The Federal Commercial Court of the Moscow District has resolved a dispute relating to a bank guarantee issued via SWIFT.

Case background

A Czech company (the “Beneficiary”) entered into a construction agreement with a Russian JSC (the “Principal”) and transferred an advance payment estimated at EUR 13 million.

In order to ensure the repayment of the advance payment under the construction agreement, a Russian bank (the “Guarantor” or the “Bank”) issued a bank guarantee via the SWIFT system to the Beneficiary in April 2008. Later, the Guarantor raised the amount and terms of the bank guarantee by the same means.

In October 2008, the Beneficiary informed the Principal it was suspending the construction agreement. The parties set a suspension date and the terms for the repayment of the advance.

The Principal did not return part of the advance payment estimated at EUR 6.5 million. Thus, the Beneficiary requested that the Bank pay this amount under the bank guarantee. However, the Guarantor refused to pay, noting that the Principal did not commit any infringements for which it must pay back the advance to the Beneficiary.

Consequently, the Beneficiary brought an action against the Bank, claiming EUR 6.5 million under the bank guarantee.

The court of first instance, as well as the appeal court, rejected the claim, ruling that:

  • the bank guarantee was invalid because of the lack of a written form;
  • the Principal was not liable; and
  • the parties failed to enter into an additional agreement regarding the payback of the advance.  

Ruling of the Federal Commercial Court

The cassation court overruled the lower courts and supported the Beneficiary, noting that:

  • the International Chamber of Commerce’s 1992 uniform rules on the guarantee of payments directly provide for the possibility of a guarantee to be issued in electronic form; and Russian law does not directly restrict a bank guarantee in such form;
  • issuing a bank guarantee in electronic form is customary in international banking practice and is common in the Russian banking market when issuing a guarantee to a foreign beneficiary;
  • to resolve the dispute between the Beneficiary and the Guarantor, the court must check only whether the Beneficiary has satisfied the procedure to request payment under the bank guarantee, as well as provided the necessary documents and notified the Bank about the violation of the obligation by the Principal;
  • the Guarantor’s obligation under the bank guarantee is separate and independent from the principle obligation (construction agreement);
  • the incompleteness and/or inaccuracy of information on the breach of the Principal’s obligation does not affect the Guarantor’s obligation to pay under the bank guarantee upon the request of the Beneficiary;   
  • the Guarantor’s refusal to pay with respect to the non-infringement of the construction agreement on the part of the Principal is a unilateral rejection by the Guarantor of its obligations; and   
  • under the conditions of the bank guarantee, the Beneficiary is not obliged to disclose which obligations were violated by the Principal, but must only inform the Bank of such breach.

For the first time in Russia, the court has acknowledged the possibility of issuing a bank guarantee via the SWIFT system, which is commonly used in international banking practice.

This is in line with the position of the Supreme Commercial Court of the Russian Federation (the “SCC”), as established in the recent Ruling No. 14 of the Plenum of the SCC “On certain issues of resolving disputes in connection with challenging bank guarantees”, dated 23 of March 2012.

Bank guarantees via SWIFT are commonly used in international practice; however, because of legal uncertainty, Russian law thus far has not clarified whether a bank guarantee in electronic form meets the requirements of a form in writing.

Consequently, the rulings of the Federal Commercial Court and the SCC should serve to increase the use and security of a bank guarantee issued via the SWIFT in Russia.