Enforceable contractual guarantees: the bank guarantee payable on first demand

The distinguishing feature of this guarantee is its independence from the principal obligation. In contrast to securities, which have accessory status, the bank guarantee payable on first demand gives rise to an obligation independent of the principal one.

The costs of this guarantee can certainly be high, given that banking institutions often demand the principal debtor comply with somewhat arduous conditions in order to issue a guarantee of this kind. In this sense, it is common for the bank guarantee to be subject to various commissions (due diligence, transparency, risk, etc.), which significantly raises the cost of its issuance.

Once formalized, the principal effect of the bank guarantee payable on first demand is that upon receipt of the creditor’s notification requesting payment, the banking institution is obligated to comply automatically and immediately, and without the possibility of demanding clear evidence of noncompliance.

Advantages of the bank guarantee payable on first demand

  • Ensures an immediate payment on the part of a banking institution
  • The creditor does not need to irrefutably prove the principal debtor’s noncompliance; it is sufficient to merely notify the bank, which considerably expedites the procedure of implementing the guarantee
  • The bank cannot make any exception to the payment beyond those explicitly envisaged in the guarantee.

In view of the above, it will always be more advisable for the creditor to opt for a bank guarantee payable on first demand, rather than a personal security. Bank guarantees are configured as a much more direct guarantee than securities, in which solvency and financial stability on the part of the guarantor are assumed. It therefore proves to be safer for a creditor´s interests. However, given the high costs associated with this format, in many cases it will not prove easy to request the principal debtor to contribute to these costs.

For more information relating to the bank guarantee payable on first demand in Spain,

Please note that this article is not intended to provide legal advice.

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