The first-demand guarantee is an increasingly common instrument in commercial contracts, yet it conceals pitfalls that can prove decisive in the event of a dispute.<\/p>\n
Imagine entering into an important contract and having to provide (or receive) a guarantee to your business partner. A \u201cfirst-demand\u201d guarantee works like a blank cheque: if the beneficiary requests payment, the guarantor \u2014 usually a bank or an insurer \u2014 must pay immediately, without discussion. It cannot say: \u201cHold on, let us first verify whether the debt actually exists<\/em>\u201d. This is the fundamental difference from a traditional guarantee: here the guarantor pays, full stop.<\/p>\n There is, however, a limit.<\/p>\n If the party requesting payment is acting in bad faith \u2014 for example, they know perfectly well that they have no right to payment, or they are concealing decisive facts which, if disclosed, would reveal that the amount claimed is not due, such as that it has already been paid \u2014 the debtor may invoke the so-called exceptio doli<\/em>, namely the fraud exception.<\/p>\n It is the only shield available, but it has a very stringent requirement: the abuse must be evident, proved by clear and incontrovertible documents.<\/p>\n This is referred to as \u201cliquid proof\u201d, meaning immediate and overwhelming.<\/p>\n It is not sufficient, for example, to claim to have counterclaims to set off against the claim being enforced: one must demonstrate, in black and white, that the enforcement is fraudulent.<\/p>\n The case recently discussed by our firm before the Court of Milan illustrates just how fine the line between considering the enforcement abusive and not abusive can be.<\/p>\n A principal had engaged a contractor to carry out certain works; the contract provided for the payment of a substantial advance on the fee, in exchange for the contractor providing an unconditional first-demand guarantee for repayment of that sum.<\/p>\n The performance of the works then became considerably more complicated than the parties\u2019 original programme and the principal, after paying the amounts requested by the contractor for work performed, exercised the right of withdrawal provided for in the contract, requesting repayment of the advance which had, precisely, been secured by the first-demand guarantee.<\/p>\n Faced with the contractor\u2019s refusal \u2014 who claimed entitlement to certain further payments \u2014 the principal called on the bank guarantee; to block this, the contractor brought urgent proceedings under Article 700 of the Italian Code of Civil Procedure.<\/p>\n The single judge of the Court of Milan ruled in favour of the contractor.<\/p>\n The judge held, in fact, that the guarantee did not cover repayment of the advance, but only damages for breach of contract. In other words, according to the single judge, the principal had called on the guarantee for a purpose different from that for which it had been granted and therefore the call was abusive and the exceptio doli<\/em> well-founded.<\/p>\n The order was appealed by our firm before the Panel of the Court of Milan.<\/p>\n The Panel overturned everything.<\/p>\n Reading the first-demand guarantee as a whole, the Panel concluded that the principal had called on it precisely for the purpose for which it had been issued (namely, repayment of the advance). As for the counterclaims asserted by the contractor, the Panel classified them as matters going to the merits \u2014 that is, disputes relating to the underlying relationship \u2014 incapable of founding the exceptio doli<\/em>.<\/p>\n The Panel, in short, held that there was no fraudulent conduct on the part of the principal (in calling on the guarantee), of which, indeed, the contractor had not even succeeded in providing \u201cliquid and incontrovertible proof\u201d.<\/p>\n Why such different outcomes?<\/p>\nWhat is the exceptio doli and when does it apply<\/h2>\n
Two judges, two opposite decisions<\/h2>\n
The first decision: enforcement blocked<\/h2>\n
The second decision: enforcement legitimate<\/h2>\n
The divergence between the two decisions can be explained by two main factors<\/h2>\n