On first demand (bank) guarantees under Swiss law

Zurich has an important banking sector, and therefore the courts in Zurich do rather often have to deal with cases related to first demand (bank) guarantees governed by Swiss law. The Commercial Court of the Canton of Zurich (the Zurich Commercial Court) has recently uploaded such a judgment to its website, dated 8 May 2019 (case reference: HG180051-O). This judgement is interesting because it explains the key features of first demand (bank) guarantees governed by Swiss law in a textbook-like fashion.

The relevant dispute arose between a Zurich-based bank, the claimant, and a German company, the defendant. The parties had entered into a guarantee agreement governed by Swiss law, under which the German company (guarantor) had issued a guarantee in favor of the Zurich bank, in an amount of CHF 3m. The Zurich bank had called the guarantee, and since the German guarantor refused to make payment under the guarantee, the bank filed a lawsuit with the Zurich Commercial Court, asking the court to order the defendant to honor the guarantee.

In a simplified fashion, these are some of the Zurich Commercial Court’s considerations contained in its new judgment HG180051-O with regard to first demand (bank) guarantees under Swiss law:

(1) Such guarantees are not subject to special form requirements (consideration 3.2). Particularly, it is not necessary that they are recorded in a notarized document. Also, in a cross-border context, it is sufficient if the guarantee is “signed” by putting a copy or reproduction of a handwritten signature(s), e.g., a stamp with the relevant signature(s), on the document (Id.).

(2) On first demand guarantees governed by Swiss law are independent from the (basic or principal) obligation(s) that shall be secured by the guarantee (in particular, considerations 3.3.1 and 3.3.4). In other words, the guarantee constitutes an independent obligation of the guarantor and secures a (principal) performance, such as the performance of certain services, regardless of whether the latter is actually owed or enforceable (Id.). Hence, are therefore also covered by the guarantee situations in which the (principal) obligation never arose or ceased to exist (Id.).

(3) Flowing from the legal consequences mentioned at (2) above, it is very difficult for the guarantor under a Swiss law governed on first demand (bank) guarantee to successfully invoke any objection or defense against his or her payment obligation under the guarantee (considerations 3.3.2 and 3.3.4). Whether or not the guarantor is obligated to make payment under the guarantee is, in principle, exclusively determined by the terms of payment set out in the guarantee. In cases of on first demand (bank) guarantees, the payment condition usually consists of the sole requirement that the beneficiary submits to the guarantor a written demand for payment (consideration 3.3.3). Such guarantees are also referred to as unconditional guarantees, and they are, as mentioned, payable upon simple demand for payment (Id.). In particular, the guarantor under such a guarantee may not invoke vis-à-vis the beneficiary that the basic or principal obligation is null and void due to impossibility, unlawfulness, or immorality, or non-binding due to error or deception on the part of the principal debtor (consideration 3.3.4).

(4) In principle, the guarantor may only raise objections / defenses vis-à-vis the beneficiary that are related to and based upon the guarantee contract itself, namely the invalidity or nullity of the guarantee contract, or that the guarantee has not been properly called (consideration 3.3.4). Under exceptional circumstances, the guarantor may assert an abusive calling of the guarantee, for instance, if he or she can prove with conclusive evidence that the obligation secured by the guarantee has undoubtedly been performed. In this regard, it is to be highlighted, however, that the hurdle of proving an abusive call of a guarantee is very high in light of Swiss case law (Id.).

(5) Some guarantees contain terms of payment pursuant to which the beneficiary must prove that the situation or event that is to be secured by the guarantee, such as a delay in delivery, has actually occurred. Such an element in guarantee payment terms is referred to in Swiss case law as an effective clause (“Effektivitätsklausel“). Such payment terms, which describe the non-performance of an expected delivery or service, contradict the character of independent and unconditional (bank) guarantees, according to which the payment promise expressed in the guarantee is independent of the existence and the effects of the basic or principal obligation. Hence, pursuant to Swiss court precedents, despite the inclusion of an effective clause in a guarantee, it is still sufficient for the beneficiary to simply confirm that the event that is to be secured by the guarantee, which is referred to in German as the “Garantiefall“, has occurred (consideration 3.3.3, at page 16). Let us assume for illustration purposes that the terms of payment in a Swiss law governed guarantee state that the guarantee is payable if and when a piece of equipment has not been delivered free of defaults. Pursuant to the mentioned Swiss case law, despite such an “Effektivitätsklausel“, the guarantee is properly triggered if and when the beneficiary simply confirms in his or her call for payment that the delivered piece of equipment was defective; the beneficiary does not have to prove this assertion in the context of his or her calling of the guarantee.

The new Zurich Commercial Court judgment briefly discussed above emphasizes that the terms of payment in a Swiss law governed guarantee must be formulated with greatest care. These conditions must be formulated in such a crystal-clear way that there is no room or need for interpretation at all to determine their meaning. Otherwise, in the event of litigation, the court may find itself obliged to interpret the terms of payment (consideration 3.3.3), which, depending on the circumstances, may involve a considerable degree of uncertainty, something that the parties to a guarantee should strive to avoid, not least because of the risk of costly legal proceedings that may originate in inaccurate payment terms (in this context, see, for example, my article on the interpretation of payment conditions contained in bank guarantees on first demand: Die Auslegung der Abrufvoraussetzungen von Bankgarantien auf erstes Anfordern, in: Jusletter dated 30 March 2015).

Philipp H. Haberbeck, Zurich, 20 November 2019 (www.haberbeck.ch)

The information contained in this post is for general informational purposes only and is not intended to constitute legal advice. Readers of this post should not take any actions or decisions without seeking specific legal advice. Any mandate is subject to the full execution of an engagement letter.