Guarantor’s Obligation
A guarantee is a unilateral undertaking by the guarantor to pay the amount specified in the guarantee, in whole or in part, to another person – the creditor, if the debtor fails to fulfil the obligation or performs it improperly, and to compensate the creditor for losses under certain conditions (e.g., if the debtor becomes insolvent or in other cases). It constitutes an additional (subsidiary) obligation of a third party, serving as a means of securing obligations.
A legal entity providing a guarantee must have the right to do so, i.e., such a right must be stipulated in its articles of association. The bank ensures that the legal entity has sufficient assets to repay the loan and fulfil all obligations related to the loan on behalf of the borrower, if required. A guarantee may cover the entire loan, including interest and penalties, or only part of it. The guarantee must be in writing. Failure to comply with this requirement renders the guarantee invalid.
Under a guarantee, a third party undertakes to fulfil the obligation to repay the loan and the related liabilities to the bank, if the debtor, on whose behalf the guarantee is provided, fails to meet the obligations stipulated in the loan agreement on time, and only after it has been legally confirmed that the debtor is insolvent. This means that the guarantor’s liability is subsidiary.
The guarantor’s obligation to the creditor is independent of the principal obligation for which the guarantee was issued, even when such obligation is referred to in the guarantee. Upon fulfilling the obligation on behalf of the debtor, the guarantor acquires the right of recourse against the debtor.
Upon receiving the creditor’s demand to fulfil the obligation, the guarantor must immediately notify the debtor and forward to them copies of the creditor’s demand and the attached documents. The guarantor has the right to refuse to satisfy the creditor’s demand if the demand or the attached documents do not comply with the conditions of the guarantee or are submitted after the expiry of the guarantee’s validity period. The guarantor must promptly inform the creditor about the refusal. If the guarantor learns that the obligation secured by the guarantee has been fulfilled, has expired on other grounds, or has been declared invalid, they must immediately inform both the creditor and the debtor. After such notification, if the creditor submits a repeated demand to fulfil the obligation, the guarantor shall satisfy the demand only if the creditor provides evidence that the obligation is still valid and in force.
A bank guarantee means that the bank or another credit institution (the guarantor) undertakes in writing to pay the debtor’s creditor a specified amount of money upon the creditor’s demand. For the provision of the guarantee, the debtor pays the guarantor a fee as agreed in the contract between the debtor and the bank. The bank guarantee becomes effective from the moment it is issued unless otherwise specified in the guarantee. The creditor’s demand to enforce the contract must be submitted to the bank in writing with all necessary documents attached. The demand must indicate how the debtor breached the principal obligation secured by the guarantee.
The bank guarantee terminates when:
- The bank pays the creditor the amount specified in the guarantee;
- The period of validity of the guarantee specified in its text expires;
- The creditor waives their rights under the guarantee and returns it to the bank or notifies the bank in writing of the waiver.
Upon learning that the guarantee has expired, the bank must immediately inform the debtor.
The bank and the debtor may agree in the contract on the right of recourse of the bank against the debtor if the bank has paid the creditor the amount specified in the guarantee. The bank shall have no right to claim from the debtor, by way of recourse, amounts unrelated to the guarantee or amounts paid because the bank failed to perform or improperly performed its obligations to the creditor.