Original scientific paper
Reasons for refusal of payment of first demand bank guarantees
Branko Vukmir
Abstract
Ever since the first demand bank guarantees were accepted as an instrument of international trade transactions, they were met with resistance from those who were primarily exposed to the risks connected with their issuance. The reasons for the resistance were in the fact that banks were obliged to pay the amount of such guarantees on the first and simple demand of the beneficiaries, regardless of the justification of such demands. The only justified reasons for the refusal to pay was fraud, but no other possible reasons and facts from the underlying transactions were accepted. As a consequence of this resistance, the International Chamber of Commerce in Paris issued the Uniform Rules for Contract Guarantees in 1978. The purpose of the Uniform Rules was to change the commercial practice of first demand guarantees and replace it with payment on the basis of an arbitral or judicial award. However, this attempt did not succeed and the commercial practice has never accepted these Uniform Rules. Nevertheless, the attempts to weaken the payment obligation of the first demand guarantees were not discontinued. In the last two decades, a few arbitral awards took the position that the beneficiaries should be prevented from calling on the first demand guarantees starting from the moment when the arbitral proceedings between the beneficiaries and applicants were initiated. These decisions were supported by writings of certain scholars. The author believes that there is no justification for such course of action, since the first demand guarantees were given to the beneficiaries as an assurance of the relief for possible costs and damages they have incurred as a result of applicants’ actions, regardless of the time when they decide to call on the guarantees.
Keywords
first demand bank guarantees; Uniform Rules for Contract Guarantees; arbitration
Hrčak ID:
6434
URI
Publication date:
5.12.2006.
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