The Russian Supreme Court has reviewed judicial practice on independent guarantees and has issued clarifications on certain controversial issues that have arisen when independent guarantees are used as a security for various types of transactions.
There has been an increasing number of cases where a guarantor refused to make payment under a guarantee, or where the guarantee has been deemed void due to the absence of agreement on the amount of the guarantee or its term, in particular in bid bond (tender) guarantees. Moreover, the law has not stipulated the consequences when a guarantor goes bankrupt, or the procedure for sharing the costs of issuing a guarantee.
These and other clarifications are provided in the Supreme Court's Overview of Judicial Practice in Resolving Disputes Involving the Application of Legislation on Independent Guarantees (the "Overview")1. Below are the most interesting takeaways from the Overview.
The term of a guarantee may be defined by criteria other than specific dates
A guarantee may stipulate that it will enter into effect as of the moment that the beneficiary performs actions related to the performance of the main (secured) agreement, for example, as of the date of an advance payment.
The amount of the guarantee may be definable
An independent guarantee may establish a procedure for determining the amount of the guarantee to be paid by the guarantor to the beneficiary, instead of specifying a fixed amount. Such procedure should allow this amount to be clearly defined at the actual moment when the guarantor makes the payment.
This issue is particularly relevant if a guarantee is issued to secure obligations under a contract to be entered into at an auction, because the price of such a main contract is ultimately formed after the guarantee is issued.
If the guarantor had information about the conclusion of the main contract at the auction and its initial price, then the guarantor will be liable within the contract price that was ultimately formed as a result of the auction.
The guarantor performs only a formal check of the documents
In the Overview, the Supreme Court mentions several times that when a claim is considered, the guarantor should be limited to a formal check of the documents submitted. The Supreme Court also reiterated that actions such as assessing the calculation of the amount required under the guarantee for completeness and reasonableness, and checking the status of mutual settlements between the parties under the main contract, are beyond the scope of a formal review and cannot influence a decision about the payment of a guarantee.
A guarantor's bankruptcy does not entail the termination of a guarantee
A guarantor has the right to demand payment from the principal for the issue of an independent guarantee, even if, during the effective term of the guarantee, the guarantor is declared bankrupt. However, insofar as the securing function of the guarantee is deteriorated in such case, the amount of such fee may be revised by a court based on an expert opinion.
The Supreme Court also pointed out that the beneficiary, in case of the guarantor's bankruptcy, has the right to present a demand for payment under an independent guarantee in the course of a bankruptcy proceeding. However, no other possible consequences resulting from the guarantor being declared bankrupt were covered in the Overview.
The principal has the right to recover from the beneficiary fees paid for a guarantee, if the contract was terminated due to the beneficiary's fault
The Supreme Court clarified that fees and expenses paid by the principal to the guarantor for issuance of an independent guarantee in respect of a state/municipal contract which was subsequently terminated due to circumstances for which the beneficiary was responsible, constitute direct losses of the principal and should be reimbursed by the beneficiary.
1. A Russian version of the Overview is available here.