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NEWSLETTER 2013
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Appeal issued a second Decision of Joint Chambers in 1969. Pursuant to
the 1969 decision, the clause included within letters of guarantee setting
forth that immediate and unconditional payment shall be made upon the
written demand of the obligee under the main agreement shows that letters
of guarantee are a type of guarantee agreement which is the undertaking of
a third party’s performance as regulated under article 110 of the old Code
of Obligations (“old CO”) No. 818. The undertaking of a third party’s
performance has been regulated in line with the old CO under the new
Code of Obligations No. 6098 (“new CO”) in its article 128.
Elements
In practice, letter of guarantee agreements are required to include
certain elements in order to be deemed as a guarantee agreement.
First, the risk that is undertaken must be predetermined. The guarantee
must be given in order to induce the guarantee to act in a certain way and
especially to enter into a commercial relationship with the beneficiary.
The guarantor must be undertaking an independent obligation to the
guarantee. The relationship between the guarantor and the guarantee and
the relationship between the guarantee and the beneficiary, who is the
obligor under the main agreement, shall be completely independent from
one another. The issuer of the letter of guarantee shall be undertaking a
primary and independent obligation. Lastly, consideration for the letter of
guarantee is subject to discussion.
Term and Prescription of Letters of Guarantee
As letters of guarantee are deemed to be guarantee agreements and
there are no specific regulations for guarantee agreements, letters of
guarantee shall be subject to the general prescription period of ten years
as regulated under Art. 125 of the old CO and Art. 146 of the new CO.
Letters of guarantee may have an expiration date. An expiration date
bears importance in respect of the determination of the responsibility of
the issuing party.
In order for the issuing party to be held liable, the undertaken risk
must be realized within the term as well as the demand of payment.