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Bank Guarantee as Security for Procedural Purposes

Datum: 
1. Januar 2011

Austrian procedural law requires the providing of securities for various purposes. E.g. a non-EU plaintiff, upon filing a complaint, has to secure for the defendant´s potential claim to be reimbursed his costs, arising in case the complaint is dismissed. While pursuant to the Code of Civil Procedure only cash deposits, certain qualified securities, saving accounts, mortgages or sureties are admissible, according to current case law and doctrine, a bank guarantee is a suitable means for any type of security as provided for in procedural law as well. Only few scholars contest this opinion by reasoning that a bank guarantee cannot be subject to a judicial lien, thus not being a suitable type of security.

A typical feature of (not only) Austrian banking business is that banks only issue bank guarantees limited in time. Most authors, however, are of the opinion that limited bank guarantees are not suitable as securities. Emphasising that court practice did not deem limited bank guarantees as appropriate securities, they did not take into account that in such cases at bar the limitation in time was always tied to an additional condition and the courts held these additional conditions not to meet the requirements of a security. An Austrian Supreme Court decision often quoted in this context, considered a bank guarantee unsuitable not because of limitation in time, but rather because the bank was obliged to pay only if the court decision to draw the guarantee had become final within the period of limitation, though it was not sure whether this court decision would become final (taking into account the possibility of appeals) within the period of limitation or not. Another Supreme Court decision was based on similar reasoning by ruling that, if a limited bank guarantee had been given as a security for costs, it could only have been drawn within the period of limitation upon final and enforceable court order for payment of costs. According to a further Supreme Court decision, however, a limited bank guarantee exerciseable on no other conditions was to be regarded as a sufficient security. According to the Supreme Court a limited bank guarantee is an adequate security, as the court may demand that the bank deposits the amount at court prior to the expiration of the time limit, thus being fully in line with more recent court rulings. The Supreme Court reasoned that the bank guarantee in question substantially differed from those bank guarantees not accepted as securities. According to this decision the bank has issued a guarantee for the defendant´s claim for costs in the amount of ATS 300,000 (approx. USD 25,000) and has undertaken to pay within 14 days after service of the court order without considering the underlying legal relationship and without objection. Thus the court may request payment from the bank - even if the defendant has up to then not claimed payment of his costs of the proceedings.

A recent Supreme Court ruling confirms this decision by stating that a bank guarantee is a contract by which the bank is obliged to secure payment of a third party - i.e. its customer - by issuing the guarantee in favour of the creditor to pay in any case and on the conditions agreed upon. Such bank guarantee, which can be drawn by the court at any time within the time limit, is - if drawn in due course of time and if not subject to additional conditions or actual currency clauses - equivalent to a cash deposit. In case the party does not present a new (limited) guarantee as a security prior to the expiration of the original guarantee, the court would be obliged to draw the guarantee in due course of time and regard the amount thus collected as a cash deposit. According to this Supreme Court ruling the court of the first instance has to duly observe the time-limit.

We feel that the general preparedness of the Supreme Court to accept bank guarantees as securities should be welcomed as it reduces the costs and necessary handling efforts of both the parties to the litigation and the court.

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