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Rules on Personal Security

Preliminary Note

Articles 1.1 to 1.4, as they stood in June and December 2000, respectively, were already discussed by the Coordinating Group in June 2000 in Rome and in December 2000 in Salzburg; articles 1.2 and 1.3 are now art.s 4.4 and 4.5. The whole set of rules was discussed by the Coordinating Group in June 2001 in Stockholm. The Advisory Group discussed in its first meeting in November 2000 in Hamburg articles 1.1. to 1.7 and 2.1 to 2.13, as they stood in the middle of October 2000. It discussed art. 1.1 to 3.3 and 3.8 at its second meeting in September 2001.

Part I

Common Rules

Art. 1.1 Scope

(1) This chapter applies to any contractual obligation by a security giver (in Parts II-

IV: guarantor) to make payment or another performance or to pay damages to the

creditor in order

- either to secure a present or future obligation of a third person (the debtor) to

perform to the creditor;

- or as an undertaking given for the purpose of security.

(2) The rules of this chapter apply, in particular, to contracts of dependent guarantee

(suretyship) and of independent guarantee, to stand-by letters of credit (even if not so

designated) and binding comfort letters. They also apply where, in addition to a main

debtor, a person assumes a corresponding obligation towards the creditor in order

to secure the main debtor’s obligation (codebtorship for security purposes).

(3) The performance of the debtor to the creditor may be the payment of money or

any other performance.

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(4) This chapter does not apply to contracts of credit insurance. It applies to

contracts of guarantee insurance only if and insofar as the insurer issues a

guarantee in favour of the creditor.

(5) The rules on the aval and the security endorsement of negotiable instruments

remain unaffected.

Art. 1.2 Creditor’s acceptance

(1) The creditor is presumed to have accepted the offer of security, unless the

creditor without unreasonable delay expressly rejects it.

(2) Subject to the preceding paragraph, the obligation of the security giver becomes

binding as soon as the offer of security reaches the creditor.

Art. 1.3 Interpretation

In case of doubt, the terms of a security assumed by the security giver without

remuneration are construed against the creditor.

Art. 1.4 Codebtorship for Purposes of Security

If a debt is assumed for the purposes of security, it is subject to the rules of Parts I

and IV and, in addition, to the rules on plurality of debtors (PECL Chapter 10).

Art. 1.5 Several Personal and/or Proprietary Security Givers

(1) To the extent that several givers of personal security have secured performance

of the same obligation or part of an obligation, each security giver assumes within

the limits of its undertaking to the creditor solidary liability. This rule also applies if

the several security givers in assuming their securities have acted independently or

successively.

(2) Paragraph 1 applies with appropriate adaptations if in addition to the giver or

givers of personal security the debtor or third persons have created proprietary

security for securing the same obligation or part of an obligation.

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Art. 1.6 Rights After Performance by Personal or Proprietary Security Giver

(1) In the cases covered by art. 1.5 recourse between several givers of personal

security or between givers of personal security and of proprietary security is

governed by art. 11:106 PECL, subject to the following paragraphs.

(2) Subject to par. 3, the share of each security giver is determined proportionately

according to the following rules:

(a) Unless the security givers have otherwise agreed, as between themselves each

security giver is liable in the same proportion that the maximum risk it assumed

bore to the total of the maximum risks assumed by all the security givers as at the

time of creation of the last security.

(b) For personal security, the maximum risk is determined by the agreed

maximum amount of the security. In the absence of an agreed maximum amount,

the amount of the secured claim or, if a current account has been secured, the

credit limit is decisive. If the secured claim is not limited, its final balance is

decisive.

(c) For proprietary security, the maximum risk is determined by the agreed

maximum amount of the security. In the absence of an agreed maximum amount,

the value of the asset(s) serving as security is decisive.

(d) If the maximum amount in the case of lit. (b) sent. 1 or the maximum amount

or the value, respectively, in the case of lit. (c) is higher than the amount of the

secured claim at the time of creation of the last security, the latter determines the

maximum risk.

(e) In the case of an unlimited personal security securing an unlimited credit

(lit. (b) last sentence) the maximum risk of other limited personal or proprietary

security rights which surpass the final balance of the secured credit is limited to

the latter.

(3) The preceding rules do not apply to proprietary security given by the debtor.

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Art. 1.7 Subsidiary Application of Rules on Solidary Debtors

The provisions of this chapter are supplemented by the rules on plurality of debtors

(PECL Chap. 10).

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Part II

Dependent Guarantees

Art. 2.1 Definition

A guarantee is dependent, if its validity, terms and extent depend upon the validity,

terms and extent of the (main) debtor’s obligation to the creditor.

Art. 2.2 Presumption for Dependent Guarantee

(1) Any undertaking to pay, to perform or to pay damages to the creditor of a debtor

by way of guarantee is presumed to be a dependent guarantee, unless the creditor

shows that it was agreed otherwise.

(2) A binding comfort letter is presumed to be a dependent guarantee.

Art. 2.3 Terms and Extent of the Guarantor’s Obligations

(1) The guarantor’s obligation does not exceed the secured obligation, except if

the debtor’s obligations are reduced or discharged in an insolvency proceeding or

otherwise as a result of the debtor’s inability to perform because of insolvency or by

virtue of law due to events affecting the person of the debtor.

(2) Except in cases falling within art. 2.5 par. 1, if no amount has been fixed for

the guarantee and cannot be determined from the agreement of the parties, the

guarantor’s obligation is limited to the amount of the secured obligations at the time

of contracting the guarantee.

(3) Except in cases falling within art. 2.5 par. 1, any agreement between the

creditor and the debtor to increase the extent, to aggravate the conditions and terms

or to predate the maturity of the secured obligations agreed upon after the guarantor

had assumed the guarantee does not bind the latter.

Art. 2.4 Debtor’s Defences Available to the Guarantor

(1) As against the creditor, the guarantor may invoke any defence that is available to

the debtor, even if waived by the latter after assumption of the guarantee, with

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respect to the existence, validity, enforceability, terms and conditions of the secured

obligation. However, the guarantor cannot invoke the lack of capacity of the debtor,

whether a natural person or a legal entity, or the non-existence of the debtor legal

entity, if the relevant facts were known to the guarantor when the guarantee was

given.

(2) As long as the debtor is entitled to avoid the contract from which the secured

obligation arises, then, if the debtor has not excercised that right, the guarantor is

entitled to refuse performance.

(3) The preceding paragraph applies with appropriate adaptations if the secured

claim is subject to set-off.

Art. 2.5 Coverage of Guarantee

(1) A guarantee that is agreed to cover all the debtor’s obligations towards the

creditor, the debit balance of a current account or one of a similar import (global

guarantee), covers only claims which originated in contracts between debtor and

creditor.

(2) Any guarantee covers, within a maximum amount, if any, apart from the principal

also the debtor’s collateral obligations towards the creditor, especially contractual

interest, default interest, an agreed payment for non-performance, damages which

arise due to non-performance by the debtor and reasonable extra-judicial costs of

recovery of those items.

(3) The cost of and expenses for legal proceedings and executions against the debtor

are covered, provided the guarantor had been informed in due time about the

creditor’s intention to undertake such proceedings and/or executions, so as to be

able to avert those expenses.

Art. 2.6 Solidary Liability of Guarantor

Unless otherwise agreed (art. 2.7), the creditor has the choice of claiming solidary

performance from the debtor and/or, within the limits of the guarantee, from the

guarantor.

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Art. 2.7 Subsidiary Liability of Guarantor

(1) If so agreed, the guarantor may invoke as against the creditor the subsidiary

character of its liability.

(2) Before demanding performance by the guarantor, the creditor must have

attempted to obtain satisfaction by execution into the debtor’s assets, except if

(a) execution is obviously without any chance or exceedingly difficult; or

(b) an insolvency or equivalent proceeding has been opened over the debtor’s

assets or opening of a proceeding has failed due to insufficient assets.

(3) The exception in the preceding paragraph does not apply if and insofar as the

creditor may obtain satisfaction from a proprietary security right granted by the

debtor or a third person.

Art. 2.8 Creditor’s Duty of Information

(1) The creditor shall notify the guarantor of any default by or inability to pay of the

debtor as well as of an extension of maturity of the secured claim, indicating the

amounts of principal, interest and other charges owed by the debtor on the date of

the information. In the case of continuing defaults, this information must be given

every three months.

(2) In addition, in the case of a global guarantee (art. 2.5 par. 1), the creditor shall

notify the guarantor of any agreed increase which in the aggregate surpasses 20 %

of the total amount of all secured credits available to the debtor.

(3) Preceding paragraphs 1 and 2 do not apply, if and insofar as the guarantor

knows or reasonably can be assumed to know the required information.

(4) If the creditor omits or delays notification, it is liable for the damage caused by

this omission or delay to the guarantor.

Art. 2.9 Limiting Guarantee with Time Limit

(1) If a time limit has been agreed for a guarantee establishing solidary liability for

the guarantor, the latter is no longer liable after expiration of the agreed time, unless

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the creditor before expiration of the time had requested performance from the

guarantor.

(2) If a time limit has been agreed for a guarantee establishing subsidiary liability

for the guarantor, the latter is no longer liable after the expiration of the agreed

time, unless the creditor

(a) before expiration of the time informs the guarantor about his intention to

demand performance of the guarantee and asserts that he has commenced

judicial proceedings against the debtor; and

(b) if demanded by the guarantor, every six months informs it about the status

of the proceeding or a succeeding enforcement proceeding.

(3) If the creditor has taken due measures according to the preceding paragraphs,

the guarantor’s maximum liability is restricted to the amount of the secured claim

and its accessories as defined in art. 2.5 par. 2 and 3 as of the date at which the

agreed time limit expires according to paragraphs 1 and 2.

Art. 2.10 Limiting Guarantee Without Time Limit

(1) Where a guarantee has no time limit, its duration may be limited to cover existing

obligations only by any party giving notice of reasonable length to the other party.

(2) The guarantor’s maximum liability is limited to the amount of the secured claim

and its accessories as defined in art. 2.5 par. 2 and 3 as of the date at which the

limitation becomes effective.

Art. 2.11 Compensation for Creditor’s Acts

If and insofar as due to the creditor’s acts the guarantor cannot be subrogated to the

creditor’s rights against the debtor (including personal and proprietary security

rights by third persons), or cannot be fully reimbursed from the debtor, the creditor

is liable for the damage caused to the guarantor.

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Art. 2.12 Debtor’s Relief for the Guarantor

(1) A guarantor who has assumed a guarantee at the debtor’s request or with its

express or presumed consent, may request relief by the debtor if

(a) the debtor has not performed the secured obligation when it became due or

is unable to pay or the debtor’s property has been substantially diminished;

(b) or if the creditor has brought an action for performance against the

guarantor.

(2) Relief may be granted by furnishing adequate security.

Art. 2.13 Guarantor’s Duty Before Performance

(1) Before performance to the creditor, the guarantor must notify the debtor and

request information about the outstanding amount of the secured obligation and any

defences or counterclaims against it.

(2) If the guarantor performs without the request provided for in par. 1 or neglects to

raise defences communicated by the debtor, it is liable as against the debtor for the

resulting damage.

(3) The guarantor’s rights against the creditor remain unaffected.

Art. 2.14 Guarantor’s Rights After Performance

(1) If the guarantor has performed the guarantee, it may claim reimbursement from

the debtor. In addition the guarantor is subrogated to the creditor’s rights against

the debtor. The two claims are concurrent.

(2) In case of part performance, the creditor’s remaining partial rights against the

debtor have priority over the rights to which the guarantor has been subrogated.

(3) By virtue of the subrogation according to paragraph 1 second sentence,

dependent and independent personal and proprietary security rights are transferred

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by operation of law to the guarantor, notwithstanding any contractual restriction or

exclusion of transferability agreed by the debtor. The relationships between several

security givers are governed by article 1.6.

(4) Where the debtor due to incapacity is not liable towards the creditor, the

guarantor may nevertheless claim reimbursement from the debtor to the extent of its

enrichment. This rule applies also if a debtor legal entity has not come into

existence.

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Part III

Independent Guarantees

Art. 3.1 Definition and Scope

(1) A guarantee is independent if it is expressly or impliedly declared not to depend

upon the validity, terms or extent of any other person’s obligation owed to the

creditor. A mere general reference to an underlying obligation (including a

guarantee) does not prejudice the independence of a guarantee.

(2) The provisions of this Part apply, inter alia, to letters of credit and standby letters

of credit.

Art. 3.2 Guarantor’s Duties Before Performance

(1) The guarantor is obliged to perform only if the guarantee is valid and the written

demand for performance complies exactly with the terms and conditions set out in

the guarantee. The guarantor must at the latest within seven day of receipt of a

demand in writing either perform or reject it.

(2) Immediately upon receipt of a demand for performance, the guarantor must

inform the debtor and request information about defences against the demand, if any.

(3) Unless otherwise agreed, the guarantor may invoke defences to which it is

entitled as against the creditor.

(4) If the guarantor decides to refuse performance, it must immediately inform the

creditor and the debtor.

(5) If the guarantor performs the creditor’s demand without the request according to

par. 2 or without raising the defences communicated by the debtor, or if it fails to

give the information according to par. 4, it is liable for any damage caused thereby.

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Art. 3.3 Guarantee on First Demand

(1) A guarantee which is expressed as being due upon first demand or where this can

unequivocally be derived from its terms, is subject to art. 3.2, except as provided

hereafter.

(2) The creditor’s demand must be supported by a declaration in writing by the

creditor in which it expressly confirms that the condition(s) upon which the

guarantee becomes due, is (are) fulfilled.

(3) The guarantor is precluded from raising any defence other than

(a) that the guarantee is invalid; or

(b) that the demand for performance is not in strict compliance with the terms of

the guarantee; or

(c) that the declaration according to par. 2 is missing.

Art. 3.4 Manifestly Abusive/Fraudulent Demand

(1) In the cases covered by articles 3.2 and 3.3, a guarantor is not obliged to comply

with a demand for performance, if it is manifestly abusive or fraudulent, respectively,

and this is proved by present evidence.

(2) If the conditions of the preceding paragraph are fulfilled, the debtor may prohibit

(a) performance by the guarantor and

(b) issuance or utilization of a demand for performance by the creditor.

Art. 3.5 Guarantor’s Claim for Return of Performance

(1) The guarantor may claim return of its performance from the creditor if

(a) the terms and conditions for the creditor’s demand were not fulfilled or

subsequently disappeared, or

(b) the creditor’s demand was manifestly abusive or fraudulent.

(2) The guarantor’s claim according to the preceding paragraph is subject to art.

4:115 PECL and the general rules on unjust enrichment.

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Art. 3.6 Guarantees With or Without Time Limits

(1) A guarantee with a time limit is subject to the provisions of art. 2.9 par. 1 and 3.

(2) A guarantee without a time limit is subject to the provision of art. 2.10 par. 1.

Art. 3.7 Transfer of Guarantee

The creditor’s right to demand performance can be transferred by operation of law.

It can also be assigned by contract, except in the case of a guarantee on first demand

or unless otherwise agreed.

Art. 3.8 Guarantor’s Rights After Performance

Art. 2.14 applies with appropriate adaptations to the rights which the guarantor

after performance may exercise against the debtor.

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Part IV

Special Rules for Guarantees by Consumers

Art. 4.1 Scope of Application

(1) Guarantees assumed by a guarantor who is a consumer are subject to the rules of

Parts I to III, except as provided otherwise in this Part. The rules of this Part do not

apply if the creditor also is a consumer.

(2) A consumer is every person who, in assuming a guarantee, does not act in the

exercise of its commercial or professional activity. [Are regarded as consumers

small merchants, farmers and artisans and any not-for-profit legal entity [[with a

maximum of five employees]] ]

(3) Are not regarded as consumers persons who, or legal entities which, by virtue of

their legal or factual position, are able to exercise substantial influence upon a

debtor company.

Art. 4.2 Mandatory Provisions

The parties may not deviate to the disadvantage of a guarantor from the rules of

Parts I to III and of this Part.

Art. 4.3 Creditor’s Precontractual Duty of Information

(1) Before a guarantee is granted, the creditor must explain to the intending

guarantor

(a) the general effect of the intended security and

(b) the special risk to which the guarantor may be exposed in view of the

perceivable present and the foreseeable future financial situation of the debtor.

In addition, if and insofar as the creditor is prevented from full disclosure or if

he or she has notice of a relationship of trust and confidence existing between

the debtor and the guarantor, the creditor must ascertain that the guarantor

has received independent advice.

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(2) If the information or independent advice according to the preceding paragraph is

not given at least ten days before the guarantor signs its promise or offer, the

contract or offer can be avoided by the guarantor within ten days after receipt of the

information.

(3) If contrary to par. 1 or 2 no information or independent advice is given, the

contract can at any time be avoided by the guarantor.

(4) If the guarantor avoids the contract according to the preceding paragraph, the

return of performances made by the parties is governed by art. 4:115 PECL or by the

general rules on unjust enrichment.

Art. 4.4 Door-to-Door Guarantees

The Directive of the European Community on Door-to-Door Transactions (85/577 of

20 December 1985) does not apply to a guarantee which is subject to this Part.

Art. 4.5 Form

(1) The contract of guarantee must be in writing. At the end of the text, the guarantor

itself must separately write out in letters [and by hand] the amount of his obligation

and sign [the signature].

(2) A security, which does not comply with the preceding paragraph is void. Art. 4.6 Guarantor’s Subsidiary Liability

If a consumer assumes a dependent guarantee, its liability is subsidiary within the

meaning of art. 2.7.

Art. 4.7 First Demand Guarantee

A guarantee on first demand assumed by a consumer is void. Art. 4.8 Limiting Guarantee for More Than Three Years

(1) A guarantor who has given a guarantee for a period of time may three years after

the guarantee had been assumed limit its effects by giving notice of at least two

months time. The creditor has to inform forthwith the debtor.

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(2) The guarantor’s maximum liability is restricted

(a) in the case of a dependent guarantee, to the amount of the secured claim (b) in the case of an independent guarantee, to the amount which the creditor

could have demanded

as of the date at which the limitation of the guarantee becomes effective, respectively.