URDG guarantees and the obligation of the guarantor and the advising party

Our associate, Szabolcs Patai published an article in Financial Regulation International about URDG guarantees. 

In a case initiated by an Italian company against a Hungarian bank, the Hungarian courts have examined whether the guarantor can be obliged to pay under a first demand guarantee if the guarantee is altered after issuance, without the consent of the guarantor in the course of transmission.

The defendant, a Hungarian bank, issued an advance payment guarantee to the plaintiff. The first demand guarantee was governed by the Uniform Rules for Demand Guarantees (URDG) 758. The guarantee was advised to the plaintiff, an Italian company, by an Italian bank. The guarantor sent the guarantee to the advising party by way of a SWIFT message and the advising party delivered the guarantee to the plaintiff.

The counterparty of the commercial transaction secured by the guarantee has not performed its contractual obligation, therefore, the plaintiff made a demand under the guarantee. However, the defendant rejected the demand, claiming that the guarantee stipulated that it enters into force only if the amount of the advance payment is paid to the bank account defined in the guarantee. This precondition has not been fulfilled. The plaintiff claimed that the guarantee, which it received from the advising bank, did not contain such condition. The plaintiff argued that irrespective of the fact whether the precondition was originally missing from the guarantee, the bank became bound by the terms of the guarantee as at the time when it reached the beneficiary.

The court of first instance agreed with the arguments of the claimant. The court stated that the relevant question is when the guarantee became effective. The court concluded that art4 URDG covers only matters relating to issuance of the guarantee, but it contains no provision on when the guarantee becomes effective vis-à-vis the beneficiary. The court, therefore, applied s214(1) of the Hungarian Civil Code, which provides that a legal declaration becomes effective when it reaches the other party. Consequently, since the defendant advised the guarantee through an advising party, the guarantor shall perform even if the wording of the guarantee was amended after issuance. Therefore the court ordered the defendant to pay.  

The defendant appealed against the first instance decision. It argued that article 4 URDG regulates not only the issuance of a guarantee, but also its effectiveness. After issuing the guarantee, the guarantee is irrevocable and the beneficiary may demand payment on the guarantee. s214 (1) of the Hungarian Civil Code would have the same consequences. Considering that the issuance and the taking effect of a guarantee refer to the same notion, and URDG contains the rules of the issuance of a guarantee, the defendant argued that the rules of taking effect of a legal declaration in the Civil Code are not applicable. 

The defendant further pointed out that it was not disputed in the case that the guarantee sent by the defendant to the advising bank contained that it enters into force only if the amount of the advance payment is paid to the bank account defined in the guarantee. The question relevant for the case is whether the fact that at some point after issuance the content of the guarantee was altered leads to the consequence that the guarantee, itself, is also altered. The defendant argued that if an offer is altered after it was made, the acceptance of the offer will be in discrepancy, consequently if the discrepancy regards an essential term, the contract will not be concluded. Analogously even if a guarantee issued by the guarantor is altered later by another person, the guarantor is still bound by the original content of the guarantee. If the alteration is attributable to a third person, it might raise the question of the liability of such person, however, it does not have any consequence to the legal relationship of the guarantee and the beneficiary under the guarantee. 

The Court of Appeal overturned the decision of the first instance court. It found that the defendant proved that upon issuance the guarantee contained the disputed condition. Furthermore, since the SWIFT system is a closed system and the message could not be altered, the advising party must have received the guarantee with the same content. The court, accepting the arguments of the defendant, stated that the fate of the guarantee after issuance cannot influence the obligation of the guarantor. Therefore, the effective guarantee is the one issued by the guarantor, therefore, the beneficiary was not entitled to make a demand on the guarantee.

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