On-demand guarantee or personal guarantee? Pay attention to the wording

By a decision rendered on 30 January 2019 (Commercial Chamber, 30 January 2019 No. 17-21279), the Court of Cassation qualified a guarantee. The Court of Cassation had to define whether the engagement of a company’s manager was a guarantee or  a on-demand guarantee.

The facts were as follows,

Company A owed an amount of €86,165 to company B.

The manager of Company A had signed a deed entitled « on-demand guarantee » in favour of Company B.

Company A was under an insolvency proceeding. Company B declared its receivable of €86,165.08 in this proceeding.

Company B then claimed to the Manager to execute the guarantee it had granted. The latter did not pay the amounts claimed. Company B summoned him to pay.

The manager considered that the deed he had signed, although referred to as a « first demand guarantee » or « on-demand guarantee », was in fact a personal guarantee (cautionnement). The manager objected that he should therefore have been warned of the risks inherent to this engagement.
Company B objected that the guarantee was not a personal guarantee but a first-demand guarantee and that a first-demand guarantee did not impose any specific information or warning from the beneficary of this guarantee.

The Toulouse Court of Appeal ordered manager X to pay €86,165.08. The Court of Appeal considered that the deed signed by Mr. X was indeed an autonomous guarantee and refused to qualify it as a personal guarantee.

The Court of Cassation was seized. The question raised led the Court to qualify the guarantee granted by the manager to determine whether a duty to warn could exist.

The Court of Cassation ruled that the Court of Appeal had legally justified its decision to qualify the undertaking as a first demand guarantee. As the act under examination is an autonomous guarantee, there was no duty to warn.

Several elements have made it possible to retain such a qualification.
– The commitment of the « guarantors » was described as autonomous and independent of the contractual relationship between Company A and B
– The guarantors undertook to pay upon receipt of a request for payment from the beneficiary by registered letter with acknowledgement of receipt notifying the default of Company A in its obligations, « it being understood that the effectiveness or validity of the breach reported is totally irrelevant to the fulfilment of our guarantee commitment »,
– the guarantors refrained from opposing any nullity, exception, objection, non-receipt end resulting from the legal or business relations between these two companies,

– The guarantee clearly stated that it was not a personal guarantee (cautionnement),
– A handwritten mention was formulated as follows: « Voucher for first-demand, joint and several and indivisible guarantee up to 100,000 euros in principal plus expenses and accessories from the date hereof until 31/03/2014 »

For the Court, these elements of Mr. X’s undertaking allowed him to be qualified as an autonomous guarantee or at first request.

This decision confirmed once again that the case law, in order to qualify a guarantee, does not focus on the title of the deed but examines the nature of the engagements of the guarantor.

If the guarantee is an accessory to a main operation, the guarantee will be qualified as a personal guarantee.

If the guarantor’s commitment to pay is independent of the main operation, the guarantee will be qualified as an independent guarantee (type of guarantee including in particular the first-demand guarantee).

The references to the deed made it possible to conclude that there was sufficient independence to rule out the personal guarantee.

This decision is therefore a good illustration of the pragmatic position of the courts which analyse the engagements to qualify the guarantee.

Once the guarantee had been qualified, it was sufficient for the Court of Cassation to point out that the creditor benefiting from a guarantee on first demand is not liable for any obligation to warn the autonomous guarantor.

Mr. X could not therefore blame Company B for not being warned.

When drafting guarantees , you need to be careful with how the engagement to pay is formulated. It’s not because you use the terms « first demand guarantee » that this guarantee cannot ultimately be requalified as a personal guarantee.

It’s all about the wording.

An ambiguous wording will encourage delaying debates at the time of its implementation and could make this guarantee ineffective.

 

By olivier VIBERT,

Lawyer, Paris, France

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