31 October 2023

Bank Guarantees in International Trade: A Legal Guide to Russian Law

October 31, 2023

BRACE Law Firm ©

Various mechanisms for securing obligations allow for the conduct of entrepreneurial activity, including international supplies, not only with Russian but also with foreign partners under foreign trade contracts. However, foreign trade participants may not always be certain about a foreign partner and the performance of its obligations, and thus they resort to various methods of securing obligations under foreign trade contracts, including bank guarantees.

A bank guarantee is a bank’s undertaking for one of the participants in an international transaction to ensure the performance of its obligations. The bank acts as a guarantor that the participant in the transaction will fulfill its obligations toward the other participant. Moreover, if the participant fails to fulfill its obligations, the guarantor, i.e., the bank, will assume their performance.

Under Russian law, pursuant to Clause 1 of Article 368 of the Civil Code of the Russian Federation (the "Civil Code"), under an independent guarantee agreement, a guarantor assumes, at the request of another person (the "Principal"), an obligation to pay a specified third party (the "Beneficiary") a certain sum of money in accordance with the terms of the undertaking given by the guarantor, regardless of the validity of the obligation secured by such guarantee. A claim for a certain sum of money is deemed satisfied if the terms of the independent guarantee allow for the determination of the sum of money payable at the time of performance of the obligation by the guarantor.

Pursuant to Clause 3 of Article 368 of the Civil Code, independent guarantees may be issued by banks or other credit institutions ("Bank Guarantees"), as well as by other commercial organizations. In Russian legislation, the concept of an independent guarantee is established in Article 368 of the Civil Code, which, in addition to the rules already identified above, also reflects that an independent guarantee must specify:

the date of issuance;
the principal;
the beneficiary;
the guarantor;
the primary obligation, the performance of which is secured by the guarantee;
the sum of money to be paid or the procedure for determining it;
the term of the guarantee;
the circumstances under which the guarantee sum must be paid.

An independent guarantee may contain a condition for the reduction or increase of the guarantee sum upon the arrival of a certain period or the occurrence of a certain event. Furthermore, Article 370 of the Civil Code indicates that the guarantor’s obligation to the beneficiary provided for by the independent guarantee [1] is independent, in the relations between them, of the primary obligation in security of which it was issued, of the relations between the principal and the guarantor, and of any other obligations, even if the independent guarantee contains references to them.

At the same time, the guarantor is not entitled to raise objections against the beneficiary’s demand arising from the primary obligation in security of which the independent guarantee was issued, or from any other obligation, including the agreement on the issuance of the independent guarantee. In its objections against the beneficiary’s demand for performance of the independent guarantee, the guarantor is not entitled to refer to circumstances not specified in the guarantee. The guarantor is not entitled to present to the beneficiary for set-off a claim assigned to the guarantor by the principal, unless otherwise provided by the independent guarantee or by the guarantor’s agreement with the beneficiary.

As an exception to the general principle of the independence of a bank guarantee, established judicial practice considers a situation where a bad-faith beneficiary — having already received proper performance under the primary obligation — demands payment from the guarantor for the purpose of its own unjust enrichment, acting intentionally to the detriment of the guarantor and the principal. [2] In this case, the beneficiary's claim is not subject to satisfaction based on Article 10 of the Civil Code. [3]

In civil legislation, there is no separately highlighted classification of bank guarantees; in practice, all primary guarantees are named depending on their situation of application and terms of issuance. In practice, it is common to distinguish between secured and unsecured, unconditional and conditional, and irrevocable and revocable guarantees.

International Legal Regulation of Bank Guarantees

The regulation of bank guarantees in the international legal field is carried out by different regulatory documents:

The United Nations Convention on Independent Guarantees and Stand-by Letters of Credit; [4]
The Uniform Rules for Demand Guarantees approved by the International Chamber of Commerce (URDG No. 758);
The Agreement on Mutual Recognition of Bank Guarantees for State (Municipal) Procurement concluded within the framework of the EAEU; [5]
Decision of the Council of the Eurasian Economic Commission No. 87 dated August 29, 2023, On Certain Issues of Mutual Recognition of Bank Guarantees in the Implementation of State (Municipal) Procurement in the Member States of the Eurasian Economic Union. [6]

For the purposes of the United Nations Convention on Independent Guarantees and Stand-by Letters of Credit, an undertaking means an independent commitment, which in international practice is understood as an independent guarantee or a stand-by letter of credit and which is issued by a bank or another institution or person (the “guarantor/issuer”), to pay the beneficiary a certain or determinable sum upon simple demand or upon demand with the presentation of other documents in accordance with any documentary terms of the undertaking, indicating or from which it follows that payment is due by reason of non-performance of any obligation or the occurrence of another circumstance, or in payment for borrowed or advanced funds, or as a payment toward the discharge of any matured indebtedness of the principal/applicant or another person. [7] At the same time, a “counter-guarantee” means an undertaking issued to the guarantor/issuer of another undertaking by its instructing party and providing for payment upon simple demand or upon demand with the presentation of other documents in accordance with any documentary terms of the undertaking, indicating or from which it follows that payment under such other undertaking was demanded from the person who issued that other undertaking, or was made by it.[8]

The Uniform Rules for Demand Guarantees (the “URDG Rules”) apply to any demand guarantee or counter-guarantee that expressly states it is subject to them. They are binding on all parties to the demand guarantee or counter-guarantee, except in those cases and to the extent that they are modified or excluded by the demand guarantee or counter-guarantee. Within the meaning of the URDG Rules, a guarantee means any signed undertaking, regardless of its name or description, providing for payment upon presentation of a complying demand. [9]

Within the framework of the Eurasian Economic Union, the Agreement on Mutual Recognition of Bank Guarantees for State (Municipal) Procurement has been published, though it has not yet entered into force. The subject of this agreement is the provision of mutual recognition of bank guarantees issued by guarantors registered in the territory of the member state of the principal for the purposes of state (municipal) procurement carried out by a beneficiary of another member state. According to this agreement, the form and content of the bank guarantee must correspond to the requirements of the legislation of the beneficiary’s member state. The bank guarantee must be included in the register of bank guarantees in the manner established by the legislation of the beneficiary’s member state in the sphere of state (municipal) procurement (if such legislation provides for the formation of the indicated register). The legislation of the beneficiary’s member state applies to relations associated with the beneficiary’s presentation of a demand under a bank guarantee to the guarantor and its consideration by the guarantor. [10]

Together with the Agreement on Mutual Recognition of Bank Guarantees for State (Municipal) Procurement, the Council of the Eurasian Economic Commission adopted Decision of the Council of the Eurasian Economic Commission No. 87 dated August 29, 2023, On Certain Issues of Mutual Recognition of Bank Guarantees in the Implementation of State (Municipal) Procurement in the Member States of the Eurasian Economic Union, which approved:

the procedure for information exchange for the purposes of mutual recognition of bank guarantees in the implementation of state (municipal) procurement in the EAEU member states;
the list of criteria that must be met by guarantors of the EAEU member states carrying out the issuance of bank guarantees for the purposes of participation in state (municipal) procurement in other member states.

In addition, it must be noted that in accordance with the Customs Code of the EAEU, a bank guarantee is one of the methods for securing the performance of the duty to pay customs duties and taxes. [11]

Independence of Guarantee and Counter-guarantee

The URDG Rules provide a definition for such a concept as a “counter-guarantee,” which means any signed undertaking, regardless of its name or description, provided by a counter-guarantor to another party to secure the issuance by such other party of a guarantee or another counter-guarantee and providing for payment upon presentation of a complying demand under the counter-guarantee issued in favor of such party.

In addition to the primary definitions, the URDG Rules provide in Article 3, for example, the following interpretations:

Branches of a guarantor in different countries are considered independent organizations.
Except where the context provides otherwise, the term “guarantee” includes a counter-guarantee and any amendments to a guarantee or counter-guarantee, the term “guarantor” includes a counter-guarantor, and the term “beneficiary” includes the party in whose favor a counter-guarantee is issued.
Any requirement for the presentation of one or more originals or copies of an electronic document is deemed fulfilled upon presentation of one electronic document.

In accordance with the URDG Rules, a guarantee by its nature is independent of the primary transaction and the application, and the guarantor is in no way bound or limited by such transactions. A reference in the guarantee to the primary transaction for the purposes of its identification does not change the independent nature of the guarantee. The guarantor’s obligation to pay under the guarantee is independent of claims or objections arising from any relations besides the relations between the guarantor and the beneficiary.

Furthermore, a counter-guarantee by its nature is independent of the guarantee, the primary transaction, the application, or any other counter-guarantee to which it relates, and the counter-guarantor is in no way bound or limited by such transactions. A reference in the counter-guarantee to the primary transaction for the purposes of its identification does not change the independent nature of the counter-guarantee. The counter-guarantor’s obligation to pay under the counter-guarantee is independent of claims or objections arising from any relations besides the relations between the counter-guarantor and the guarantor or another counter-guarantor to whom the given counter-guarantee was issued.

Moreover, the URDG Rules define the conditions for the independence of each demand:

The presentation of a demand that is not a complying demand, or the withdrawal of a demand, does not deprive and in no way prejudices the right to present another timely demand, regardless of whether partial or multiple demands under the guarantee are prohibited or not.
The payment of a demand that is not a complying demand does not cancel the condition that other demands must be complying.

Content of Instructions and Guarantees; Amendment of Guarantees

In accordance with Article 8 of the URDG Rules, all instructions for the issuance of guarantees and the guarantees themselves must be clear and precise and must not contain redundant details. In all guarantees, it is recommended to specify:

the applicant;
the beneficiary;
the guarantor;
the number or other information identifying the primary transaction;
the number or other information identifying the issued guarantee, and in the case of a counter-guarantee — the issued counter-guarantee;
the sum or maximum sum to be paid, as well as the currency in which payment may be made;
the expiration of the guarantee;
any terms and conditions in relation to the demand for payment;
the condition regarding the necessity of presenting a demand or other documents in paper and/or electronic form;
the language of any document indicated in the guarantee;
the party responsible for the payment of expenses.

Article 11 of the Uniform Rules defines the terms for amendments to a guarantee:

If, upon receiving instructions to issue an amendment to a guarantee, the guarantor is for any reason not ready or does not have the possibility to issue such an amendment, the guarantor must immediately inform the party that instructed it.
An amendment made without the consent of the beneficiary does not bind the beneficiary. Nevertheless, the guarantor is irrevocably bound by the amendment from the moment of its issuance, unless and until the beneficiary rejects this amendment.
Unless an amendment to a guarantee was made in accordance with the terms of the guarantee itself, the beneficiary is entitled to reject it at any time until it has notified its consent to accept the given amendment or has carried out a presentation corresponding exclusively to the amended guarantee.
The advising party must immediately notify the party from whom the amendment was received about the consent or refusal to accept this amendment received from the beneficiary.
Partial acceptance of an amendment is not permitted and will be considered as a notification of refusal to accept the amendment.
A condition contained in an amendment that the amendment enters into force unless it is rejected within a certain period of time will not be taken into account.

Presentation of Demands under a Guarantee in Foreign Trade

In accordance with the Uniform Rules, a demand under a guarantee must be supported by other documents provided for in the guarantee, but in any case—by a statement from the beneficiary indicating the respect in which the applicant is in breach of its obligations under the primary transaction. This statement may be contained in the demand or in a separate signed document accompanying the demand or sent additionally, but with a reference to the given demand. [12]

A demand under a counter-guarantee must be supported in any case by a statement from the party in whose favor the counter-guarantee was issued, indicating that this party has received a complying demand under the guarantee or counter-guarantee issued by it. This statement may be contained in the demand or in a separate signed document accompanying the demand or sent additionally, but with a reference to the given demand.

Neither the demand nor the supporting statement may be dated earlier than the date when the beneficiary's right to present a demand arises. Any other document may be dated with a date preceding such a date. Neither the demand, nor the supporting statement, nor any other document may be dated later than the date of its presentation.

Furthermore, the guarantor must immediately notify the instructing party or the counter-guarantor, depending on the situation, about any demand under the guarantee or any request for the extension of the guarantee as an alternative. The counter-guarantor must immediately notify the instructing party about any demand under the counter-guarantee and any request for its extension as an alternative. [13]

Also, in accordance with Article 17 of the Uniform Rules, it is defined that:

A demand may be presented for a sum less than the guarantee sum (“partial demand”).
The presentation of more than one demand is possible (“multiple demands”).
The expression “multiple demands prohibited” or a similar expression means that only one demand may be presented in the amount of the guarantee sum or a part thereof.
In the event that the guarantee provides for the possibility of presenting only one demand and such demand was rejected, another demand may be presented no later than the expiration date of the guarantee.
A demand is not complying if:

it is presented for a sum greater than the guarantee sum;
sums that in total are less than the sum specified in the demand are indicated in the supporting statement or any other documents provided for by the guarantee.

On the contrary, a demand does not become non-complying solely for the reason that a sum exceeding the demand sum is specified in the supporting statement or another document.

In Article 24 of the Uniform Rules, conditions regarding non-complying demands are highlighted:

If the guarantor establishes that a demand under the guarantee is not complying, it is entitled to reject such a demand or, acting exclusively at its own discretion, approach the instructing party or, in the case of a counter-guarantee, the counter-guarantor for consent to accept the demand with discrepancies.
If the counter-guarantor establishes that a demand under the counter-guarantee is not complying, it is entitled to reject such a demand or, acting exclusively at its own discretion, approach the instructing party for consent to accept the demand with discrepancies.
None of the provisions of the points designated above extends the established period or cancels the requirements of Article 16 of the Uniform Rules. Receipt of consent from the counter-guarantor or the instructing party does not impose on the guarantor or counter-guarantor an obligation to accept any discrepancy.
If the guarantor rejects a demand, it is obliged to send to the person who carried out the presentation of the demand one single notification. The notification must indicate: – that the guarantor rejects the demand; – each discrepancy on the basis of which the guarantor rejects the demand.
The notification provided for by the URDG Rules must be sent without delay, but no later than the end of the fifth business day following the day of presentation.

Upon non-compliance by the guarantor with the provisions of the points designated above,[14] it is deprived of the right to refer to the fact that the demand and any documents associated with it are not a complying demand. [15] At any moment after sending the notification, the guarantor may return to the person who carried out the presentation any documents presented on paper, as well as take any decision that it considers acceptable in relation to electronic records without any obligations whatsoever on its part.

Applicable Law and Jurisdiction for Guarantees in Foreign Trade

In accordance with the URDG Rules, unless otherwise provided in the guarantee, it is governed by the law of the country of the location of the branch or office of the guarantor that issued this guarantee. Unless otherwise provided in the counter-guarantee, it is governed by the law of the country of the location of the branch or office of the counter-guarantor that issued this counter-guarantee.

Furthermore, unless otherwise provided in the guarantee, any dispute between the guarantor and the beneficiary in relation to the guarantee is subject to resolution exclusively by a competent court of the country of the location of the branch or office of the guarantor that issued this guarantee. Unless otherwise provided in the counter-guarantee, any dispute between the counter-guarantor and the guarantor in relation to the counter-guarantee is subject to resolution exclusively by a competent court of the country of the location of the branch or office of the counter-guarantor that issued this counter-guarantee.

In addition, the Uniform Rules also provide a form of demand guarantee that reflects the primary provisions necessary for the formalization of a guarantee.

Judicial Disputes Regarding the Issuance of Bank Guarantees in Foreign Trade

A bank guarantee allows foreign partners to interact with each other and conduct foreign trade transactions more safely. However, despite the convenience of using a bank guarantee, disputed points arise among foreign trade participants when using bank guarantees, for the uniform resolution of which, for example, the Presidium of the Supreme Court of the Russian Federation on June 5, 2019, approved the Review of Judicial Practice in Resolving Disputes Related to the Application of Legislation on Independent Guarantees. Several positions related to independent guarantees are provided by the Review; we will cite examples of some of them:

a unilateral expression of the guarantor's will is sufficient for an obligation to arise from an independent guarantee, unless otherwise expressly provided in the text of the guarantee itself [16];
an obligation from an independent guarantee cannot be recognized as absent on the grounds of failure to specify the name of the beneficiary in the text of the guarantee if the person in whose favor this guarantee was issued has been reliably established [17];
a demand for payment under an independent guarantee is considered presented in a timely manner if it is sent to the guarantor within the validity period of the guarantee and the terms of the independent guarantee do not provide otherwise (for example, that the moment of presentation of the demand is determined based on the moment of its delivery to the guarantor) [18];
the requirement for the determination in the independent guarantee of the sum of money subject to payment to the beneficiary is deemed fulfilled if the terms of the guarantee allow this sum to be established at the moment of performance of the obligation by the guarantor [19];
as a general rule, upon the introduction of amendments to the terms of the primary contract in security of the performance of obligations under which the guarantee was issued, the scope of the guarantor’s obligations does not change [20], etc.

The use of bank guarantees when conducting foreign trade significantly simplifies the interaction of foreign partners, reducing the risks associated with the performance of foreign trade contracts. However, it is important to remember that when using a bank guarantee under international contracts, it is necessary to be guided not only by the legislation of the Russian Federation but also by the norms of international law applied to the relations under a bank guarantee.

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References

Review of judicial practice in resolving disputes related to the application of legislation on independent guarantees. Approved by the Presidium of the Supreme Court of the Russian Federation on June 5, 2019.
Resolution of the Arbitration Court of the Volga-Vyatka District dated September 22, 2023, No. F01-5722/2023 in case No. A31-5419/2021. “On the recovery of debt and penalty under an agreement on the provision of a bank guarantee.” The guarantor (bank) refused to pay the beneficiary the bank guarantee, stating that the presented demand for its payment does not correspond to the conditions of its issuance, and the presented documents do not allow establishing the fact of the existence of circumstances that are the basis for payment of the sum under the bank guarantee (do not allow establishing what the contract breach consisted of, what the liability for such a breach is, and what the scope of the principal's liability is within which the guarantor is liable). Satisfaction of the claim was refused, as a bank guarantee is not a method for the enrichment of the beneficiary at the expense of the principal.
Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation dated January 15, 1998, No. 27. Review of the practice of resolving disputes related to the application of the norms of the Civil Code of the Russian Federation on bank guarantees.
The Convention was approved by the UN General Assembly on December 11, 1995. The Convention entered into force on January 1, 2000. Russia does not participate in this Convention.
Concluded in Moscow on August 29, 2023. Enters into force from the date of receipt by the depositary through diplomatic channels of the last written notification of the performance by the member states of the intra-state procedures necessary for the entry of the Agreement into force.
In accordance with point 2, the document enters into force upon the expiration of 30 calendar days from the date of its official publication (published on the official website of the EAEU on August 31, 2023), but not earlier than the date of the entry into force of the Agreement dated August 29, 2023.
Point 1 of Article 2 of the UN Convention on Independent Guarantees and Stand-by Letters of Credit.
Article 6 of the UN Convention on Independent Guarantees and Stand-by Letters of Credit.
Article 2 of the URDG Rules.
Article 5 of the Agreement on Mutual Recognition of Bank Guarantees in the Implementation of State (Municipal) Procurement.
Point 1 of Article 63 of the Customs Code of the EAEU.
Determination of the Supreme Court of the Russian Federation dated June 16, 2016, No. 309-ES16-5838 in case No. A60-25113/2015. “On the review in a cassation procedure of judicial acts in a case on the recovery of monetary funds.” The transfer of the cassation appeal for consideration in a judicial session of the Judicial Collegium for Economic Disputes of the Supreme Court of the Russian Federation was refused, as grounds for the review of the judicial acts adopted in the present case were not established.
Article 16 of the URDG Rules.
Resolution of the Arbitration Court of the Moscow District dated June 6, 2023, No. F05-13755/2023 in case No. A40-179098/2022. Demands of the beneficiary: 1) On the recovery from the guarantor of the sum under an independent guarantee; 2) On the recovery of a penalty. Circumstances: It was established that the demand for carrying out the payment of the monetary sum under the bank guarantee was sent in connection with the improper performance by the principal of its obligations under the contract during the validity period of the bank guarantee, consequently the defendant lacked grounds for refusal in the performance of the beneficiary's demands. The demands were satisfied.
Determination of the Judicial Collegium for Economic Disputes of the Supreme Court of the Russian Federation dated November 3, 2017, No. 305-ES17-5496 in case No. A40-85050/2016. “On the recovery of indebtedness under bank guarantees.” The plaintiff believes that the bank's refusal to pay monetary funds under a bank guarantee with a reference to the presentation of the demand and documents after the expiration of the term of validity of the guarantees is illegal. Decision: The demand was satisfied, as the improper performance by the guarantor of the duty to communicate information about the change of address for the presentation of the demand under the guarantee was actually aimed at evasion of payments and must entail negative legal consequences for the bank.
Resolution of the Arbitration Court of the East Siberian District dated May 24, 2023, No. F02-1955/2023 in case No. A19-9627/2022. The plaintiff (beneficiary) approached the court with a claim for recovery of debt under a bank guarantee and indicated that the guarantor refused to fulfill the demands under the bank guarantee, motivating this by the fact that the guarantee had not entered into force by reason of non-compliance by the beneficiary with the terms of the guarantee regarding the notification of the guarantor of its acceptance. In accordance with the clarifications of the Presidium of the Supreme Arbitration Court of the Russian Federation (Information Letter dated January 15, 1998, No. 27), notification of the guarantor of the acceptance by the beneficiary of the guarantee is not required for the occurrence of a guarantee obligation, unless otherwise expressly provided in the text of the guarantee obligation. Furthermore, the guarantor's obligations arise at the moment of issuance of the guarantee, unless in the guarantee the guarantor has made the occurrence of its obligations dependent on receipt of a written response from the beneficiary regarding acceptance of the guarantee (Review of judicial practice in resolving disputes related to the application of legislation on independent guarantees, approved by the Presidium of the Supreme Court of the Russian Federation on June 5, 2019). In connection with the fact that the bank guarantee is irrevocable and enters into force from the moment of receipt by the guarantor of written notification from the beneficiary regarding acceptance of the guarantee, but not earlier than the date of entry into force of the contract, the beneficiary's demand was satisfied by the court.
Resolution of the Arbitration Court of the Volga-Vyatka District dated May 25, 2023, No. F01-1777/2023 in case No. A31-17335/2021. The plaintiff approached with a claim for recovery of debt under a bank guarantee and a penalty. In the course of consideration of the case, it was established that the bank acting as the guarantor refused the plaintiff (beneficiary) in the payment of the bank guarantee. Refusing payment of the guarantee, the bank indicated that the presented demand for payment of the bank guarantee does not correspond to its terms. It was established by the court that the beneficiary complied with the terms of the guarantee (the demand was sent within the validity period of the bank guarantee; it was indicated in the demand exactly which obligation under the supply contract the principal breached; relevant documents were attached), and in connection with this the statement of claim was satisfied.
Resolution of the Arbitration Court of the North-Western District dated October 12, 2023, No. F07-14459/2023 in case No. A21-9422/2022. Approaching the court, the plaintiff demanded recovery of indebtedness and penalties under a bank guarantee. In the course of consideration of the case, it was established by the court that the bank did not fulfill the demand under the guarantee, indicating that the reason for non-performance was that the beneficiary's demand was received upon the expiration of the validity period of the bank guarantee. Taking into account the provisions of the Review of judicial practice in resolving disputes related to the application of legislation on independent guarantees, approved by the Presidium of the Supreme Court of the Russian Federation on June 5, 2019, the court came to the conclusion regarding the necessity of satisfaction of the demand for recovery of indebtedness, in connection with the fact that the demand for payment under the guarantee was presented on time and within the validity period of the guarantee.
Resolution of the Arbitration Court of the North-Western District dated March 1, 2023, No. F07-555/2023 in case No. A56-35356/2022. In the course of consideration of the case, it was established that the guarantor did not fulfill obligations to the beneficiary under a bank guarantee, signifying that a calculation of the sum included in the demand was absent in the documents attached to the demand. The court took the decision to satisfy the demand, as all terms of the guarantee were complied with by the beneficiary, and the calculation of the sum subject to payment was indicated in the demand itself.
Resolution of the Ninth Arbitration Appellate Court dated September 11, 2020, No. 09AP-27014/2020 in case No. A40-254451/2019. In the statement of claim, the beneficiary demanded recovery from the guarantor of monetary funds under an independent guarantee. In the case under consideration, evidence undoubtedly testifying to abuse of right by the plaintiff was not presented, contrary to the arguments of the applicant of the appellate appeal. The materials of the case do not contain evidence of receipt by the beneficiary of performance from the debtor under the credit agreement in one way or another, in connection with which the payment by the defendant of monetary funds under the bank guarantee does not create unjust enrichment on the part of the beneficiary. The court took the decision to satisfy the beneficiary's demands.