"Change can be frightening, and the temptation is often to resist it. But change almost always provides opportunities – to learn new things, to rethink tired processes, and to improve the way we work."
KLAUS SCHWAB
Introduction
1. On 10 July 2020, the Luxembourg Parliament (Chambre des Députés) adopted a new law relating to professional payment guarantees (garanties professionnelles de paiement, hereafter "PPG") which came into force on 17 July 2020 (hereafter "PPG Law").
2. Similar to the law of 5 August 2005 on financial collateral arrangements, as amended (the "Collateral Law"), a contractually flexible and yet protective legal regime for security arrangements of paramount importance in the context of international financial transactions, this new law introduces a special regime for personal guarantees, which are equally important in the context of such international financial transactions but not only, as an alternative to the traditional regimes of personal guarantees existing under Luxembourg law: the suretyship (cautionnement) and the first demand guarantee (garantie à première demande).1
3. It is generally admitted that the existing Luxembourg law regimes of the autonomous guarantee and suretyship do not always satisfy the structuring needs of certain financiers or other users of personal guarantees, especially where the guarantee purports to combine certain characteristics of both the suretyship and the autonomous guarantee resulting in a risk of requalification into a suretyship, who often resort to foreign law governed guarantees which allow for greater contractual freedom in their structuring. These structuring difficulties arise in the private and public sector alike such as in the context of operations promoted by the European Commission within the framework of the capital markets or by States and aimed at providing financial support to certain economic segments and which benefit, e.g. from State guarantees, guarantees from the European Investment Bank or European Investment Fund. Although unrelated to the adoption of the new law on professional guarantees, the COVID-19 crisis and the economic relief initiatives undertaken at European and national level constitute already a contemporaneous example of a situation in which the new regime on professional guarantees will prove to be particularly useful.2
4. The PPG will no doubt enhance the competitiveness of Luxembourg law governed collateral and guarantee arrangements in that it removes the risk inherent to the autonomous guarantee of being requalified into a suretyship and which is common to many civil law systems as opposed to guarantees governed by the laws of an Anglo-Saxon jurisdiction. Will the PPG however partially or fully eclipse the suretyship and the autonomous guarantee in the future?
5. It is certainly not the intention of the authors of the bill of law3 but this type of guarantee is said to have the potential to replace the suretyship and autonomous guarantee in the Luxembourg legal field. Practitioners seem to agree on this point, one of them claiming even that "it is not unrealistic to consider that the introduction of the PPG may make disappear – in practice – all the other personal guarantees."4
6. The above statement will be tested against the main legal features of the PPG (I) and in relation to selected financing, commercial, construction and unfunded credit protection operations (II), it being noted however that we do not pretend nor intend to be exhaustive of all the instances or practice areas in which the PPG may be relevant.
Chapter I. The Legal Regime of the PPG
7. A PPG is an undertaking by which the guarantor undertakes to pay a beneficiary, on demand of such beneficiary or an agreed third party, an amount determined pursuant to agreed terms, in relation to one or more claims or associated risks.5
8. The ingenuity of the PPG regime lies foremost in its simplicity and flexibility: (i) limited form and substance conditions apply; and (ii) its regime is inspired by contractual freedom. The PPG is said to bridge the summa divisio6 of the traditional regimes of the suretyship and the first demand guarantees by taking the best of both worlds. Section 1. Light Formalism
9. The granting of a PPG merely requires the written form7 and, since it is an opt-in regime, it must contain an express indication that the guarantee is subject to the PPG Law. § 1. The Necessity to Attest the Guarantee in Writing
10. The commentators of the bill of law acknowledged that, in most cases, PPGs are likely to consist in commercial acts subject to Article 109 of the Luxembourg Commercial Code8 pursuant to which commercial deeds may be evidenced freely between parties.
11. However, the requirement of the written form is consistent with the nature of the PPG in that it is designed as a contract-based instrument the terms of which ought to be documented in writing – such contractual terms are protected against the effects of other guarantee regimes by virtue of a specific reference in the guarantee arrangement that it is subject to the PPG Law and to afford greater legal certainty to the contracting parties (similar to collateral arrangements under the Collateral Law).9 § 2. A Guarantee by Choice 12. PPGs are reserved for contracting parties (or the guarantor if it issues a unilateral deed) that explicitly and unequivocally state10 that they wish their guarantee to be governed by the PPG Law.
13. Indeed, the legislator did not intend to impose the regime of the PPG Law as a triumphant guarantee regime exclusive of other types of guarantee available under Luxembourg law but rather to complement the offer with a new type of guarantee.
14. The requirement to indicate a reference to the PPG Law is a simple and yet effective means to protect the PPG against the risk of requalification which may exist for other forms of guarantee arrangements.
Section 2. Contractual Freedom in Terms of Scope of Obligations
15. The letter and structure of the PPG Law are revealing of the legislator's intention to address the shortcomings of the traditional forms of guarantees available under Luxembourg law. In doing so, the legislator (i) relied on contractual freedom while providing for fallback solutions where the agreement is silent; and (ii) clarified certain features and effects of the guarantee (in particular those that usually raise concerns when they relate to the traditional forms of guarantee), more specifically to ensure greater legal certainty.
16. Illustrations of the contractual freedom can be found in Articles 2 and 4 of the PPG Law which provide for freedom in terms of:
17.Guaranteed obligations. A PPG may be entered into in connection with all types of claims and associated risks thereof without restriction in relation to their nature or their object.11 Hence, a guarantor may undertake to pay a sum of money under a PPG to guarantee obligations to give (obligations de donner), obligations to do (obligations de faire) and obligations not to do (obligations de ne pas faire), to guarantee existing claims, future claims or even hypothetical claims as well as pecuniary or non-pecuniary obligations, to deliver financial instruments or any other asset, to guarantee individual claims or risks or portfolios of claims and associated risks, in the latter case, no matter if the composition of the portfolio is stable or changes during the course of the agreement provided only that the sum payable under the PPG is determined or determinable and subject to compliance with mandatory rules and rules of public order.12
18. Notwithstanding the large scope of obligations that it is possible to guarantee, there should be no concerns in terms of cause of the guarantee (i.e. the consideration of the obligation, the reason for undertaking an obligation). Indeed, in connection with autonomous guarantees, it is considered that the cause of the agreement exists when the principal (donneur d'ordre) has an economic interest in the conclusion of the underlying arrangement, even if it is not a party to the underlying agreement.13 French courts consider that it is not necessary for the underlying agreement to exist, it suffices for the principal to have an economic interest in the conclusion of such agreement. "Undertaking an obligation without any specific goal could only be the doing of a mad person."14 The same rationale should be applied to PPGs.15 The PPG finds its cause in the existence of a claim or a risk associated thereof to guarantee.
19.Guaranteed Amount. As opposed to an autonomous guarantee in relation to which references to the underlying guaranteed obligation in order to determine the guaranteed amount can prejudice its autonomous nature, the PPG Law allows the parties to contractually determine the amount payable under the PPG and, in so doing, "[t]he parties may expressly refer to the claims or the associated guaranteed risks for the determination of the amount, the terms and the duration of the guarantee".16
20.Enforcement. All the aspects of the enforcement can be contractually adjusted, starting with who can call the guarantee, the beneficiary or a designated third party, the circumstances in which the guarantee may be called, even in the absence of a default under the underlying guaranteed obligation, the conditions that need to be fulfilled for a valid call of the guarantee, e.g. with or without notice of enforcement.
21. While it is inconceivable to accommodate that much contractual freedom with a suretyship due to the accessory nature of the suretyship, achieving the same contractual freedom with an autonomous guarantee is possible but remains challenging without jeopardising its autonomous nature. The PPG proves once more to be most flexible.
22.Exceptions to enforcement. The legislator left it to the parties to contractually determine whether or not any exceptions pertaining to the claims or risks in relation with which the guarantee was concluded may be invoked to challenge payment under the guarantee. In the absence of contractual provisions dealing with exceptions, the legislator adopted the principle that no exceptions may be invoked as is the case with autonomous guarantees but not suretyships.
23. The commentators of the bill of law however objected to this principle in the case of abuse (abus), manifest fraud (fraude manifeste) of the beneficiary and fraudulent collusion (collusion frauduleuse) between the principal and the beneficiary17 based on the Latin idiom fraus omnia corrumpit. There is very limited Luxembourg case law on this topic in the context of guarantees due to the fact that judges are reluctant to challenge the efficiency of independent guarantees. It is generally considered that an abuse of rights does not require a malicious intent; it is sufficient for a person to use a right beyond its boundaries. On the contrary, manifest fraud requires its perpetrator to voluntarily act with a view to cause damage to the other party.18 Establishing that the person has acted in a malicious way in the context of autonomous guarantees and a fortiori in relation to a PPG will prove to be difficult. Indeed, Luxembourg (and other civil law jurisdictions) consider that it is not sufficient to evidence that there has been an abuse or a fraud to challenge the validity of the call, such fraud or abuse must be obvious (manifeste); it must be clear as day. The rationale of the courts is that if the courts need to make a detailed analysis of the situation by having to make certain checks in connection with the underlying debt, this will defeat the autonomous feature of the guarantee and ultimately its efficiency.
24. A parallel may be drawn with the Collateral Law which is well known for its robustness, its efficiency and its swiftness. Indeed, the Collateral Law gives the power to the pledgee to enforce its security without prior notice upon the occurrence of the enforcement events determined by the parties. Judges have systematically refused to acknowledge a fraudulent behaviour on the part of pledgees who enforce their security interest in accordance with the Collateral Law and the security agreement. Instead, they consider that if a damage is incurred by the collateral provider because of the enforcement, damages may be allocated to him. In one case known as the Pillar case, for instance, Luxembourg courts have considered that the pledgee had acted in a fraudulent way in accelerating the debt the way it did because the fraud was eye-popping.19
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