In a recent decision,(1) the Supreme Court clarified its position on sureties payable on first demand and confirmed its view on the interpretation of contractual undertakings (eg, guarantees or sureties)(2) by which one party assumes a personal liability for a third-party debt. Considering the significant different legal consequences for a beneficiary's position following a qualification as either an abstract guarantee or an accessory surety, the guidelines provided by the Supreme Court on how it interprets wording included in such contractual undertakings are of the utmost importance for Austrian legal practice.
The Civil Code provides for two model types of security arrangement:(3)
- So-called 'abstract' guarantees(4) – a three-party arrangement by which the guarantor assumes an independent liability towards the beneficiary for receipt of the performance by the third party, whereby the guarantor's liability is independent from:
- the existence of the third party's performance obligation; and
- any so-called 'cover arrangement' between the guarantor and the third party on the reimbursement of the guarantor.
Under an abstract guarantee, the guarantor is generally bound to perform in accordance with the terms of the guarantee, unless a defence based on abuse of rights is feasible.(5) In particular, the guarantor is barred from defending itself by referring to objections that the third party may have against the beneficiary.
- Sureties(6) – a contractual arrangement between the guarantor and the beneficiary by which the guarantor assumes liability only for the performance of a third party's obligations. Contrary to the abstract guarantee, the obligations arising from a surety are of an accessory character – that is, they depend on the existence of the third party's main obligation to the beneficiary and the guarantor may defend itself against a claim under the surety by using all objections that the third party (principal debtor) may have against the beneficiary.
Further to these two types of security arrangement, a surety on first demand (ie, a hybrid form of security arrangement not regulated by Austrian laws) emerged at the end of the last millennium. The Supreme Court has already (critically) examined and acknowledged this new type of security arrangement.(7) The core aspects of a surety on first demand are as follows:
- Similar to the abstract guarantee, the security provider is barred from defending itself from its performance obligation by raising objections based on the (secured) principal obligations between the beneficiary and the third party. Accordingly, the security provider must perform as a first step.
- The accessory character of a surety is not fully eliminated by the surety on first demand, and is instead only provisionally restricted. The security provider may – following its performance – reclaim what has been performed from the beneficiary, if the performance was not covered by the secured relationship between the beneficiary and the third party.
Accordingly, in its 2010 decision, the Supreme Court briefly characterised the position of a security provider under a surety on first demand as "pay first, then litigate".
The Supreme Court reviewed a security arrangement denominated as a guarantee, by which the defendant as a third party assumed the proper fulfilment of all payment obligations of an special purpose vehicle (SPV) arising from hire purchase contracts for sailing yachts entered into by the SPV. The guarantee had been drafted by the beneficiary as follows:
"I/we are aware that [the SPV] has entered into a leasing agreement with you for the leased object [yacht] at a price of EUR… with a term of 60 months [first sentence]. I/we are fully aware of the terms of this leasing agreement [second sentence]. In this context, I/we assume the guarantee of proper performance of all payment obligations arising from this agreement [third sentence]. We agree to comply with your first request for payment, which does not require any statement of reasons, without any objection, within 14 days [fourth sentence]. This guarantee shall expire upon complete fulfilment of all payment obligations arising from this contract."(8)
The Supreme Court first confirmed the method of interpretation already outlined in detail in the 2010 decision: in order to ascertain the scope of the obligations undertaken, the Supreme Court will apply the statutory interpretation rules pursuant to Sections 914 and following of the Civil Code. The interpretation must initially be based on the literal sense of the wording, used in its usual meaning. Next, the will of the parties – in particular the intentions of the declaring party – as understood by the recipient of the declaration must be investigated. Finally, the declaration of intent must be interpreted in such a way as to reflect the practice of fair trading, taking into account the circumstances of the declaration and the prevailing customs and practices.
Based on these methodological foundations, the Supreme Court held with respect to the fourth sentence that the security arrangement was not a standard surety, as the security provider undertook to pay it within 14 days without any objections.
With respect to the first and second sentence, the Supreme Court confirmed that this factual information on the underlying agreements (similar to the preamble of a bank guarantee) does not per se lead to an accessory character of the payment undertaking (ie, construction of the security undertaking as an abstract guarantee would still be feasible).
However, the Supreme Court held that the third sentence (ie, "In this context, I/we assume the guarantee of proper performance of all payment obligations arising from this agreement") constituted a clear and unambiguous link to the secured transaction and provided the security provider with the right to defend itself by alleging, for example, that the third party had no payment obligations. However, the Supreme Court held that the security provider could not raise such objections when the payment was claimed under the security arrangement due to the 'on demand' character of the surety. However, the security provider could reclaim what had been paid from the beneficiary on the basis of this argument (pay first, then litigate).
Further, the Supreme Court held that use of the term 'guarantee' ('Garantie' rather than 'Bürgschaft' (surety)) in connection with an unconditional payment obligation (without objections on first demand) will not prevent its interpretation as a surety on first demand, provided that the wording includes a clear reference to the secured transaction (in this case, guarantee for the proper performance of all payment obligations under a contract).
In summary, the Supreme Court held that a simple interpretation of the wording led to a qualification of the security arrangement as a surety on first demand. Without giving any further details, the Supreme Court closed the case by stating "that there is no evidence that this [ie, its re-qualification of a document explicitly denominated itself as a guarantee as a surety on first demand] was not intended by the parties".
The 2017 decision, as well as the far more elaborate 2010 decision on a similar case, are perfect examples of how tricky proper drafting of (bank) guarantees can be. Of course, when looking at the core wording "assume the guarantee of proper performance of all payment obligations arising from this agreement" from a trained finance lawyer's perspective, it is obvious that there is an alarmingly strong factual link to the secured relationship, as one would not expect such a direct reference but a – Supreme Court-approved – work-around like "upon receipt of your notice, that [XY] has not fulfilled his contractual obligations". Even though the requalification of an (assumed) abstract guarantee into a surety on first demand is – at first sight – not overly detrimental, as the security provider will have to pay in any case, such requalification will give rise to a repayment claim by the security provider. In the end, the beneficiary may face two separate legal disputes, all based on the particularities of the (formerly) secured transaction. This is a highly unpleasant situation (claims involved in such dispute are – most likely – double the value of the secured transaction) that could have been avoided if a properly drafted demand guarantee had been agreed.
The Supreme Court applies a strict view on the wording of (abstract) guarantees and has developed vast and highly casuistic precedence dealing with the various types of guarantee, the nature of the obligations to be secured by such guarantees and the particularities of the underlying transactions.
Notwithstanding that, in practice, guarantee templates (prepared by non-Austrian lawyers) are regularly introduced in cross-border contracts involving Austrian parties or in contracts governed by Austrian laws. Depending on the role of the client in the contract negotiations (eg, a principal asking for an (abstract) guarantee or a customer or third-party security provider having a separate agenda in order to avoid an immediately enforceable abstract guarantee), it may be crucial to amend such templates in order to avoid legal ambiguities.
Further, the Supreme Court's willingness to deal with ambiguities arising from improper drafting is limited, and the judges are not shy in telling parties that they bear the risks associated with less-than-perfect wording of, for example, a parent company guarantee:(9)
"From the point of view of an Austrian receiver of a declaration, the phrase 'with explicit waiver of the pleas of the advance action' does not point to a surety… For an Austrian surety, the waiver of the plea of the advance action does not make sense. According to § 1355 Civil Code, the collectability of the guarantor's liability only presupposes the (out-of-court) reminder, not also the legal action. The Claimant did not have to know that the author of the declaration (according to the pleading of the defendant a German lawyer) obviously referred to § 771 BGB (German Civil Code), according to which, under German law, the guarantor has the objection of the advance action…"
"The last four paragraphs of the [agreement] do not pose any particular problems of interpretation and can only help to interpret the [agreement] as a whole insofar as the last paragraph (court of jurisdiction clause) - as mentioned above - clearly reveals a certain redundancy and thus a lack of care in preparing the [agreement], so that redundancies cannot be ruled out in other parts of the [agreement]."
In short, using guarantee templates that refer to foreign law particularities or that use boilerplate-style wording in ancillary clauses may have unexpected and unwelcome effects, including with respect to interpretation of the core aspects of the security arrangement. A lack of care in preparing security arrangements can jeopardise their main goal – that is, to ensure the quick and secure performance of contractual obligations – as it may give raise (based on Supreme Court precedence) to new venues for litigation.
For further information on this topic please contact Stephan Schmalzl at Graf & Pitkowitz by telephone (+43 1 401 17 0) or email (firstname.lastname@example.org). The Graf & Pitkowitz website can be accessed at www.gpp.at.
(2) The Supreme Court had already acknowledged that – in particular in cross-border transactions – the English term 'guarantee' may be used for both types of security arrangement under Austrian laws, which may lead to certain misunderstandings and incorrect expectations as to the nature of the security arrangement governed under Austrian laws (OGH December 17 2010, 6 Ob 142/10s).
(5) For the purpose of this update, the vast and highly casuistic precedence on issues that limit a guarantor's obligation to perform under an abstract (bank) guarantee are not addressed. For further details – in particular on the admissibility of a defence based on abuse of right – please see "Bank guarantees – abuse of rights when demanding payment?".
"Es ist mir/uns bekannt, dass [SPV] mit Ihnen den gegenständlichen Leasingvertrag über das Leasingobjekt [Yacht] zum Kaufpreis von EUR… mit einer Laufzeit von 60 Monaten abgeschlossen hat. Die Bedingungen dieses Vertrages sind mir/uns vollinhaltlich bekannt. In diesem Zusammenhang übernehme(n) ich/wir die Garantie für die ordnungsgemäße Erfüllung sämtlicher sich aus diesem Vertrag ergebenden Zahlungspflichten. Wir erklären uns bereit, Ihrer ersten Zahlungsaufforderung, die keiner Angabe von Gründen bedarf, unter Verzicht auf jeden Einwand, binnen 14 Tagen nachzukommen. Diese Garantie erlischt mit vollständiger Erfüllung sämtlicher sich aus diesem Vertrag ergebenden Zahlungsverpflichtungen."
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