Demand guarantees are the important instrument which is commonly used in business transactions. Namely, this type of bank guarantee is a liquid instrument on the basis of which the beneficiary may collect funds quickly if the debtor does not fulfill its obligations as stipulated.

Having in mind that for the activations of such guarantee it is sufficient to issue a written call, sometimes followed by a short statement explaining the breach of the obligation on the side of the debtor, unjustified calls for activation of bank guarantees occur. Therefore, the banks obligation to make the payment may be questioned.

Fraud and misuse of the rights from the bank guarantee

When it can be deemed that there is a fraud, i.e. misuse of the rights from the bank guarantee? These are the cases when the beneficiary submits the call for the payment of the guarantee, while the preconditions have not been satisfied and the beneficiary has the knowledge of these facts.

In such case the principle fraus omnia corupmit (fraud changes everything) is applicable. The bank can reject the payment of demand guarantee if the debtor can prove the fraud. For example, if it has submitted evident written proof to the bank, where there can be little doubt about the existence of fraud, the bank may reject the payment. The bank has duties to check if the call has been made in accordance with the formal preconditions as determined in the formal text of the guarantee. Futher on, the bank should inspect the material aspect of the case, without unreasonable efforts, if arguments about the fraud have been raised by the debtor.

Illegality of the underlying relationship

Besides fraud, in the comparative law there are also cases of the illegality of the underlying relationship (between the beneficiary and the debtor). This illegality may amount to the reasons of public order, sale of goods to parties which come from the countries under sanctions etc. These cases have also occurred in relation to insolvency of ENRON in the United States.

Interim measures

If the beneficiary calls for the payment of the demand guarantee and the debtor is of the opinion that the preconditions have not been fulfilled, the debtor may opt for the interim measures by the court. In such cases these measures may be demanded against the bank or against the beneficiary - to refrain from submitting the call for the activation of the bank guarantee or to withdraw the already submitted call.