Professional payment guarantees: how are they used after two and a half years of application of the law?
New positive law rules on guarantees were introduced into the Luxembourg legal system by the Law of 10 July 2020 on professional payment guarantees (the "2020 Law").
The professional payment guarantee (garantie professionnelle de paiement) was created to respond to the needs of practitioners to allow the application of guarantees for financial and commercial transactions based on a flexible and reliable legal framework. Until then, while a surety bond (cautionnement) had a legal basis, a first demand guarantee (garantie à première demande) was created through practice, which, while recognised by jurisprudence, was significantly insecure because of the risk of its being requalified as a surety bond.
The 2020 Law remedied this legislative failure and today provides for the option of drafting guarantees matching the needs of the market, particularly for first demand guarantees with implementation terms and conditions that formerly would have risked having it be requalified as a surety bond.
1 - The professional payment guarantee, an instrument benefitting from broad contractual freedom
According to the Law of 2020 the professional payment guarantee is defined as "the commitment by which a person, the guarantor, undertakes to a beneficiary to pay, on demand of the beneficiary or of an agreed third party, a determined sum according to the agreed terms and conditions, in relation to a claim or claims or the risks associated with them."
The professional payment guarantee opens the way to a large degree of contractual freedom in the drafting of the text of the guarantee.
This instrument does not abolish traditional guarantee instruments, including the surety bond, which continue to exist, but is added as an additional tool.
The legislative history thus specified that "The law leaves a large degree of freedom to the parties, with the only requirement, in line with the general principles of the law of obligations, that the object of the guarantee be determined or determinable and that it be in conformity with public policy."
Thus, the scope of application of the professional payment guarantee is very broad, encompassing all kinds of claims and risks, and may in particular guarantee "obligations to pay or deliver financial instruments or other assets, present or future claims, or even possible or hypothetical claims". Also, the scope of application is in no way limited to certain sectors of activity or certain professionals, the only condition for the application of the professional payment guarantee, in addition to compliance with public policy, being the express reference to it by the parties in accordance with Article 3 of the 2020 Law.
2 - Advantages of the professional payment guarantee
a. The scope of application of the professional payment guarantee
The scope of application of the 2020 Law was opened to any guarantor (legal person or company even without legal personality, mutual funds or other forms of joint ownership or public or international institutions), including natural persons. However, opinions expressed during the legislative process suggest that the law is intended to cover a guarantor acting in his professional capacity.
There are no restrictions as to the status of the principal or beneficiary.
In addition, the 2020 Law also provides that the guarantee may be granted to a third party (agent, fiduciary, trustee) provided that the third-party beneficiary is determined or determinable. In this case, the third-party beneficiary will have the same rights as the beneficiary.
In short, for the guarantee to be subject to the regime of the 2020 Law, it will generally suffice to have a "classic" writing or one in electronic format, or any other durable medium, referring to the Law of 10 July 2020.
b. Contractual freedom conferred by the law on professional payment guarantees
The 2020 Law gives practitioners great contractual liberty with respect to the determination of the object of the guarantee (guaranteed claims, obligations or risks), the conditions of the guarantee (amount, terms and duration) as well as the modalities for calling and paying the guarantee.
By default, the suppletive provisions of the 2020 Law correspond with the principles of an autonomous guarantee under which a guarantor may not oppose a guarantee call, using any exception whatsoever, relating to the claims or risks covered.
The main use of the 2020 Law will be the granting of autonomous first demand guarantees, under the principle that the exceptions drawn from the underlying contract will be unable to be used against a guarantee call, while arranging specific execution modalities and, if necessary, referring to certain elements or exceptions in the underlying contract, without the guarantee being able to be reclassified as a surety bond.
After payment, the guarantor has personal recourse against the principal and is subrogated to the rights of the beneficiary in respect of the claims concerned. Here again, the parties may agree on the conditions for exercising the guarantor's personal and subrogation rights.
The guarantor remains liable to the beneficiary for the entirety of his obligations even if the principal, main debtor of the claims concerned, is subject to reorganisation proceedings or measures, liquidation proceedings (defined as collective proceedings involving the realisation of assets and the distribution of the proceeds of this realisation with the intervention of an administrative or judicial authority, including proceedings closed by composition with creditors or similar measure, whether or not they are based on insolvency and irrespective of whether they are voluntary or compulsory) and any other situation in which creditors are involved. However, an exception applies with respect to the Law of 8 January 2013 on overindebtedness.
It should also be noted that collateral agreements entered into prior to the enactment of the 2020 Law may be made subject to the 2020 Law by amendment to them.