Russian Supreme Court review adds scope and depth to independent guarantees

In an effort to ensure a uniform approach by the lower courts, on 5 June 2019 the Presidium of the Russian Supreme Court published* a review of court practice for disputes related to the application of the legislation on independent guarantees.

This review is the first detailed outline of court practice regarding independent guarantees since this concept was introduced into Russian law in 2015.

When obligations under independent guarantees arise

Unless otherwise stated in the text of an independent guarantee, an obligation arises the moment when a guarantor unilaterally expresses its will to do so (but note that the beneficiary is not required to send written notice of acceptance of the guarantee).

Thus, by default, a guarantor’s obligations arise from the time of issue of the guarantee (i.e. when the guarantor sends it to the beneficiary).

Commencement of the term of a guarantee

If the parties stipulate that the validity period of the guarantee commences the moment when the beneficiary performs certain actions relating to the performance of the main contract and these actions were completed within the stipulated period (or, if no such period was cited, within a reasonable time), the procedure for such a guarantee to come into effect will be deemed to have been observed.

Consequently, if the guarantor refuses to pay under the guarantee (based on the fact that it did not come into effect on this ground), this is considered unlawful.

Term for submitting claims under a guarantee

If the terms of a guarantee do not expressly state otherwise, a demand for payment under an independent guarantee can be considered lawfully submitted if it was sent to the guarantor by post before the expiry of the guarantee, even if the guarantor actually received the claim after the expiry.

Determining the amount to be paid under the guarantee

An independent guarantee may establish a procedure for determining the amount to be paid to the beneficiary instead of specifying a certain amount.

To ensure that the legal requirement on the determination of the amount to be paid to the beneficiary is satisfied:

• the guarantee must contain references to the beneficiary and the main transaction that are sufficient to identify them; and
• the guarantor must issue a guarantee stating the initial price of the underlying agreement and a provision indicating that this price may change in the future.

Change in the scope of obligations under the underlying contract

As a general rule, changes made to the terms of an underlying contract ensuring the performance of obligations under which the guarantee was issued do not affect the guarantor’s scope of obligations.

Accordingly, if the beneficiary’s claim for payment meets the conditions of the guarantee and the scope of the guarantor’s obligations has not changed, the guarantor cannot refuse to perform its obligations based on the fact that the principal obligation changed after the issue of the guarantee.

As a result, when issuing an independent guarantee limited to a certain amount of money, an increase in the amount of the principal obligation will not affect the amount of the guarantor’s obligations, since the guarantor will be liable for the guarantee only to the extent of the originally defined amount of money. If the amount of the principal obligation is reduced, the scope of obligations of the guarantor remains the same. If a claim, however, is made to the guarantor for the full amount of its obligations and the guarantor pays it in full, the principal then has the right to claim the excess funds from the beneficiary.

The consequences of guarantor bankruptcy

The bankruptcy of an entity that issued the independent guarantee is not in itself a ground for the termination of the obligations under the guarantee, but this:

• indicates that the role of the guarantee as a security measure is reduced; and
• may be a ground for recalculating the previously agreed-upon fee for the guarantee’s issue.

In the event of the bankruptcy of the guarantor, it is important to note that the beneficiary’s claim under the independent guarantee will be satisfied in the third priority, together with other unsecured creditors.

The right of a principal to recover excess money from the beneficiary under the guarantee

The independent nature of the obligations of the guarantor towards the beneficiary and the rules on the reimbursement of the sums paid under a guarantee to the guarantor do not mean that the beneficiary is entitled to receive more from the principal than is secured under the contract.

In this case, the principal may file a claim for the recovery of funds from a beneficiary who unreasonably received payment under the guarantee even when this beneficiary had no claims for the performance of the main contract.

Independent guarantees and pre-trial settlement dispute resolution procedure

By sending a claim for payment to the guarantor, a beneficiary has sufficiently complied with the dispute resolution pre-trial procedure. A separate claim does not need to be sent to the guarantor.

Conclusion

This review by the Supreme Court allows parties to use more correctly the concept of independent guarantees in their dealings and thus avoid additional risks.

In our opinion, the main purpose of the judicial review was to protect the interests of the beneficiary since most points made concerned cases where the guarantor refused to pay under the guarantee, in breach of its terms. Therefore, if, in the near future, your company intends to use an independent guarantee as a means to ensure the performance of obligations, your guarantee should pay particular attention to the procedure for interactions with the guarantor on the issues of payment under the guarantees.

If you have any questions on this eAlert, do not hesitate to contact CMS Russia experts Konstantin Baranov and Alexander Zhuravkov or your regular contact at CMS Russia.

* In Russian