Article

Factual Summary: Principal entered into a facilitation agreement with Guarantor to secure the exportation of merchandise purchased from Supplier on behalf of Buyer. At Principal's request, Guarantor issued a first demand guarantee in favor of Buyer. In return, Buyer had ECO Bank, Bamako issue the first commercial letter of credit in a back-to-back series of LCs in favor of Principal. Article 6 of the facilitation agreement required that the first of the back-to-back LCs be received by Guarantor, then Guarantor was to issue a second LC in favor of Supplier. It was stipulated that the first LC must be received at the counter of Guarantor before the second LC could be issued to the Supplier.

However, the first LC was sent to and received at City Bank Tunis rather than by Guarantor. Guarantor then refused to issue a second LC in favor of Supplier and Supplier refused to deliver the merchandise to Principal. Therefore, Principal was not able to import the merchandise from Supplier or export it to Buyer. Buyer then drew on the demand guarantee. The collapse of the operation was due to Guarantor's failure to receive the first LC at its counter.

Principal is now menaced by the payment of the first demand guarantee and the utilisation of a land mortgage issued by the Company "Les jardins de la cité olympique" (Mortgagee) to secure implementation of Principal's obligations. In fact, Guarantor gave Principal notice to repay the amount of the demand guarantee or risk the use of the mortgage.

Both Principal and Mortgagee together took the matter before the Court of First Hearing of Tunis, claiming the dissolution of the facilitation agreement between Principal and Guarantor because the Guarantor breached its obligations, as well as the termination of the guarantee agreement and consequently of the mortgage. Principal and Guarantor applied the Tunisian Code of Obligations and Contracts, particularly Article 247. No reference to the United Nations Convention, as applicable law, was made.

The Court of First Hearing of Tunis, case number 21386/23 on April 19, 2008, entered judgement in which it simply applied Tunisian law and made no reference to the UN Convention. It declared that Guarantor had committed no violation of its obligations and had implemented the contract by issuing the demand guarantee without any mistake from his part. The Court concluded by rejecting Principal and Mortgagee's claims.

Both Principal and Mortgagee appealed this decision. The appeal Case is the subject of this report.

Legal Analysis:

This case deals not only with questions relating to the application of the UN Convention, but also with unrelated questions like the validity of the mortgage securing the guarantee, the unnecessary authorisation to engage foreign currency in favor of a non-resident, the bank's duty to advise when opening a letter of credit, and the disregard of the back-to-back letter of credit's domiciliation obligation.

The decision contained two paragraphs related to the UN Convention, dealing with the application of the Convention in Tunisian legal system and its interpretation.

1. Application of the UN Convention:

The Judges expressly declared that in the Tunisian Legal System the UN Convention should be applied with priority over internal law, notably the Code of Obligations and Contracts promulgated in 1906.2 The UN Convention is considered the first source of law when there is a question of independent guarantees and standby letters of credit. This position is legally justified by Article 32-2 of the Tunisian Constitution, which stipulates: "Treaties ratified by the President of the Republic and approved by the House of Deputies have an authority higher than that of laws".

In respect to this text, Tunisian judges must exclude the application, on one hand, of national general law, in reference to the Code of Obligations and Contracts. On the other hand, they must exclude the application of national specific law, that is the Code of International private law3 applicable on international relationships (as defined by article 2 of this Code4) especially its article 62 (dealing with the law applicable on voluntary obligations5) specifying the application of the "Law of autonomy" that means the rules chosen by the parties (either national law or private rules called "Lex Mercatoria")6. In this regard, the judge in this case must also exclude the application of the URDG ICC Publication N° 458 chosen by the parties as governing rules.

Paragraph 2 of the decision (page 9) states:

"Although the appellant founded its action on Tunisian Law, precisely articles 242, 273 and 274 of the Code of Obligations and Contracts, raising the application of UN Convention on Independent Guarantees and Standby Letter of Credit dated on December 11, 1995 is right since the object of this action is a First Demand guarantee".7

2. Interpretation of UN Convention Article 14-2:

The Judges applied UN Convention Article 14-2 to determine the responsibility of Guarantor. The Article excludes Guarantor's responsibility except in case of a major mistake or Guarantor's good faith. This article does not precisely define "major mistake" or "good faith". It gives judges the power to interpret the Article based on the situation. In this case, the Judges faced the problem of interpreting Article 14- 2. They had to decide whether or not the behaviour of the Guarantor, which did not stipulate in the letter of guarantee sent to the Buyer that it was necessary to domiciliate the letter of credit that was going to be opened in favor of the principal of the guarantee at its counter, despite the fact that the condition was included in the facilitation agreement between Guarantor and Principal, constitutes or not a major mistake or a bad faith. The Judges interpreted Article 14-2 to indicate that the behaviour of Guarantor, in this case, was not a major mistake or bad faith. They concluded that Guarantor was not responsible.

This interpretation was made in the paragraph 6 of the decision (pages 10-11):

"Since the facilitation convention was written in a date posterior to the emission of the First Demand Guarantee given to [Beneficiary], raising the transgression of its article 6 is a false issue and doesn't imply the responsibility of [Guarantor] according to the article 14 paragraph 2 of the United Nations Convention, because it wasn't proved that it committed a major mistake and it wasn't proved that it acted in bad faith".8

Comment by Dr. BACCAR: This decision is partially acceptable and partially arguable. The application of the UN Convention in paragraph 2 is satisfactory. The interpretation of Article 14-2 in paragraph 6 is, on the contrary, discussable. That is why this case is actually being heard in the "Cour de cassation" (Tunisian Supreme Court). As of 1 January 2011, it is still in progress and no final decision has been made.

Comment by IIBLP: The exclusion of URDG 458 is somewhat surprising in light of UN LC Convention Articles 13(1), 14(1), and 16(1) but is an operation of domestic reimbursement law to which the Convention is only incidentally relevant.

[JB/kmw]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.

1. Doctor in Law, Lawyer in Tunis, Professor Assistant in Tunisian universities, (E-mail: jamelbaccar@yahoo.fr). This summary was submitted by Dr. BACCAR. The facts have been reformatted and rearranged by the IIBLP staff to correspond with the formatting used in this volume but the legal analysis is that of the author. Concluding comments are as indicated.

2. Text promulgated on December 15, 1906 and reorganised by Law N° 87 on August 15, 2005.

3. Text promulgated by Law N° 97 on November 27, 1998.

4. Article 2 specifies that: "Is international, the legal relationship attached at least by one of its determining elements to one or more orders other than the Tunisian legal order" (our translation).

5. Article 62 specifies that: "The contract is governed by the rules ("DROIT") indicated by the parties. If they don't designate the applicable rules, the contract is governed by the law of the State of the residence of the party whose obligation is determining for the qualification of the contract, or that of the place of its establishment, when the contract is concluded within the framework of its professional or commercial activity" (our translation).

6. It is interesting that the French version of article 62 contains an equivocal expression, which is "DROIT". It is equivocal because it is subject to two interpretations: either RULE or LAW. This expression was interpreted by Tunisian doctrine a large interpretation as synonymous to the expression RULE and not LAW. This interpretation is large because the word LAW includes both national law and international private rules like those of the ICC. However, the expression LAW signifies only national law and excludes the private said rules.

7. Text translated to the English from the Arabic by our care. The original version stipulates : IMAGE

8. Text translated to the English from the Arabic by our care. The original version stipulates : IMAGE