Boletín No. 8 Octubre 2005 - Febrero 2006

7/30/2019 Boletn No. 8 Octubre 2005 - Febrero 2006

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FIRST DEMAND BANK GUARANTEES

First demand bank guarantees are more commonly used every day, inboth private and administrative contracts (those entered upon with

public entities), usually just to satisfy a formalrequisite, but without

measuring or understanding the risks associated to its inappropriate

structuring, which are very high due to the first demand bank

guarantees inherent characteristics.

Stricto Sensu, and in its broader meaning, bank guarantees are securities

given by a bank to warrant compliance of any obligation. Usually they are

requested by clients in benefit of their creditors and by demand of these.

Bank guarantees are structured by Banks according to their clients needs,

respecting -of course- certain limitations set forth in regulation, but without

having to follow a specific model, or imperative legislation regulating the

subject in a special or rigorous fashion, as happens with the insurance

contract.

It is of common occurrence, thus, that the definition of characteristics and

reach of the guarantee result from the position of the party that requests it, so

that itsatisfies its needs and provides cover for the level of risk derived from

an eventual default of the main obligation. This implies, hence and by general

rule, that the guarantee is an accessorial compliance mechanism, linked

precisely to theoutcome of the secured main obligation.

But in the guarantees' evolution process and in a growing tendency to favor

more efficiently the beneficiarys position, first demand guarantees are being

used more and more. These guarantees are, unlike their predecessors, issued

independently and irrevocably, allowing to be made effective by the creditor


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through a mere request, and the presentation of certain previously agreed

upon documents, without having to prove default of the main obligation, nor

allowing for the applicant-debtor to invoke in his defense the fact of

compliance.

When issuing a bank guarantee of this nature, according to legal or contractual

requirements, one must bear in mind that this is not made merely to comply

with a formal requisite but to obtain real coverage for risks that are implicit

in its issuance, as well as know the vicissitudes that could eventually affect the

guarantees effectiveness despite its apparent strength.

In the last years, Rodrguez-Azuero Abogados has taken part in the study of

several cases related mainly with two typical risks derived from the use of first

demand guarantees: the apparent excess in the guarantees executions for its

total amount, against the debtors interest, or the executions delay by the

bank despite of the request, against the creditors position.

The first hypothesis may appear more frequently when the guarantee is issued

to secure long term contracts such as public work contracts, since the alleged

default that allows the beneficiary to make the guarantee effective could occur

when the project has been almost fully completed, situation that would make

the debtor feel that an execution for the complete guarantees amount is

excessive if compared to the controversies arising between the parties.

The opposed situation appears when, despite being a first demand guarantee,it is structured and issued in a way making it no longer independent and hence

having its execution directly or indirectly connected to the main contract,

opening a space for the bank to refrain from paying when his client (debtor)


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claims that no breach has taken place and thus no execution may occur. This

would imply for the creditor a loss in the guarantees pursued efficacy.

Given the above, it is mandatory for both creditors and debtors alike to have

in-depth knowledge of details and particularities concerning bank guarantees,

in order to avoid making common and recurrent mistakes which end-up

causing complex and expensive conflicts which could be avoided with an

adequate structuring of both contract and guarantee.

IMPORTANT FINANCIAL REGULATIONS IN THE NEAR FUTURE

Numerous regulatory texts and initiatives should be expected in the

forthcoming months

Dynamism in the financial activity, true backbone of a countrys economy,

periodically demands a revision of regulation, despite the desire to maintain

high stability in this and all topics related to entrepreneurial development.

In Fact, the Estatuto Orgnico del Sistema Financiero has become an example

of stable and complete regulation that must be upheld, since it compiles, so to

say, all dispositions ruling the sector.

Nonetheless, a series of recent circumstances would make one think on the

need to introduce certain adjustments. These are linked with the recent

merger of the Superintendencia de Valores and the Superintendencia Bancaria(Colombian agencies formerly charged with surveillance and control over the

stock market Valores- and banking and other financial institutions Bancaria-

), the new capital markets law, the entry into force of Basel II in regulatory

issues, the adoption of the FTA, as well as technological and consumer-


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protection related issues that have been vigorously developing in these last

years.

The new capital markets law alone will require numerous regulations that

invite, as we shall proceed, to make a close follow-up on new developments

and precisions that shall be made, along with projects that shall come on the

aforementioned subjects.

Si requiere informacin adicional sobre cualquiera de los temas contenidos en

este boletn, no dude en contactarnos [email protected]

Should you require further information concerning any of the subjects

addressed herein, do not hesitate to contact us at

[email protected]

This bulletin was made by the Editorial Board of Rodrguez-Azuero Asociados S.A. for

an informative and academic value; therefore its content does not constitute legal

advice. The publication of this bulletin is only authorized quoting the source.
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Boletín No. 8 Octubre 2005 - Febrero 2006

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