On-demand guarantee (independent guarantee)
An undertaking by which a guarantor pays on the beneficiary's mere complying demand, without raising defenses from the guaranteed contract, save manifest fraud or abuse.
French ordinance no. 2006-346 of March 23, 2006 wrote into article 2321 of the Civil Code an instrument banks had been issuing for decades without a statute: the independent guarantee. The guarantor undertakes, in consideration of an obligation entered into by a third party, to pay a sum either on first demand or on agreed terms. It may raise no defense arising from the guaranteed obligation. It is not bound in case of manifest abuse or fraud by the beneficiary, or collusion between the beneficiary and the applicant. Everything else follows. A suretyship guarantor, being accessory, can contest the debt; the independent guarantor pays first, and the applicant litigates afterwards, against the beneficiary, under the contract. Drafting matters: a guarantee whose amount or triggering can only be worked out by reading the underlying contract risks being recharacterized as a suretyship, and loses its independence. In international trade the reference is ICC publication 758, the URDG, in force since July 1, 2010. Unless expressly excluded, they require the demand to come with a statement by the beneficiary indicating in what respect the applicant is in breach, and give the guarantor five business days to examine the demand on its documents alone. In export sales the chain is often indirect: the exporter's bank issues a counter-guarantee to a local bank, which issues the guarantee to the buyer. Fraud or abuse must be manifest, meaning obvious without investigation at the time of the call; an injunction blocking payment is rarely granted. That residual risk is what wrongful calling insurance takes on.
Textbook case: an exporter signs a 30 million euro contract with a foreign ministry and provides a 10% performance guarantee, 3 million, issued by a local bank under a counter-guarantee from its French bank, all subject to URDG 758. Eight months after provisional acceptance, the ministry calls the 3 million with a two-line statement of breach. The exporter seeks an urgent injunction for manifest abuse; the judge refuses, since the acceptance certificate does not make the abuse obvious. The local bank pays, the French bank reimburses it and debits the exporter. Insured for wrongful calling at 90%, the exporter receives 2.7 million once the call is found unjustified under the terms of its policy.
demand guarantee, independent guarantee, first demand guarantee, URDG 758, on-demand bond
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