by Arne Ots and Sander Kärson
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.
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
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