Extension of bank duty of care to beneficiaries of bank guarantee

I have previously written about the banks' duty of care. Following a Supreme Court decision,[1 ] the duty of care of banks now extends to the extent that a bank, when providing a bank guarantee, must keep in mind not only the interests of its client, but also the cognizable interests of the beneficiary of a bank guarantee. Again, an extension of the bank's duty of care. But under circumstances.

Depot as security for winding down

What's going on? An office building is being divided into several apartments. The apartment rights are sold to consumers and non-consumers. The apartment owners enter into a building contract for the rebuilding and completion of the office building into an apartment building. Pursuant to the contract and Article 7:768 (1) BW, the apartment owners withhold 5% of the construction sum on the last payment installment and deposit this amount with the notary. Under the agreement, the contractor can receive earlier payment of the deposit, provided that a substitute security is provided for the deposit.

Bank guarantee as a substitute for deposit

The substitute security in this matter consists of a bank guarantee. At the contractor's request and in cooperation with the project notary, ABN AMRO, the contractor's "house banker," provides the apartment owners with a bank guarantee. The bank guarantee has as a condition for payment that there must be a binding decision in a procedure between the buyers of the apartments and the contractor and has as the end date by which the guarantee can be invoked (expiration date), 6 months after the scheduled completion date. The notary agrees to this substitute security and pays the deposit amounts to the contractor.

Contractor bankrupt

Before the common parts of the apartment building are completed and delivered, the contractor goes bankrupt. The trustee does not enforce the construction agreements and the apartment building is not completed.

The buyers invoke the bank guarantee, but ABN AMRO does not pay out the bank guarantees because there is no binding decision between the contractor and the apartment buyers (one of the conditions under which a draw may be made under the guarantee).

Woningborg, an involved indemnity insurer, starts proceedings against the bank on behalf of the buyers. ABN AMRO bank is alleged to have acted unlawfully in issuing the bank guarantee because, based on its duty of care, it should have checked whether the bank guarantee was consistent with the underlying legal relationship between the apartment buyers and the contractor. The bank argues that no such far-reaching duty of care applies.

Bank guarantee is not equivalent substitute security for deposit

The Supreme Court does not follow the bank in this matter and finds in favor of Woningborg. A factor here is that the bank is aware of the buyers' interests. At the contractor's request, the bank provided a bank guarantee to replace the deposit of 5% of the contract sum as security for the (finishing) construction. The contracting company asked ABN AMRO bank to deviate from the specific bank guarantee model by including a maturity period of less than six months. This together with the requirement that the guarantee could only be invoked after a binding decision, implies that ABN AMRO must have reasonably known that these conditions are so strict that the bank guarantee is not an equivalent security, as the deposit was. Moreover, at the time the guarantee was issued, the contractor was already lodged with the bank's special management department and the buyers were not involved in the negotiations on the content of the bank guarantee.