A fairly recent Supreme Court ruling[1] on Rabobank/Rollecate confirmed that in the case of an abstract bank guarantee, the exact wording of the bank guarantee is of great importance. If the exact wording is not complied with, this is often a valid reason for the issuer of the bank guarantee (usually the bank) not to pay out the bank guarantee to the beneficiary.
What was going on?
Ballast Nedam was involved in the Hilton Hotel project at Schiphol Airport. Ballast Nedam commissioned Rollecate to supply and install facades for this project. Rollecate in turn purchased composite facade elements from Polux for
EUR 3,000,000.00. Because Polux could not or would not pre-finance the production of these façade elements, Rollecate and Polux agreed that Rollecate would make advance payments to Polux. Polux would provide two bank guarantees as security for the delivery of the façade elements.
At Polux's request, Rabobank provided a bank guarantee under the condition precedent that an amount of EUR 56,700.00 would be deposited with the bank by or on behalf of Rollecate, which amount was paid. Not much later, Rabobank provided a second guarantee. Here, too, there is a condition precedent: the amount of the bank guarantee is increased from nil in accordance with a payment schedule, in which Rollecate must always pay a certain amount to Polux on or before a certain date. Rollecate has paid all the amounts in the schedule, but only one of them on time.
After Rollecate pulled under the bank guarantees, Rabobank paid out the first bank guarantee. It paid out the second guarantee only up to the amount paid on time according to the payment schedule.
In the ensuing proceedings, as far as is relevant here, the issue is whether the terms in the second bank guarantee are deadlines.
Abstract Bank guarantee
The parties agree that there is an abstract bank guarantee. This entails that the bank's obligation to pay the guarantee is made independent of the underlying contractual relationship between the originator of the bank guarantee (Polux) and the beneficiary (Rollecate). The bank has an independent obligation to pay the amount specified in the bank guarantee at the first request of the beneficiary, if the conditions specified in the guarantee are met. This guarantee is also called an on-call guarantee or a guarantee on first demand.
Events that may affect the underlying legal relationship between Rollecate and Polux do not, in principle, affect an abstract bank guarantee.[2] If the conditions in the guarantee are met, the bank should pay out. If the principal believes that the beneficiary is wrongly invoking the bank guarantee, he should take up this discussion with the beneficiary. The bank is not involved in this. The abstract bank guarantee entails "pay first, then talk ...".
Strict conformity
The function of an abstract bank guarantee in commerce is that there is no ambiguity for parties as to whether or not the bank should pay out the guarantee. Parties must be able to rely on the bank paying out if the conditions in the guarantee are met (strict conformity)[3]. Incidentally, the Supreme Court has allowed an exception to this strict conformity in the event of fraud or arbitrariness by the beneficiary or by the principal of the bank guarantee.[4] Also in the event of fraud or arbitrariness regarding the underlying agreement, the bank can reject a claim for a strict bank guarantee. In doing so, the bank must promptly and sufficiently disclose the grounds for its refusal to pay and these grounds must be able to support the claim of fraud or arbitrariness.[5]
Is there room for explanation of a bank guarantee?
If the text of the bank guarantee contains ambiguities, it will have to be interpreted. A literal interpretation of the bank guarantee takes precedence in an explanation.[6] If such an interpretation offers no, or at least insufficient leads, then any explanation of the abstract bank guarantee will have to be done by application of the Haviltex criterion.[7] This means that not only the linguistic meaning of the text is taken into account, but also the meaning that the parties could attribute to that text, given the given circumstances of the case and on the basis of what they could expect from each other.
Are the payment terms in the bank guarantee deadlines?
The second bank guarantee provided by Rabobank in this case states that the bank guarantee is always increased by the installments paid according to the payment schedule. However, only one of the eight installments was paid on time.
Rollecate, as beneficiary of the bank guarantee, argues that the late paid installments, have to be considered as on time paid installments for the next installment. Rabobank believes that if an earlier payment is not paid on time, a subsequent payment can never lead to an increase in the bank guarantee. The Court of Appeal disagrees with Rabobank, but the Supreme Court does for now. The text of the second bank guarantee is clear, the payment terms included therein are deadlines, and only one term was paid on time. Given these facts, without further justification, payments made late for one term cannot still be imputed to a subsequent term as timely payment thereof, the Supreme Court said. Indeed, this deprives the fatal character of the deadlines included in the payment schedule. The case is referred to another Court for further consideration.
Conclusion
Although at first glance it is not illogical to attribute late installment payments to a subsequent installment, the Supreme Court does not go along with this. When interpreting an abstract bank guarantee, great value (still) attaches to the strict wording of the guarantee.
[1] HR December 14, 2018, ECLI:NL:HR:2018:2297.
[2] In Haefner v. ABN AMRO (HR September 25, 1998, ECLI:NL:HR:1998:ZC1749), the HR ruled that the question of whether or not a bank guarantee for the bucket precludes reliance on the underlying contract must be considered on a case-by-case basis by examining what sense the parties involved could reasonably ascribe to the wording of the guarantee in the circumstances and what they could reasonably expect from each other.
[3] In the judgment of June 9, 1995, ECLI:NL:HR:ZC1749 on Gesnoteg/Mees Pierson, the HR considered that: "... in view of the character of a bank guarantee such as the one in question and the function which such guarantees perform in commercial transactions, and in view of the position of the bank which must keep in mind both the interests of the person who ordered the guarantee to be issued and those of the person in whose favor the guarantee was issued, a strict application by the bank of the conditions laid down in the guarantee is required."
[4] The restrictive effect of reasonableness and fairness may entail in the case of fraud or arbitrariness that, even if the strict conditions in the bank guarantee have been met, a reliance thereon by the bank need not be honored (HR 26 March 2004, ECLI:NL:HR:AO2778 regarding Anthea Yachting/ABN AMRO).
[5] HR March 13, 2015, ECLI:NL:HR:2015:600 regarding ABN AMRO/Rabobank.
[6] HR March 13, 2015, ECLI:NL:HR:2015:600 regarding ABN AMRO/Rabobank.
[7] HR March 13, 1981, NJ 1983, 635.
