Legal Analysis of Guarantees
Commercial instruments in commercial law represent claims or ownership of goods and are subject to relatively simple formal requirements. These instruments include bills of exchange, promissory notes, cheques, official warehouse receipts, shares, and bonds. As observed, the embodiment of a claim in an instrument provides transferability, enhanced security for the holder, and specific legal advantages expressly recognized by the legislator.
Commercial instruments, irrespective of their broad conceptual meaning, generally refer to documents exchanged among merchants that are negotiable in nature and represent short-term claims.
Although no general statutory definition of commercial instruments has been provided, specific provisions governing each type can be found in the Commercial Code and other special laws. A guarantee letter does not reflect an existing claim, as it represents a contingent or potential obligation. Moreover, the applicant for the guarantee and the guarantor do not bear joint and several liability, as the beneficiary may seek recourse against the guarantor only upon fulfillment of certain conditions. Additionally, paragraph 7 of Article 2 of the Commercial Code classifies all banking and exchange operations as commercial activities.
A bank guarantee constitutes a form of contractual security and represents a modern legal phenomenon that has emerged primarily from domestic and international commercial practice. It appears necessary to subject this instrument to closer legal scrutiny and to enact effective laws and regulations to strengthen its legal certainty and credibility.
Guarantees in Judicial Practice and Legal Doctrine
Bank Guarantees in Iranian Law
In Iranian law, bank guarantees were initially recognized as security instruments in government transactions under Articles 11 and 41 of the Government Transactions By Law of 1970, and subsequently under Article 34 of the General Conditions of Contract. The legal basis for issuing such guarantees is found in the Monetary and Banking Law of the Country and the resolutions of the Money and Credit Council. Furthermore, paragraph 15 of Article 1 of the Law on Usury Free Banking Operations, enacted in September 1983, expressly authorizes banks to issue guarantees.
Legal Nature of Bank Guarantees
A bank guarantee is a relatively modern development in contractual relations, and no comprehensive legislative framework has been enacted to regulate it in the same manner as traditional contracts. The primary purpose of a bank guarantee is to secure the obligations arising from an underlying contract, and it may be regarded as a form of personal security.
A fundamental legal question is whether a bank guarantee is subject to the rules governing contractual guarantees involving the transfer of debt or joint and several guarantees. Loan guarantees fall under personal guarantees rather than real guarantees and generally fall within the framework of guarantee contracts. However, a bank guarantee cannot be interpreted solely under the provisions of the Civil Code, as the concept of transfer of obligation is inapplicable in this context.
At the time a bank guarantee is issued, no debt has yet arisen, nor has the cause of the debt been established. According to Article 691 of the Civil Code, a guarantee of a debt whose cause has not yet arisen is void. Since no breach has occurred at the time of issuance, the guarantee relates to a potential obligation and, if analyzed strictly under traditional rules, would be considered invalid. Moreover, bank guarantees are not subject to the provisions governing joint and several guarantees under the Commercial Code, because in such guarantees the creditor may simultaneously seek recourse against both the principal debtor and the guarantor. In contrast, under a bank guarantee, the beneficiary has no right to pursue the principal debtor directly.
An undertaking to pay a future contingent obligation, where liability is conditional upon the occurrence of the principal obligation, may be legally valid. For example, if a person guarantees compensation for potential losses arising from an employee’s future misconduct, such an undertaking does not constitute a traditional guarantee contract. Still, it is nevertheless enforceable under Article 10 of the Civil Code. A bank guarantee is, therefore, a distinct and modern legal institution that has entered domestic law as a result of the expansion of international commercial relations. Like other modern legal phenomena, it cannot be adequately governed solely through traditional legal doctrines and requires the development of specific regulatory rules.
Governing Law of Guarantees
In domestic bank guarantees, the issue of applicable law does not arise, as the applicant, beneficiary, and issuing bank are all located within the same jurisdiction and are subject to that country’s national laws. In contrast, in international guarantees, determining the governing law applicable to counter-guarantees and related obligations is a significant legal issue.
Frequently Asked Questions About the Legal Analysis of Guarantees
A bank guarantee is an instrument issued by a bank in favor of a beneficiary to secure the obligations of the principal debtor. It is commonly used in domestic and international transactions to guarantee contractual or financial commitments.
A bank guarantee is a contractual security instrument. It does not fully fall within traditional contractual or joint-and-several guarantee rules. The obligation to pay is typically conditional upon the occurrence of a specified event.
No. A bank guarantee cannot be interpreted solely under traditional guarantee rules of the Civil Code. It constitutes a modern legal institution and is generally enforceable under Article 10 of the Civil Code as a valid contractual undertaking.
Domestic guarantees are governed by national law. In international guarantees, the determination of the governing law depends on the parties' agreement or on applicable conflict-of-laws principles.
In a joint and several guarantee, the creditor may pursue both the guarantor and the principal debtor simultaneously. In a bank guarantee, the beneficiary typically has recourse only against the issuing bank.
Bank guarantees are widely used to secure contractual performance, payment obligations, tax liabilities, and various commercial and banking transactions.
Yes. A bank guarantee reflects a potential or contingent claim, as the bank’s obligation arises only upon fulfillment of the conditions specified in the underlying contract.
Bank guarantees were initially introduced in government contracts and later recognized in banking regulations and the Law on Usury-Free Banking Operations. What is a bank guarantee?
What is the legal nature of a bank guarantee?
Is a bank guarantee governed by the Civil Code?
What law governs domestic and international bank guarantees?
What is the difference between a bank guarantee and a joint and several guarantee?
What are the practical uses of bank guarantees?
Does a bank guarantee represent a contingent claim?
What is the legal background of bank guarantees in Iran?
