Article

Note: The defendant bank (Issuer) issued a bank guarantee for the benefit of the plaintiff (Beneficiary). Apart from a time limitation, the guarantee provided that payment under the guarantee was conditional upon presentation of the original guarantee. Following receipt of the bank guarantee, Beneficiary lost the original guarantee and could only provide a copy when drawing the guarantee. Issuer refused to honor, claiming that the condition for payment of the guarantee amount was not fulfilled.

The lower courts applied the principle of strict formality, a well-established rule of Austrian case law in the field of bank guarantees which requires "scrupulous" compliance with conditions set out in guarantees, and rejected the Beneficiary's claim for payment.

The Supreme Court, although adding some qualifications to the principle of strict formality, confirmed the lower courts' judgments. In its opinion, the Supreme Court stated that "scrupulous" compliance with the conditions of a guarantee was, as an exception, dispensable in cases where compliance was entirely dependent on circumstances outside the beneficiary's control. This was, however, not the case in relation to the Beneficiary who undisputedly received the original guarantee. Further, the Supreme Court stated that it could not be ruled out that a second demand would be made if the original guarantee was discovered before its expiry date.

Comment:

While application of the strict formality rule appears to be appropriate in this case, the argument about a possible second demand is certainly not. Under Austrian law, a bank guarantee is not a bearer instrument and a bank can validly refuse to honor repeated demands if the guarantee has already been drawn. Also, transfers or assignments of guarantees (the contractual right to demand payment of the guarantee amount) are generally not permitted, so the risk of a valid demand made by a party other than the original beneficiary is remote.

In any event, the Supreme Court's judgment imposes grave consequences on the loss of bank guarantees that require, as a condition of payment, presentation of the original guarantee. Since procedural remedies available under Austrian law in similar cases, e.g. the loss of bonds, stock certificates, or bills of exchange, may not apply to bank guarantees and take at least six months, there are only two practical remedies available: (i) refuse to accept bank guarantees that require presentation of the original (which also helps to avoid the problem of not having the original at hand in case of multiple drawings when it is uncertain whether, after the first drawing, the original will be returned in time for the next drawing, if at all) or (ii) keep the original in very safe custody.

* Philipp Fuchs is Attorney-at-law, BINDER GRÖSSWANG Rechtsanwälte GmbH (Austria).

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