Legal Updates

Financial difficulties do not justify non–forfeiture of an autonomic bank guarantee

April 30, 2020

A cooperative association retained the services of a company for building a residential project within a year. The project was delayed and the cooperative terminated the agreement and forfeited the bank guarantees furnished by the company. The construction company sought to avoid such forfeiture contending that it would result in its economic collapse.
The Court held that financial difficulties do not justify non-forfeiture of a guarantee. A bank guarantee is autonomous and the bank may not review the basic transaction. This principle encourages contractual stability and certainty. A bank will avoid forfeiture of a guarantee only where the beneficiary committed a serious fraudulent act or other special irrelated serious circumstances, which exception will be construed narrowly so that the purpose of such guarantee would not be undermined. For example, when the beneficiary agrees that there is no cause for forfeiture, usually in cases where the project has already been completed. In addition, the recent case of Bibi Roads stated that when parties to an agreement distribute risks ex-ante, fairness requires compliance with their obligations, and this projects on the issue of forfeiture of bank guarantees, which are also a risk taken by a party to a contract. Here, the consummation of the project became difficult and it was thus incomplete. The economic status of the construction company does not matter in this regard, as it took a risk and agreed to undertake autonomous bank guarantee.