17 September 2024

Bank guarantee: pay first, then litigate – except for Russian connections

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The call on a bank guarantee by a beneficiary Russian company is obviously an abuse of rights and justifies a preliminary payment ban if the service is prohibited by the sanctions.

  • Dr. Kiril R. R. Haslebacher

    Legal Associate

Bank guarantees are a very commonly used security instrument, especially in international business transactions. They are irrevocable commitments by a bank to pay a certain sum of money to a beneficiary as soon as the conditions specified in the respective guarantee clause for the creation of the payment obligation are met.

The bank guarantee is usually issued by the bank directly to the beneficiary in the form of a unilateral innominate contract. As an independent obligation of the bank towards the beneficiary, the bank guarantee is independent of the underlying transaction that it is intended to secure (usually between the principal debtor and the beneficiary). In other words, if the conditions set out in the guarantee clause are met, the bank must pay the guaranteed amount at the request of the beneficiary. In particular, the bank is not obliged to check whether a call on the guarantee is justified under the underlying transaction and cannot raise any objections or pleas in this regard.

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Since the bank immediately seeks compensation from the principal debtor after paying out the bank guarantee, the latter bears the risk that the guarantee amount will be unjustifiably called up by the beneficiary. In such a case, it would be up to the principal debtor to take legal action against the beneficiary to enforce the guarantee amount that was unjustifiably claimed by the beneficiary. In this respect, the principle applies: ‘Pay first, then litigate’ (ZR 97/1998 No. 92, p. 227). This gives rise to the need to take action against a threatened unjustified call on the bank guarantee.

If a party fears a violation of a legitimate claim and can credibly demonstrate that the violation threatens to cause a damage that is not easily remedied, it may, in urgent cases, apply to the competent court for a precautionary measure (Art. 261 para. 1 ZPO). With regard to bank guarantees, the principal debtor can thus obtain a preliminary payment ban against the bank concerned if he fears that the beneficiary could unjustifiably call the bank guarantee and that he would suffer a damage that cannot be easily remedied as a result. However, due to the abstract nature of bank guarantees, corresponding preliminary payment bans are only issued with great reluctance in practice.

According to case law, preliminary payment bans can only be issued if it appears credible that the call on the guarantee amount is not merely unjustified but is obviously an abuse of rights (ZR 97/1998 No. 92; ZR 111/2012 No. 69). Abuse of rights is only deemed to exist if, based on an objective assessment of the entire facts of the case, the beneficiary cannot be justified in calling the bank guarantee from any reasonable point of view that can be taken into consideration (ZR 97/1998 no. 92, p. 227 with further references).

In its recently published judgment of 25 October 2023 (case no. HE230111-O), the Commercial Court of the Canton of Zurich had to rule on a case in which the engineering services and product deliveries to be provided by the principal debtor to the beneficiary were secured by bank guarantees, but could no longer be provided due to the sanctions imposed by Switzerland on Russia. The Commercial Court of the Canton of Zurich ruled that the claiming of the bank guarantees in such a case was obviously an abuse of rights:

«Es ist demnach glaubhaft, dass die vertraglichen Verpflichtungen der Gesuchstellerin [«Hauptschuldner»] gegenwärtig ruhen und der C._____ [«Begünstigte»] keine Forderungen aufgrund eines Verzuges, einer Vertragsverletzungen wegen Nichterfüllung der Leistungen oder einer Rückabwicklung des Vertrages zustehen kann. Der Versuch, nichtsdestotrotz vertragliche Leistungen oder eine Rückabwicklung des Vertrages zu erwirken, ist unter den gegebenen Umständen als rechtsmissbräuchlich zu taxieren. In Anbetracht der vertraglichen Regelung ist es ebenfalls glaubhaft, dass dies für die Gesuchsgegnerin [«Bank»] offensichtlich ist.» (Urteil des Handelsgerichts des Kantons Zürich HE230111-O vom 25. Oktober 2023 E. 4.2 S. 6.). 

The cited judgment of the Commercial Court of the Canton of Zurich is one of the few judgments in which a preliminary payment ban has been issued regarding bank guarantees. It is also interesting that in this case the commercial court accepted the disadvantage that could not easily be remedied due to the difficulties or impossibility of enforcing claims in Russia or against a Russian company as being credible given the ‘notorious current situation’. To put it bluntly: ‘Pay first, then litigate – except in the case of a Russian connection’.

Our trade controls and sanctions experts are happy to support and advise you on how to deal with sanctions and cases involving Russia.
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