A letter of guarantee is a type of a contract issued by a bank on behalf of a customer who has entered into a contract to purchase goods from a supplier and promises to meet any financial obligations to the supplier in the event of the default. The main purpose of this product is to guarantee payment to the beneficiary regardless of any objection or contestation from any other party.
The letter of Guarantee in Egypt is governed by the Egyptian Commercial Law No. 17 of the year 1999 and it is defined in Paragraph No.1 of Article No. 355 of the Egyptian Commercial Law as:
‘The letter of guarantee is a written letter undertaking from the bank upon the request of a person called (the remitter) to pay an amount, specified or liable to be specified, to another person (the beneficiary), if he asks the bank to do so, within the period determined in the letter, and without reckoning to any objection’.
Such written letter undertaking from the bank must be self-sufficient to articulate the content and extent of both parties’ obligations therein. In addition, Paragraph No.2 of Article No. 355 of the Commercial Law stipulates:
‘The rules and practices prevailing in international dealings transactions concerning the letter of guarantee shall apply where no text or usage is prescribed in this division.’
Article No. 356 of the Egyptian Commercial Law stipulates that:
‘The bank may require a deposit against issuing the Letter of Guarantee. Such deposit shall be in cash, debenture, goods or assigning the remitter’s right vis-à-vis the beneficiary’.
Article No. 357 also stipulates that:
‘The beneficiary shall not assign his right as prescribed in the letter of guarantee except with the approval of the bank, and providing the bank shall be authorized by the remitter to give this approval.’
The Letter of Guarantee generates independent and separate obligation upon which the bank (guarantor) shall not refrain from fulfilling his commitment for a reason ascribed from the bank’s basic contract or the bank’s relation with the remitter. This is the independence of interrelations and this is the spirit of Letter of Guarantee.
Further, Article No. 358 of the Egyptian Commercial Law stipulates that: ‘The bank shall not refrain from paying the beneficiary for a reason ascribed to the bank’s relation with the remitter or the remitter’s relation with the beneficiary.’
Article No. 359 of Egyptian Commercial Law stipulates that:
1- The bank shall be relieved of its liability vis-à-vis the beneficiary if no request for payment reaches it from the beneficiary within the validity period of the letter of guarantee, unless it is agreed explicitly on renewing this period automatically, or the bank agrees to its extension.’
2- The bank shall restore to the remitter at the end of the validity period of the letter of guarantee the deposit he gave the bank to obtain this Letter of Guarantee.’
Letter of Guarantee, in essence, is a written undertaking. In that, the self-sufficient condition shall be provided in such written undertaking to articulate the content and extent of both parties’ obligations therein.
If the bank pays to the beneficiary a straight payment, it may have recourse against the remitter for the amount paid and its yield from the date of its payment, unless the remitter does not pay it in advance. Legislator has provided such provision to make the bank pay to the beneficiary its liability not the remitter’s liability. Thus, such liability shall not be replaced. This is what is stipulated in Article No. 360 of the Egyptian Commercial Law that if the bank pays to the beneficiary the amount agreed upon in the letter of guarantee, it may have recourse against the remitter for the amount paid and its yield from the date of its payment.
Some of Supreme Court provisions in Egypt in regard of Letter of Guarantee:-
- In the Letter of Guarantee, the bank shall be obliged in its capacity as a principal not as an agent. If the bank disburses the amount of guarantee to the beneficiary, the client is not entitled to disclaim before the disbursement of indemnity provided in Letter of Guarantee.
- The effectiveness of Letter of Guarantee during a specific period is an obligation to pay its amount during such period so that the date provided therein shall not be deemed the due date of bank obligation, but the bank obliges to pay during the period of guarantee until the date set forth in a Letter of guarantee considering as the maximum of its effectiveness.
- If the bank is the issuer of a Letter of Guarantee, the bank shall pay its amount to the beneficiary upon his request during the term of its effectiveness without the client’s consent, and shall not postpone the due of a Letter of Guarantee except by the client’s consent.
- The bank shall be exempted from its liability in case the beneficiary’s claim to pay is not arrived before the end of due date.
- Nonetheless, Letter of Guarantee issued to execute the contract entered by and between the bank and the debtor who deals with the bank, the relation between the bank and the beneficiary for whom Letter of Guarantee was issued is a separate relation from the client’s relation upon which the bank shall be obliged. The Letter of Guarantee issued and arrived to the beneficiary to pay the amount by which the latter requests as a right of his governed by Letter of Guarantee as long such performance is in the limit of bank’s liability provided therein. Such liability shall not be ceased if the beneficiary claims the bank during the letter effectiveness to pay or to postpone the due date. It cannot be conceived that the beneficiary may suffer a loss because he/she offers to postpone the Letter of Guarantee for another period, and to suggest otherwise dissipate tranquility for which letters of guarantee system targets in dealing. In such case the payment of the bank shall be a correct fulfillment when the claim received by the beneficiary during the effectiveness of Letter of Guarantee, even such fulfillment is done after the end of letter of Guarantee effectiveness because the considerable date is the date of claim arrival to pay irrespective of the due date itself.
- The effect of Letter of Guarantee arrival to the beneficiary originates his right to claim the amount of Letter of Guarantee until the expiration of its specified date. The action of Letter delivery from the beneficiary to the bank, the issuer of which, after the expiration of its period shall not deem a waiver as long as the letter does not include such an agreement and the beneficiary claims the amount of the letter before the expiration of its period.
Upon the abovementioned, it is obvious that the Letter of Guarantee has an important role in the economic relations as it represents an effective alternative for retention of money to guarantee the execution of the obligations properly between the parties. As it provides the remitter with the chance to invest his money instead of freezing it by issuing an independent Letter of Guarantee upon the beneficiary’s approval and at the same time it protects the beneficiary’s rights in order to obtain the payable amounts.