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Strict Interpretation of Bank Guarantees: New Court Rulings

Butterworths Journal of International Banking and Financial Law, 1989
1. Januar 1989

According to Austrian law ,"bank guarantees" grant a claim which is distinct from the claim to be secured; this is called an "abstract claim" which is based solely on, and arising only from, the bank guarantee. The beneficiary´s claim under such a guarantee is not based on the commercial relationship between the beneficiary and the debtor (who usually is a client of the bank issuing the guarantee). Accordingly, the Austrian Supreme Court recently held that the beneficiary is not bound to state or to prove the reasons for demanding payment from the bank under the bank guarantee. The bank guarantee is an instrument for securing or for payment both disregarding the validity or existence of the contract to be secured or the claim to be settled.

The decision in another case that all conditions required for demanding payment must be accomplished strictly seems extremely harsh: if eg the demand for payment has to be in writing by registered letter then a demand by telex is without any effect. This court decision is disputed by some scholars (Koziol, Rummel) but praised by banks and all practitioners looking for dear and strict guidelines beyond dispute and without the necessity of further difficult interpretation.

In another case, the Austrian Supreme Court held that a clause in a bank guarantee providing for a condition (condition precedent), which has to be fulfilled by or before demand for payment, is subject to strict interpretation: in this case the bank guarantee had come into force only upon payment of a certain amount to a specified current account. But the beneficiary of the bank guarantee paid a smaller amount by quoting the amount as specified in the bank guarantee and additionally stating that a deduction was made on the ground of a counterclaim. The Supreme Court stuck to the strict wording of the bank guarantee and denied the validity of this bank guarantee because the beneficiary did not bring it into force as he did not precisely fulfill the condition precedent stated therein.

The Austrian Supreme Court also held that the wording of a bank guarantee is to be interpreted according to current banking practice which generally uses a specific language if the issuance of an "abstract bank guarantee" is intended. In one case a bank used the wording "we guarantee that our customer´s promissory note will be paid upon maturity". The court held that this wording does not comply with the standard language of bank guarantees which usually states that the bank "irrevocably guarantees payment upon first written demand and the bank hereby waives any and all objections or oppositions of any kind whatsoever and will not investigate the reasons or grounds". According to this court decision bank guarantees are to be interpreted according to business customs and the guarantee used by the parties to the case was not regarded as an abstract bank guarantee.

These cases and practice show that many a bank commits errors when formulating a bank guarantee. Specific legal advice seems necessary for avoiding the pitfalls which may invalidate the security intended by use of a bank guarantee.


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