Uncertain Enforceability of Guarantees in Estonia

by Arne Ots and Sander Kärson

Excerpt:

The concept of the first demand guarantee has been well accepted and recognized in Estonia. This contract security has been a widely used and irreplaceable tool to secure the immediate availability of funds needed due to the breach or other circumstances involving an underlying contract. Recent decisions by the Estonian Supreme Court on the enforceability of first demand guarantees, however, has put the guarantee's usability as a prefigured security into question.

Legal background

Article 155 of the Estonian Law of Obligations Act (Article 155) defines a guarantee as follows:

a guarantor may, by a contract, assume an obligation (guarantee) before an obligee, according to which the person undertakes to perform obligations arising from the guarantee on the demand of the obligee (Article 155 (1)).

The same article further provides that:

the obligation of a guarantor before the obligee which arises from the guarantee shall not be affected by the obligation of the obligor secured by the guarantee nor the validity of the obligation even if the guarantee contains a reference to the obligation (Article 155 (2)) and a guarantor may only set up such defenses against the obligee which arise from the guarantee (Article 155 (3)). These provisions demonstrate that the Estonian legislation recognizes guarantees that are issued unconditionally and irrevocably. These obligations must be fulfilled on first demand, irrespective of the secured or underlying contract. The right to issue proper first demand guarantees has been recognized by the Civil Chamber of the Supreme Court of Estonia (Supreme Court) even prior to the enactment of Article 155.

On 11 February 2003, in case No. 3-2-1-9-03, the Supreme Court stated that Estonian Law also permits first demand guarantees in a form accepted and recognized by their use in international trade. In its decision, the Civil Chamber of the Supreme Court also referred to the ICC Uniform Rules for Demand Guarantees and the United Nations Convention on Independent Guarantees and Stand-by Letters of Credit as persuasive sources of law acknowledging first demand guarantees. Moreover, the ICC Uniform Rules for Demand Guarantees were used as a basis for formulating the wording of the Article 155 itself.

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Arne Ots is a partner with Raidla Lejins & Norcous, and a notable litigation and public procurement specialist in Estonia. He also practices international arbitration in Estonia and abroad, and handles labor law and white collar crime cases. Mr. Ots has organized many seminars and field training courses for energy, IT, construction, and health care companies. He speaks at local and international conferences, forums, and seminars on issues related his practice areas.

Sander Kärson is an associate with Raidla Lejins & Norcous, specializing in mergers and acquisitions, business, corporate, contract, and medical law. He lectures on the Law of Obligation at the University of Tartu, where he is also pursuing his Ph.D.