A bank guarantee is an autonomous obligation

A bank guarantee is intended to allow comfort for the bank to be paid for a service given. This was held in a court judgement delivered by Mr Justice Joseph Micallef in Clarosa Hotels Limited v APS Bank Limited, Bank of Valletta for any interest it may have and Rosario Tabone and Claudia Spiteri Sacco.

In their application, the plaintiff company, Clarosa Hotels Limited asked the court to declare null and void a bank guarantee given to APS and also a bank guarantee issued by BOV. The company asked the court to declare that the payment of 23048.09euro to APS was not required and the sum should be returned.

APS filed a statement of defence where it pointed at the fact that it was the plaintiff company that agreed that BOV should issue the guarantee in its favour and in fact APS asked to be paid. The guarantee was not dependent on any of the obligations made by Tabone and Spiteri Sacco.

BOV also replied to the application by saying that the guarantee is valid at law and that it was issued at the company’s request. The condition was that it should be paid to APS at its request without BOV having to make any verifications and that is exactly what took place.

Tabone and Spiteri did not file the application.

Mr Justice Micallef analysed the facts that surrounded the case in that Tabone and Spiteri Sacco were shareholders of the plaintiff company, which ran a hotel. They sold their shares to Marco Sammut. One of the conditions was that the company had to pay the outstanding debt to APS. This was financed by BOV. Another debt emerged of 24,000euro owed to APS by the former shareholders. In order for APS to cancel a hypothec it had on the company, APS asked for a guarantee for the sum of 24,000euro. Clarosa agreed to this and the guarantee was issued by BOV in favour of APS.

Clarosa argued that it agreed to the guarantee as long it was not for more than two years, but this was not written as it was a verbal agreement. This guarantee was extended four times, but on the last occasion the company objected, and APS asked BOV to pass on the payment in June 2013.

The Court looked at the legal considerations, namely the pleas raised by the banks. Mark Sammut had signed subrogation documents. Also that Sammut had participated in a number of meetings and therefore cannot argue that the situation was sprung on him.

APS denied that there was any further verbal agreement. BOV argues that if there was any verbal agreement, it is of no concern. Furthermore, the Court commented that the testimony from the plaintiff’s side was not credible and applied the rule that no evidence should be produced against written evidence, if not for serious and exceptional reasons. Furthermore, Clarosa did not claim that the guarantee was issued on conditions it did agree to.

The Court then accepted the Banks’ pleas.

The Court then dealt with the merits of the case, first being whether the guarantee issued by the BOV to the APS constituted a contract. The law considers a guarantee as a contract, between the creditor, who had to fulfil his obligations to another party. The guarantee is valid for the principal obligation and ancillary debts. Guarantees must be written.

Therefore, the Court had to examine whether the guarantee was secondary to the obligation that Tabone and Spiteri Sacco had with APS or else was it an autonomous obligation that Clarosa entered into with APS.  The Court held that the guarantee cannot be considered as obligation that Tabone and Spiteri Sacco had with APS. From the evidence produced the guarantee was required for what Clarosa required from APS for banking services. The bank guarantees are bank services offered to rest assured that the bank will be paid. These bank guarantees are considered as autonomous and different from the other type of guarantees. Chorley & Giles wrote in their book Slater’s Mercantile Law: “A guarantee is to be distinguished from a contract involving a primary obligation to the creditor, e.g. an indemnity... The essential point of an indemnity, or other primary undertaking, is that it is a distinct, autonomous undertaking which is in no way dependent for its content or enforceability on the terms or validity of the undertaking given by the debtor... To be a guarantee, an undertaking must be truly accessory to that of a principal debtor and must be an undertaking triggered by the principal debtor’s default”

The Court pointed out that in this particular case APS requested that BOV pay the guarantee, when the guarantee was still valid. Therefore, the obligation was not ancillary, but was an autonomous obligation. Therefore, BOV fulfilled its obligations and was authorised by Clarosa itself.

The Court then moved to turn down the plaintiff company’s claims.

Dr Malcolm Mifsud

Partner

Mifsud & Mifsud Advocates