV. An Agreement Between a Guarantor and a Principal for Execution of Which a Guarantee is Issued
V. Legal Problems of Identification of a Proper Debtor Under a Counter Guarantee
VI. Legal Risks in Case of Issuing a Counter Guarantee in Russia
VII. Conclusion
Bibliography
I. Introduction
The issuance of a counter guarantee represents a documentary operation of banks performed traditionally within trade financing or in foreign trade. A counter guarantee is one of the most demanded kinds of an independent guarantee in the world banking practice. Its effective application requires creating the corresponding standard and imposing legal requirements. Nowadays in Russia a large-scale civil legislation reformaimed at creating new and enhancing already operating legal frameworks is in progress. Unfortunately, the legal regime of the counter guarantee in the legislation of Russia has not been settled yet.
To understand a counter guarantee, the key issue is identifying its legal nature, on which, eventually, the whole complex of issues connected with the relations between the parties and interpretation of such transactions by courts, depends. Under Article 156 of the Civil Code of the Russian Federation mixed agreements can be applied to a counter guarantee as a unilateral transaction.
These circumstances when a counter guarantee is in high demand in banking practice result in the emergence of certain problems in law enforcement that require discussion and timely solution.
II. The Concept and Legal Regulation of a Counter Guarantee
The issuance of a counter guarantee represents a documentary operation of banks traditionally performed within trade financing or in foreign trade.
In Russia there is no special legislation regulating the legal regime of a counter guarantee. The issuance of a counter guarantee and its essential requirements are determined in accordance with the Uniform Rules for Demand Guarantees (ICC Publication No. 758, revised in 2010) (hereinafter "URDG 758" or "Uniform Rules") and general rules with regard to an independent guarantee enshrined in the Civil Code of the Russian Federation (hereinafter "the Civil Code of the Russian Federation").
A counter guarantee means any signed obligation regardless of its name or description undertaken by a counter guarantor towards the other party to secure the issuance by such other party of a guarantee or other counter guarantee is issued for repayment upon filing a due claim against a counter guarantee issued in favor of such a party (art. 2 of URDG 758). A counter guarantee is distinctive for its independence. It by its nature does not depend on either a guarantee or main transaction, on either an application or any other counter guarantee to which it is referred, and a counter guarantor is not connected with it and not limited by such transactions (Paragraph "b" of Article 5 of URDG 758, Sub-paragraphs "a", "b" of Article 3 of the UN Convention on Independent Guarantees and Stand-by Letters of Credit of 1997).
An independent nature of a counter guarantee is also proven by the fact that a claim on a guarantee shall be supported only by an application filed by a party for the benefit of which a counter guarantee was issued and that verifies that this party received the due claim on the issued guarantee or counter guarantee (Sub-paragraph "a" and "b" of Article 15 of URDG 758). Thus, although accessory to it, a counter guarantee is different because of its legal peculiarities.
To understand the notion of a counter guarantee, the key value is detection of its legal nature on which, eventually, the whole complex of issues connected with relations between the parties and interpretation of such transactions by courts, depends.
A counter guarantee is recognized as an indirect guarantee, as it is issued not to the beneficiary, but to other entity that grants a subsequent counter guarantee or guarantee. A counter guarantee is a unilateral deal, as for its issuance declaration of a will of only one party is required, and it represents is a unilateral obligation executed in writing.
According to Article 156 of the Civil Code of the Russian Federation, general provisions on liabilities and agreements are applied to unilateral deals respectively, as it does not contradict the unilateral nature of the law and the essence of the deal.
According to Article 421 of the Civil Code of the Russian Federation an agreement that contains elements of various agreements provided for by the law or other legal acts is considered as a mixed agreement. Such an agreement allows regulating various relations between the parties to full extent with one agreement, and not to use for this purpose various contractual models.
From the point of view of its internal structure, a mixed agreement can be considered as a civil law agreement that contains different prerequisites of several agreements, but at the same time all these prerequisites are attributed to the same entities.
Thus, according to the requirements of Article 156 of the Civil Code of the Russian Federation provisions of mixed agreements can be applied to a counter guarantee as a unilateral deal.
The point of view on a mixed nature of a counter guarantee is not indisputable, but at the same time it allows resolving the issues of its application that arise in banking practice. There is also an opinion that deals concerning the issuance of counter guarantees in Russia areagreements "unnamed" in the Civil Code of the Russian Federation, but under Article 421 of the Civil Code of the Russian Federation on the freedom of a contract, it is legitimate*(1).
Owing to the absence in the Russian legislation any special legal regulation of a counter guarantee, it is reasonable to introduce such a provision taking into account requirements of URDG 758, namely:
a counter guarantee shall be accurate and clear and shall not contain excessive details;
in a counter guarantee it is recommended to specify: an applicant (guarantor bank), a beneficiary, a counter guarantor, other information, identifying an issued counter guarantee, an amount or maximum amount subject to repayment, currency of payment, guarantee expiration dates, any conditions concerning the way of payment, conditions concerning the need of submission of claims or other documents in a hard or soft copy, a language of any document specified in a guarantee, and the party responsible for payment of expenses;
a counter guarantee is recommended to be drafted in accordance with a standard form given in Appendix to URDG 758.
In particular, a counter guarantee may contain the following information:
date of issuance;
name, address or location and the counter guarantor's details;
to whom a counter guarantee (the name, the address of the location and details of guarantor bank) is issued;
terms of payment;
obligations of a counter guarantor and a number of a counter guarantee;
an amount of a counter guarantee and payment currency; a form of granting a counter guarantee;
date of expiry;
documents (and requirements they must meet) against which repayment of a counter guarantee will be made;
a party responsible for payment of expenses (as a rule, it is a counter guarantor);
subordination to requirements of URDG 758;
jurisdiction clause (a court of which state and what law is applied if a dispute arises).
A counter guarantee is one of the most demanded means of ensuring the fulfillment of liabilities, applied by credit organizations, while implementing international transactions. Its obvious advantages include the following:
a buying company gets an opportunity not to distract funds from the turnover for the purpose of implementation of an advance payment on the main deal (a supply agreement, purchase and sale agreement, etc.), so, for example, on the condition of receiving a guarantee of the first-class bank against the counter guarantee of the Russian Bank the supplying foreign company allows a payment deferral for the buyer;
a counter guarantee is much cheaper as compared with a traditional bank loan, as the remuneration paid by the principal for the issuance of a counter guarantee is always below the interest rates established for commercial loans;
a certain measure for the issuance of counter guarantees is simpler registration requirements as compared with the registration requirements for a bank loan.
The most typical situations when a counter guarantee in Russia is applied are the following:
a guarantor bank for some reasons cannot issue a guarantee or a beneficiary for some reasons will not accept it (for example, in the case of depleting the limit of the amount of all simultaneously issued bank guarantees for the benefit of a beneficiary for the purpose of ensuring payment of customs duties or taxes, requirements a beneficiary must fulfill to be allowed to work with the first-class banks or banks located in the state of its (beneficiary's) jurisdiction or for other reasons);
a beneficiary does not accept the guarantee liability assigned by means of a guarantee issued by the bank that provides services to the principal, because of mistrust to the principal's
bank or accepts guarantees only of the leading banks of the country, or a limited list of foreign banks;
the principal has no opportunity to apply to the bank the guarantee that can be accepted by the beneficiary for the reason that the guarantor grants guarantees only against counter guarantees of the banks with which it cooperates, and the principal's bank does not cooperate with them.
In the considered situations the issuance of a counter guarantee is a good way out for the principal and the bank processing it, as it allows involvement of other banks acceptable for the beneficiary and reduction of bank risks.
Despite the lack of a special legal regulation a counter guarantee is widely applied in the Russian banking practice because 1) its essential conditions do not contradict general provisions for an independent guarantee prescribed in the Civil Code of the Russian Federation; 2) requirements of URDG 758 can be applied to any guarantee or a counter guarantee that specifies their subordination to URDG 758.
III. The Form of a Counter Guarantee
We will remind that URDG 758 does not have any accurate and unambiguous mentioning of a counter guarantee form. The definition of a counter guarantee (as "any signed liability", given by a counter guarantor to the other party and implying repayment upon submission of an appropriate claim based on a counter guarantee) addresses a concept of a "signed" document.
In accordance with the meaning of Article 2 of URDG 758 a signed counter guarantee means that its original is signed by the person, who issued it, or is signed on behalf of this person by means of a digital signature that can be authenticated by the party to which this counter guarantee was granted. The same is applied in case of submission with the handwritten signature, facsimile, stamp, and symbol or using any other mechanical way. It is obvious that the document signed by a digital signature will be transferred by electronic communication channels. The issuance of counter guarantees with the use of electronic communication channels is an everyday practice in bank transactions.
At the same time, in Russia the issuance of a counter guarantee form, as well as a form of the independent guarantee was not always madein such an unambiguous way*(2). For a long time courts considered bank guarantees issued by means of the use of the SWIFT telecommunication system to be invalid (i.e. not complying with the requirements of Article 368 of the Civil Code of the Russian Federation for a guarantee to be issued on a hard copy)). At the same time, recently courts have mitigated their requirements*(3).
According to Paragraph 2 of Article 368 of the Civil Code of the Russian Federation an independent guarantee is issued in a written form allowing true determination of guarantee conditions and making sure in authenticity of its issue by a certain person in the order, established by the legislation, customs or agreements between a guarantor and a beneficiary.
Thus, the modern approach of the Supreme Court of the Russian Federation results in the situation when the issuance of a guarantee by means of the SWIFT system is recognized as proper observance of the written form requirement applied to an independent guarantee. In case of legal proceedings the parties can prove their legal positions by submission of written and other pieces of evidence confirming the transaction and its essential conditions.
IV. An Agreement Between a Guarantor and a Principal for Execution of Which a Guarantee is Issued
The Russian legislation does not establish any obligation of signing an agreement between a guarantor and a principal in accordance which a guarantee or indirect guarantee is issued. According to international rules, the absence of a written agreement between a counter guarantor and a principal with regard to the issuance of a counter guarantee does not cause invalidity of an obligation prescribed by a guarantee and does not deprive a guarantor of the right to claim regress compensation of the amounts paid under a guarantee.
At the same time, a guarantee agreement is indirectly mentioned in regulatory legal acts and the Bank of Russia.
In law-enforcement banking practice such agreements are traditionally concluded between a principal and a guarantor as they determine the most important issues of interaction, such as a procedure of compensation for the guarantor (counter guarantor) the amounts paid under an independent guarantee, an amount and a procedure of payment of remuneration for issuing an independent guarantee (counter guarantee) and other issues.
Under the terms of an independent guarantee (counter guarantee) agreement:
the Bank undertakes: to issue a counter guarantee for the benefit of a guarantor bank, to establish and ensure an interaction with a guarantor bank, to compensate a guarantor bank with the amounts, paid by it for the benefit of a beneficiary according to a bank guarantee;
the Principal undertakes: to provide the bank with all necessary information with regard to key liabilities secured by a bank guarantee, documents concerning the financial status of a principal, to sign agreements ensuring fulfillment of the principal's liabilities, to pay to a counter guarantor remuneration for issuing a counter guarantee and to redress amounts, paid under a counter guarantee;
the Parties by means of a separate agreement can agree upon providing a collateral to secure the fulfillment of liabilities.
The precise list of the documents characterizing financial stability of a principal, an order of their submission and certifying have an important value in similar agreements*(4). According to the requirements of the regulation of the Bank of Russia with regard to the procedure of creating loan loss provisions (hereinafter "Regulations on Provisions"), the amounts paid by the credit organization to the beneficiary under bank guarantees, but not received from the principal, refer to money claims resulting from deals with financial instruments treated as loans. Thus, incorrect assessment of the principal's financial status can lead to the bank risks of claiming increase inpayments on behalf of the Central Bank of the Russian Federation against a guarantor (a counter guarantor).
V. Legal Problems of Identification of a Proper Debtor Under a Counter Guarantee
The legal problem of identifying a proper debtor under a counter guarantee arises when in order to issue a bank guarantee it is required to issue a counter guarantee of Russian banks (for example, when the guarantor bank issues a guarantee only against a counter guarantee of its subsidiary bank performing activities on the territory of the principal's country). The parties to the legal relationships arising in this way are:
Principal - a person, at whose request and expenses a guarantee is issued;
Principal's Bank - a bank providing services to a principal and instructions to other counter guarantor's bank to issue a counter guarantee in favor of a guarantor beneficiary's bank (hereinafter referred to "Counter Guarantor"),
Counter Guarantor Bank - a bank issuing any subsequent counter guarantee at the request of the instructing counter guarantor bank (hereinafter "Subsequent Counter Guarantor");
Guarantor - a bank issuing a guarantee for the benefit of a beneficiary against a counter guarantee;
Beneficiary - a party for which benefits a guarantee is issued.
Correct identification of a debtor under a counter guarantee will allow
the bank to estimate its financial position properly and fulfill requirements of the Bank of Russia regarding requirements applied to the loan debt and its equivalent.
Traditionally, while issuing bank guarantees a principal is considered as a debtor, i.e. a debtor on the key liability, as in such cases a guarantee is issued at the request of a principal. If a counter guarantee is issued against a counter guarantee, other counter guarantor, and not the principal, applies to the counter guarantor. Owing to such circumstances, disputable situations connected with identification of a debtor, occur. In practice, there are various opinions concerning what person is the debtor of the subsequent counter guarantor (the principal or the previous counter guarantor).
Proceedings caused by the determination of a counter guarantee under URDG 758 are grounded by the following liabilities:
an liability of a counter guarantor to make payments upon submission of a proper claim under a counter guarantee. Provided the counter guarantee is considered to be the way of ensuring the fulfillment of liabilities, a counter guarantor will be liable. An order is a liability secured by a counter guarantee in this case;
an order given to a subsequent counter guarantor to issue a counter guarantee against other counter guarantee and to apply it to a guarantor (other counter guarantor) with an order to issue, respectively, a guarantee (counter guarantee). The formulation of an order is included in the definition of a counter guarantee and in the following counter guarantee's form (as attached to URDG 758): "Please, issue under our responsibility your guarantee for the benefit of a beneficiary in accordance with the following text ... "This attachment is also included in counter guarantees that are issued upon the request for issuance of a subsequent counter guarantee in accordance with Paragraph "b" the Articles of the Uniform Rules "unless otherwise provided, the term "guarantee" includes a counter guarantee...".
It is quite difficult to detect an entity obliged to a bank that is a subsequent counter guarantor in the case under consideration due to the absence of the special legal regulation applied to a counter guarantee in the Russian legislation, lack or relevant court practice and undeveloped legal regime of regulating a counter guarantee in the doctrine of Russian law.
To determine the nature of a specific specified deal it is necessary to answer the following questions: on whose behalf, at whose expenses an order is given to a subsequent counter guarantor for the issuance of a counter guarantee, and upon whom liabilities are imposed under this order.
The Central Bank of the Russian Federation approach is as follows: for the liabilities created by a credit organization upon the issuance of a counter guarantee until complete fulfillment of liabilities under a counter guarantee it is necessary to estimate risks for a principal (a debtor under the key liability) based on the probability of fulfillment of liabilities assumed under a counter guarantee. A counter guarantor can be treated as a debtor only after the payment of the amount provided for by a guarantee(counter guarantee): "according to the monetary claims initiated by a credit institution after the performance of "a counter guarantee", the assessment of risk should be carried out with regard to the person to whom under the terms of "a counter guarantee" claims on compensation of expenses incurred by a credit institution to perform "a counter guarantee" can be filed (hereinafter referred to as "Broad Opinion").
According to the RF Central Bank Regulations the risks are assessed concerning a counter party/ a debtor in the deal.
Unfortunately, the Broad Opinion does not allow determining what legal relations should be used while determining responsibility of a principal. If liabilities of a principal towards a subsequent counter guarantor arise after the issuance of a counter guarantee and if it is considered that a principal does not interact with a subsequent counter guarantor directly, it will become possible to apply provisions of Chapter 49 of the Civil Code of the Russian Federation with regard to legal relations created by an order.
Under a commission agreement one party (attorney) undertakes to take some legal actions on behalf and at the expense of another party (principal). The rights and liabilities under the deal made by an attorney arise directly with the principal. The legal opinion on existence of an order made by a principal to a subsequent counter guarantor contained in a counter guarantee, has some grounds as the main objective of filing an application for the issuance of a counter guarantee to the bank processing a counter guaranty is eventually to make an order to ensure the issuance of a necessary guarantee to a beneficiary.
A order means assignment of taking actions of various nature owed by one person to another. Traditionally, in case of voluntary representation, including the cases concerning a commission agreement, developing legal communications can be divided into internal and external. The first are understood as relations between an attorney and a principal, and the second is understood as relations between the principal and third parties*(5). According to what was said above, it seems that the order of the principal to the counter guarantor bank can be provided for by the parties specified in the bank counter guarantee agreement, and the order to the subsequent counter guarantor in the counter guarantee.
At the same time, the Broad Opinion seems to be unsubstantiated and unreasonable due to the following reasons.
For the purpose of receiving from a bank a guarantee "necessary" to the beneficiary, some coun
