Letter of Credit and International Trade Usages
A letter of credit is an instrument for securing payment, defined by the Georgian Civil Code. Upon opening a letter of credit, the credit institution (the issuing bank) is obliged, at the request and on the instructions of its client (the person giving the letter of credit order), to pay a sum of money to a third person (the remittee) against the specified document, to discount or accept a bill of exchange transferred by the remittee, or to instruct another bank to do so, provided the credit conditions are fulfilled. The client, in turn, must pay the agreed remuneration. A related operation is the collection order, under which the bank undertakes, at its client's instruction, to hand over commercial securities against acceptance and, where necessary, payment. Unless otherwise agreed, the parties' rights and obligations follow the usages of documentary credits or documentary collection established in international circulation.
Bank Guarantee: Concept and Independence
The bank guarantee is the fully regulated security instrument of the Code. Under it, a bank, another credit institution or an insurance organisation (the guarantor), at the request of another person (the principal), undertakes a written obligation to pay the beneficiary a sum of money on the basis of the beneficiary's written demand. The guarantee secures the proper performance of the principal's obligation towards the beneficiary, and for its issuance the principal pays the agreed remuneration. The independence principle is decisive: the guarantor's obligation does not depend on the underlying obligation even where the guarantee refers to it. A bank guarantee enters into force on the day of its issue, unless otherwise provided in the guarantee. The guarantor may not revoke the guarantee, nor may the beneficiary's right of demand be transferred to another person, unless the guarantee provides otherwise. In liquidation, the bank's liquidator may transfer the guarantee to another bank without the consent of the beneficiary and the principal.
Procedure for Presenting a Demand and the Guarantor's Duties
The beneficiary's demand for payment must be presented to the guarantor in written form, accompanied by the documents indicated in the guarantee, and must specify in what the breach of the principal's underlying obligation consists. Where an electronic document exchange agreement exists, written form is not required. The demand must be presented before the expiry of the term defined in the guarantee. Upon receipt, the guarantor immediately notifies the principal, hands over a copy with the related documents, examines the demand within a reasonable period and with reasonable care establishes its conformity with the terms. A non-conforming or late demand is refused, and the beneficiary is immediately notified. If the underlying obligation turns out to be performed, terminated or void, the guarantor notifies both parties, and a repeated demand thereafter is subject to satisfaction.
Scope of the Guarantor's Obligation, Termination and Recourse
The guarantor's obligation towards the beneficiary is limited to the payment of the sum for which the guarantee was issued. It terminates by payment of that sum, by expiry of the term, or by the beneficiary's waiver and return of the guarantee. A guarantor who learns of the termination must immediately notify the principal. Recourse — reimbursement from the principal of sums paid to the beneficiary — is determined by the agreement under which the guarantee was issued. Sums paid contrary to the terms of the guarantee or in breach of the guarantor's obligation cannot be reclaimed from the principal, unless otherwise agreed.
Frequently Asked Questions on Letters of Credit and Bank Guarantees
Below are answers to the questions most frequently raised in practice on letters of credit and bank guarantees.
What is the difference between a letter of credit and a bank guarantee?
A letter of credit is a mechanism under which the issuing bank pays a third person against a document, while a bank guarantee secures the principal's obligation and gives the beneficiary an independent written demand against the guarantor.
Can a bank guarantee be revoked?
No, a bank guarantee cannot be revoked by the guarantor unless otherwise provided in the guarantee, which additionally protects the beneficiary.
How should the beneficiary present its demand?
In writing, with the guarantee's documents and a description of the breach, before the expiry of the term; written form is not required under an electronic exchange agreement.
When does the guarantor's obligation terminate?
By payment of the sum, expiry of the term, or waiver and return of the guarantee; the guarantor immediately notifies the principal.
Does the guarantor have a right of recourse?
Recourse is determined by the agreement with the principal; sums paid contrary to the terms cannot be claimed.
How We Help on Legal.ge
The specialists of Legal.ge assist banks, importers and exporters: we review the terms of letters of credit, collection orders and bank guarantees, draft contracts and demands under guarantees, assess risks and represent your interests in negotiations and in court. Contact us — we will assess your situation and help you decide.