Independent guarantee ● The principal does not have to prove prior reimbursement of the guarantor in order to take action against the beneficiary for wrongful collection of the amount of the guarantee

Civil ● Securities ● First demand guarantee > Conditions for admissibility of the principal's recourse against the beneficiary for wrongful collection of the amount of the guarantee

(French) Cour de cassation, Ch. Com., 14 juin 2023, Pourvoi n° 21-23.864 (Publié au Bulletin) [dismissal]

SUMMARY

In order to be entitled, on the basis of the basic contract, to ask the beneficiary to refund all or part of the amount of a first demand guarantee (garantie à première demande), the principal must establish that the beneficiary has received undue payment by proving either the fulfilment of its own contractual obligations or that the non-fulfilment of the contract is attributable to the fault of the co-contractor who is the beneficiary of the guarantee, without having to justify the prior reimbursement of the guarantor.

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The solution expressly adopted for the first time by the Commercial Chamber of the French Court of Cassation (Supreme Court), which is based on the criterion of payment of the guarantee and not on prior reimbursement of the guarantor, helps to maximise the effect of the independent guarantee (garantie autonome), a security detached from the principal debt. **

This ruling is also noteworthy in Monaco. For the record, the provisions of the Monegasque Civil Code and the French Civil Code relating to the autonomous guarantee are identical. *

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IN DETAIL

The facts and the procedure

The case arose out of a management lease for a hotel-restaurant-bar business (the basic contract) between the company that owned the hotel and a subsidiary in whose rights the parent company was acting.

In 2007, a first demand guarantee was given by the parent company (guarantor) to the company owning the hotel (beneficiary) in the event that its subsidiary (principal) failed to pay the sums due under the management lease.

The subsidiary does not renew the management lease.

In 2017, the company that owned the hotel sued the parent company to enforce the guarantee, claiming that the premises had not been restored and that the business had lost value.

The claim was upheld and the parent company was ordered to pay €611,187.40.

The subsidiary company, arguing that the conditions for implementing the guarantee granted in 2007 had not been met when it was called upon by the company that owned the hotel, sued it for repayment on the basis of the basic contract.

For its part, the company that owned the hotel argued that the subsidiary had no standing or interest in seeking reimbursement of a sum that it had not paid personally and that it could not justify having had to pay to the parent company.

In a ruling handed down on 5 October 2021, the Chambéry Court of Appeal upheld the subsidiary's claims, on the grounds that "the principal of a first demand guarantee is entitled to demand restitution of its amount from the beneficiary, on condition that it establishes that the beneficiary received undue payment, by proving performance of its own contractual obligations, or by proving that the non-performance of the contract is attributable to the fault of the other contracting party, the beneficiary from the guarantee, or by proving the nullity of the basic contract, without having to prove fraud or manifest abuse, as in the case of preventive opposition to performance of the guarantee by the guarantor".

The Court, while setting the amount of the loss suffered by the company owning the hotel at €115,000 following the return of its business, ordered the latter to reimburse the subsidiary the sum of €633,928.99 plus interest at the legal rate.

The appeal to the French Supreme Court

The company that owned the hotel, which was the appellant, argued that while the principal has a right of recourse against the beneficiary of an autonomous guarantee for repayment based on the basic contract in the event of an unjustified call on the guarantee, the exercise of this right of recourse based on unjust enrichment requires that the principal be impoverished by repaying to the guarantor the sums paid by the guarantor to the beneficiary.

The Court of Appeal was therefore criticised for declaring the claims of the principal (the subsidiary) admissible without ensuring that the principal had reimbursed the guarantor (the parent company) for the sum paid to the beneficiary (the company that owned the hotel) under the first demand guarantee.

The Commercial Division of the Court of Cassation dismissed the appeal on the grounds that:

"After payment of an autonomous guarantee (or counter-guarantee), the principal is entitled to bring an action against the beneficiary to have the latter held to have wrongfully received the amount of the guarantee, without having to prove prior reimbursement by the guarantor".

The contribution of the judgment of 14 June 2023 lies not so much in the solution adopted, which is not in itself revolutionary, but in the fact that it is clearly stated for the first time.

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*The legal enshrinement of the independent guarantee (garantie autonome) in Monaco

The Monegasque Civil Code has only recently enshrined the autonomous guarantee, the fruit of contractual freedom.

It is the result of Law no. 1.529 of 29 July 2022 on various economic and legal provisions (JDM no. 8603 of 12 August 2022), which incorporated this legal tool for guaranteeing the creditor against the risk of the debtor's insolvency into article 1882-1 of the Civil Code, which reproduces the wording of article 2321 of the French Civil Code.

**The independant guarantee mechanism

The Civil Code defines the "garantie autonome" as "an undertaking by which the guarantor undertakes, in consideration of an obligation undertaken by a third party, to pay a sum either on first demand [first demand guarantee] or on agreed terms".

In principle, therefore, it is based on a triangular relationship between :

• the principal- donneur d'ordre (the debtor under the basic contract),
• the guarantor - garant (usually a banker who has signed a credit agreement with the principal), and
• the beneficiary - bénéficiaire (the creditor of the principal).

The object of the "garantie autonome" is not the debt of the debtor but the payment of a sum (disconnected from the guaranteed debt, "autonomous"). Thus, the guarantor undertakes, at the request of the principal, to pay the beneficiary a certain sum of money in an amount determined in advance.

Hence the essential rule that the guarantor may not rely on exceptions that the debtor could raise against the beneficiary (relating to the person of the debtor or to the obligation guaranteed). The guarantor is therefore obliged to respond to the guarantee call, except in the case of abuse or obvious fraud by the beneficiary or collusion between the beneficiary and the principal.

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