The technical paper
deals with the "Transferability of rights under Demand Guarantees in
German law" written by Mr
Jörg Gloss, Berliner Sparkasse - Branch of Landesbank Berlin AG, Corporate
Development and Legal.
1. Different perspectives: Demand Guarantee as an obligation and Demand
Guarantee as collateral security
It is quite a
difference in perspective whether a bank issues a demand guarantee or whether a
bank accepts a demand guarantee as collateral security.
In both situations a bank will be interested in a guarantee that provides clear terms for a demand (in most cases either a simple demand or a demand together with a declaration and/or a submission of specific documents) with as little examination duties as possible for the respective guarantor.
For banks issuing guarantees the transferability of the rights under a guarantee is not very attractive as the potential additional administrative effort in examining demands by or payments to assignees is invariably not compensated for. This potential additional administrative effort consists in the examination of the assignee’s (or of several assignees’) entitlement to the rights under the guarantee in order to avoid the risk of a payment to a person not entitled.
Either the original beneficiary and assignor has given a written notice of assignment to the guarantor or the guarantor may demand from the assignee submission of the assignment agreement.[1]
The perspective of a bank which wants to benefit from a demand guarantee (issued in connection with the receivable) when purchasing a receivable à forfait is obviously different. The forfaiting bank wants to have transferred to it the rights under the demand guarantee and possibly to transfer these rights to subsequent purchasers.
2. The Law governing the assignability of a claim or right
According to the applicable EU-Regulation[2] the law governing the assigned claim shall determine its assignability. Therefore, if the demand guarantee is – either expressly or according to article 4 of the said regulation - governed by German law, the assignability of the rights under it shall be determined by German law.
3. The Distinction between the Right to Proceeds and the Right to make a Demand under a Guarantee
The beneficiary’s right to the proceeds only arises once a demand is made which complies with the conditions stipulated in the guarantee, in most cases a specific declaration. On the other hand the right to make a demand and consequently the fulfillment of these conditions which (although abstract and to be examined on a documentary basis) are aimed at a specific security purpose (e.g. security for the payment of a purchase price, security for the performance of specific contractual obligations) may depend on different and more complex criteria, e.g. on specific events in a contractual relationship and their evaluation. The distinction between the right to proceeds and the right to make a demand under a guarantee is reasonable and has been an established distinction for considerable time.[3]
4. Assignment of Proceeds
Once a demand complying with the conditions stipulated in the guarantee has been made the right to proceeds comes into existence and can be assigned. According to section 354a of the German Commercial Code a provision in the guarantee prohibiting such assignment will not render the assignment void. But the guarantor may still choose to pay to the original beneficiary thereby being released from its payment obligation (in the context of a demand guarantee issued by a bank it is neither practical nor likely that payment will be made to the original beneficiary after a notice of assignment has been received by the guarantor).
The conditions for the applicability of the mentioned section will almost regularly be met: the right to proceeds is a claim for money and the agreement giving rise to the right to proceeds (the demand guarantee) will in most cases constitute a commercial transaction for the parties of the guarantee as defined in section 343 of the German Commercial Code.
Many demand guarantees do not contain any provision as to their transferability or the assignability of rights under it. Reported court judgments do not relate to an assignment of the right to make a demand under a demand guarantee which is silent as to its transferability. Published articles and commentaries differ in their views. The following thoughts are based on what I perceive to be the most persuasive legal argumentation.
5.1.1 The right to make a demand as an accessory ancillary right
Section 401 of the German Civil Code provides for a transfer of the accessory rights when transferring the rights to which the accessory rights belong. There is case law applying this section “per analogiam” to ancillary rights closely related to the rights which are to be transferred. One could think of arguing the assignability of the right to make a demand under an independent, non-accessory demand guarantee by applying the mentioned section “per analogiam”.
But it is almost impossible to conceive the right to make a demand under a demand guarantee as an ancillary right only. Rather considering the nature of a demand guarantee the right to make a demand is the most important and essential right. Furthermore, the application of a statutory rule “per analogiam” should be restrictive. Therefore, the mentioned section should not apply to the transfer of the right to make a demand under a demand guarantee[4].
5.1.2 Restriction of Assignability of a claim
The content of the performance of the guarantor’s obligations under a demand guarantee (examination of a demand and subsequent demand rejection or payment) would not change by the fact that the demand is made by an assignee.
Due to the security agreement between the party instructing the guarantor and its counterparty (the beneficiary of the guarantee) the guarantee carries a specific security function closely related to the underlying contract (e.g. to serve as security for the performance of payment obligations or of other specific contractual obligations). In addition, the exercise of the security function of a demand guarantee does not require any evidence that the right to make a demand has crystallized. Rather, a formalized demand according to the conditions stipulated in the guarantee is sufficient to trigger the payment obligation of the guarantor.
These circumstances show that a demand guarantee presupposes a considerable amount of trust by the guarantor and the party instructing it and ultimately privity to the underlying contract by the beneficiary. Neither the party instructing the guarantor nor the guarantor would extend the necessary trust to grant the right to make a demand to any other person.
Although the guarantor is not a party to the underlying contract, the guarantor knows about the security function of its guarantee obligations, is well aware of the trust extended to the beneficiary and takes a vital interest in avoiding any increase of the danger of fraudulent or unrightful demands under its guarantee.
Professional guarantors like banks do not simply rely on the credit risk of their instructing customers and forget about the identity of the beneficiary. For compliance purposes and in order to protect its own reputation and the reputation of its demand guarantee business a guarantor is always keen to understand (although not to accurately assess) the underlying situation including the security function of the demand guarantee, the identity of the beneficiary and its role in the underlying contract.
The necessary trust involved in demand guarantees is equally shared by both the party instructing the guarantor and the guarantor itself.
It does not seem clear, whether a demand guarantee securing a payment obligation the performance of which may easily be evidenced (as opposed to demand guarantees requiring declarations and/or documents relating to specific breaches of contract), presupposes a lesser degree of trust.
For these reasons a demand guarantee is to be construed as containing an implied exclusion of the assignment of the right to make a demand. Section 354a of the German Commercial Code does not apply to the right to make a demand because it is not a claim for money.
An assignment of the right to make a demand would require the consent of the party instructing the guarantor and of the guarantor and an according amendment to the guarantee.
In both situations a bank will be interested in a guarantee that provides clear terms for a demand (in most cases either a simple demand or a demand together with a declaration and/or a submission of specific documents) with as little examination duties as possible for the respective guarantor.
For banks issuing guarantees the transferability of the rights under a guarantee is not very attractive as the potential additional administrative effort in examining demands by or payments to assignees is invariably not compensated for. This potential additional administrative effort consists in the examination of the assignee’s (or of several assignees’) entitlement to the rights under the guarantee in order to avoid the risk of a payment to a person not entitled.
Either the original beneficiary and assignor has given a written notice of assignment to the guarantor or the guarantor may demand from the assignee submission of the assignment agreement.[1]
The perspective of a bank which wants to benefit from a demand guarantee (issued in connection with the receivable) when purchasing a receivable à forfait is obviously different. The forfaiting bank wants to have transferred to it the rights under the demand guarantee and possibly to transfer these rights to subsequent purchasers.
2. The Law governing the assignability of a claim or right
According to the applicable EU-Regulation[2] the law governing the assigned claim shall determine its assignability. Therefore, if the demand guarantee is – either expressly or according to article 4 of the said regulation - governed by German law, the assignability of the rights under it shall be determined by German law.
3. The Distinction between the Right to Proceeds and the Right to make a Demand under a Guarantee
The beneficiary’s right to the proceeds only arises once a demand is made which complies with the conditions stipulated in the guarantee, in most cases a specific declaration. On the other hand the right to make a demand and consequently the fulfillment of these conditions which (although abstract and to be examined on a documentary basis) are aimed at a specific security purpose (e.g. security for the payment of a purchase price, security for the performance of specific contractual obligations) may depend on different and more complex criteria, e.g. on specific events in a contractual relationship and their evaluation. The distinction between the right to proceeds and the right to make a demand under a guarantee is reasonable and has been an established distinction for considerable time.[3]
4. Assignment of Proceeds
Once a demand complying with the conditions stipulated in the guarantee has been made the right to proceeds comes into existence and can be assigned. According to section 354a of the German Commercial Code a provision in the guarantee prohibiting such assignment will not render the assignment void. But the guarantor may still choose to pay to the original beneficiary thereby being released from its payment obligation (in the context of a demand guarantee issued by a bank it is neither practical nor likely that payment will be made to the original beneficiary after a notice of assignment has been received by the guarantor).
The conditions for the applicability of the mentioned section will almost regularly be met: the right to proceeds is a claim for money and the agreement giving rise to the right to proceeds (the demand guarantee) will in most cases constitute a commercial transaction for the parties of the guarantee as defined in section 343 of the German Commercial Code.
5. Assignment of the right to make a demand
5.1 Assignment of the right to make a demand where the guarantee is silent as to its transferability
Many demand guarantees do not contain any provision as to their transferability or the assignability of rights under it. Reported court judgments do not relate to an assignment of the right to make a demand under a demand guarantee which is silent as to its transferability. Published articles and commentaries differ in their views. The following thoughts are based on what I perceive to be the most persuasive legal argumentation.
5.1.1 The right to make a demand as an accessory ancillary right
Section 401 of the German Civil Code provides for a transfer of the accessory rights when transferring the rights to which the accessory rights belong. There is case law applying this section “per analogiam” to ancillary rights closely related to the rights which are to be transferred. One could think of arguing the assignability of the right to make a demand under an independent, non-accessory demand guarantee by applying the mentioned section “per analogiam”.
But it is almost impossible to conceive the right to make a demand under a demand guarantee as an ancillary right only. Rather considering the nature of a demand guarantee the right to make a demand is the most important and essential right. Furthermore, the application of a statutory rule “per analogiam” should be restrictive. Therefore, the mentioned section should not apply to the transfer of the right to make a demand under a demand guarantee[4].
5.1.2 Restriction of Assignability of a claim
The content of the performance of the guarantor’s obligations under a demand guarantee (examination of a demand and subsequent demand rejection or payment) would not change by the fact that the demand is made by an assignee.
Due to the security agreement between the party instructing the guarantor and its counterparty (the beneficiary of the guarantee) the guarantee carries a specific security function closely related to the underlying contract (e.g. to serve as security for the performance of payment obligations or of other specific contractual obligations). In addition, the exercise of the security function of a demand guarantee does not require any evidence that the right to make a demand has crystallized. Rather, a formalized demand according to the conditions stipulated in the guarantee is sufficient to trigger the payment obligation of the guarantor.
These circumstances show that a demand guarantee presupposes a considerable amount of trust by the guarantor and the party instructing it and ultimately privity to the underlying contract by the beneficiary. Neither the party instructing the guarantor nor the guarantor would extend the necessary trust to grant the right to make a demand to any other person.
Although the guarantor is not a party to the underlying contract, the guarantor knows about the security function of its guarantee obligations, is well aware of the trust extended to the beneficiary and takes a vital interest in avoiding any increase of the danger of fraudulent or unrightful demands under its guarantee.
Professional guarantors like banks do not simply rely on the credit risk of their instructing customers and forget about the identity of the beneficiary. For compliance purposes and in order to protect its own reputation and the reputation of its demand guarantee business a guarantor is always keen to understand (although not to accurately assess) the underlying situation including the security function of the demand guarantee, the identity of the beneficiary and its role in the underlying contract.
The necessary trust involved in demand guarantees is equally shared by both the party instructing the guarantor and the guarantor itself.
It does not seem clear, whether a demand guarantee securing a payment obligation the performance of which may easily be evidenced (as opposed to demand guarantees requiring declarations and/or documents relating to specific breaches of contract), presupposes a lesser degree of trust.
For these reasons a demand guarantee is to be construed as containing an implied exclusion of the assignment of the right to make a demand. Section 354a of the German Commercial Code does not apply to the right to make a demand because it is not a claim for money.
An assignment of the right to make a demand would require the consent of the party instructing the guarantor and of the guarantor and an according amendment to the guarantee.
5.2 Assignment of the right to make a demand where the demand guarantee
provides for the assignability of such right
5.2.1 German Law
5.2.1 German Law
At present there are at least two reported judgements of the German Federal Court of Justice[5] holding that an assignment of the right to make a demand is possible to the extent such assignment is expressly allowed in the demand guarantee.
Such assignability provision in the demand guarantee would indicate from the beginning that the party instructing the guarantor and the guarantor agree that the beneficiary is entitled to delegate the trust inherent in the demand guarantee to the assignee(s) of its choice[6].
5.2.2 URDG 758
The URDG 758 are even more cautious in allowing the transfer of a demand guarantee (transfer constructively meaning the issuance of a demand guarantee with identical conditions to the new beneficiary).
Not only must the demand guarantee expressly indicate that it is “transferable” but:
- Even if the guarantee is transferable a transfer is still subject to the
consent of the guarantor
- The guarantee may be transferred more than once but it may not be transferred partially
- The transferor must submit to the guarantor a signed statement that the transferee acquired the transferor’s rights and obligation in the underlying relationship.
- The guarantee may be transferred more than once but it may not be transferred partially
- The transferor must submit to the guarantor a signed statement that the transferee acquired the transferor’s rights and obligation in the underlying relationship.
6. Conclusion
In order to assign the right to make a demand under a demand guarantee governed by German law it is highly recommendable to expressly provide for the assignability of the right to make a demand under it. Such a provision would, of course, need to be covered by the instruction or consent of the party instructing the guarantor and by the consent of the guarantor.
In order for the assignor to avoid any liability in case of a fraudulent or unrightful demand by the assignee and new beneficiary, the latter should expressly assume (e.g. in the forfaiting agreement) the obligation to respect the security purpose of the demand guarantee. This obligation should generally not be a burden for the assignee and forfaiter or subsequent assignee and forfaiter because it will also become the creditor of the secured receivable and thus be in a position to monitor the performance under the receivable.
As a further precautionary measure the forfaiting agreement should include an obligation by the original beneficiary of the demand guarantee (assuming that it is a party to the forfaiting agreement) to make a demand under the guarantee at the request of the forfaiter.
Alternatively, a new guarantee may be issued directly to the benefit of the forfaiter.
If the demand guarantee is subject to the URDG 758 the requirements stipulated in art. 33 URDG 758 will have to be met.
[1] According to section 410 of the German Civil
Code, which would be applicable to the relationship between assignee and debtor
(here the guarantor) in accordance with art. 14 (2) of the EU Regulation
593/2008 (“Rome I”) if the demand guarantee is subject to German law
[2] EU Regulation 593/2008 (“Rome I”), art. 14 (2)
[3] The distinction is reflected in Art. 4 URDG
458, Art. 33 URDG 758, R. 6.06 ISP and in articles 9 and 10 of the UNCITRAL
Convention on Independent Guarantees and Stand-by Letters of Credit (adopted by
the UN General Assembly on 11 Dec. 1995 and in force since 1 Jan. 2000 between
Ecuador, El Salvador, Kuwait, Panama and Tunisia and up until today also
Belarus, Gabon and Liberia)
[4] In a decision of 1987 the German Federal Court of Justice (BGH NJW 1987,
2075) referred to section 401 of the German Civil Code in holding that the
right to make a demand was assigned together with an accessory suretyship
(“Bürgschaft”). Most commentators are of the view that this decision should be
treated with caution when applying it to independent demand guarantees. The
facts are quite singular and an accessory suretyship can only be assigned
together with the secured claim.
[5] BGHZ 90, 287, 291; BGH WM 1999, 72,73
[6] According to the German Federal Court of
Justice the assigning beneficiary of an independent security right is under the
obligation to oblige the assignee and new beneficiary to respect the security
purpose of the demand guarantee (BGH NJW 1997, 461, 463f.)
No comments:
Post a Comment