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    Remote KYC: not only for fintech

    COVID-19 is rapidly accelerating changes in our ways of communicating and making business commitments, bringing those processes into virtual space. But these changes involve their own risks that businesses need to tackle.

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    Romania: Enforcing bank guarantee letter on failure to pay rent during the state of emergency

    Enforcing bank guarantee letter on failure to pay rent during the state of emergency

     

    Some measures adopted during the state of emergency have resulted in the interruption of commercial activities in shopping centres.[1] This has led to temporary inability to fulfil terms of agreements by both landlords and tenants.

    So the question is whether a temporary legal obstacle has been created by the interruption of commercial activities in shopping centres. A temporary legal obstacle seems to have been created against fulfilment of tenants’ main lease duties and landlords’ liability to ensure quiet use in accordance with the terms of the agreement (usually commercial).

    Basically, on one side, economic operators, as landlords, are not able to ensure use of rented areas within shopping centres and on the other side, tenants have become unable to use these areas for the particular scope for which they have been rented or to conduct commercial activities. These facts are creating ‒ at least on a theoretical level ‒ a basis for raising the likely impossibility of enforcing obligations[2] and also for bearing the risk under the agreement, resulting in tenants claiming for interruption of rent payment while unable to use rented areas.

    Note, though, that landlords may rely on enforcement of autonomous guarantees, which they are entitled to do. These guarantees are created to insure against failure by tenants to fulfil their obligations, especially regarding rental payments. This form of security is often provided by a letter of guarantee, which at a national level is issued mainly by banks as a letter of bank guarantee (“LBG”).

    To the extent that temporary interruption of retail commerce as a result of the lockdown may make it impossible for the Landlord to ensure use of a leased asset according to the scope of the agreement, the consequence is that the contractual risk may be borne by the tenant, who then falls under obligation to fulfil a responsibility that is impossible to carry out. So the question is whether a landlord’s claim to enforce a LBG is open to challenge, unless otherwise specified by the contract. Below we shall point out the main characteristics of the LBG, continuing with an analysis covering if and how an LBG can be enforced in cases of justified failure to fulfil obligations arising from a lease.

    1         Regulation. Concept.

    A LBG is specifically regulated by the Civil Code,[3] which established general rules on letters of guarantee. Nevertheless, in certain cases it is important also to bear in mind the Uniform Rules for Demand Guarantees (URDG 758) issued by the International Chamber of Commerce. These rules codify commercial international bank practices for demand guarantees. The Uniform Rules are applicable and therefore compulsory for the parties inasmuch as they are mentioned, as well as if the stipulations are not contrary to the imperative provisions of the Civil Code.

    Regarding the legal substance of LBG, this consists of a guarantee. The banking institution (guarantor bank) uses it to irrevocably undertake to pay the amount under the LBG towards the warranty beneficiary (the landlord), according to agreement, in case of breach of duties by the bank’s client (the tenant). Afterwards, the bank claims the warranty based on the commitment previously undertaken by the client. Through this commitment, the guarantor bank undertakes the payment obligation in the event that the bank client (tenant) is unable to carry out their contractual duties. Through this operation, banks undertake the payment obligation in case tenants, as bank clients, fail to fulfil their obligation to pay the rent. So the LBG becomes in this particular case a guarantee instrument meant to secure the tenant’s contractual obligation.

    2        Enforcement of LBG

    According to the rule, a claim by the beneficiary (landlord) would suffice for enforcement, unless otherwise specified in the LBG text. So the parties are entitled to expressly specify to the contrary, using the LBG’s terms and conditions. For instance, they may condition  enforcement by: stipulating specific dates for payment terms: “upon request” from the beneficiary, or by providing specific documents by the beneficiary, or by considering the term of the LBG’s validity, or by considering a minimum or maximum amount that can be paid, as well as the payment currency. Nevertheless, the terms of LBG enforcement may not compel the bank to analyse and check the legal relationship between the beneficiary and the debtor. Banks may not decline to pay by invoking any of the following: exceptions arising from the beneficiary-debtor contractual terms; lack of bank capacity to conduct investigations or analysis of the matter.[4]

    Therefore, for enforcement of guarantee letters, banks are held by limitations to the terms of the LBG and checking formal validity, but they may not fulfil the role of arbiter concerning parties’ affirmations.[5]

    Under the Uniform Rules banks must notify the main debtor of any enforcement claim.

    Even though banks must usually pay upon the landlord’s request, they may not be compelled to pay in cases of abuse or fraud. However, payment should be carried out according to the LBG’s terms, after verifying compliance of the request, but without verifying the pre-existing legal relationship between landlord and tenant.[6]

      3        LGB abuse and fraud

    The only exceptions that may be invoked by banks to justify declining guarantee payment to the beneficiary are based on contract terms: breach of LBG terms, breach of validity period, as well as beneficiary fraud or abuse of guarantee ‒ these must be proved compellingly.

    Regarding fraud and abuse, regulations are limited to the term that “The Issuer […] may not be held to pay in case of abuse or evident fraud”, without defining what these concepts consist of and also without clearly mentioning how the defence system works for the main debtor that wishes to block enforcement.

    Therefore, defining terms in this matter remains in the scope of doctrine and jurisprudence, from which diverse opinions have arisen.

    In general terms, doctrine considers a claim made before the value of the guaranteed obligation remaining to be enforced became certain is abusive. For instance, this would apply if a beneficiary foresees the possibility of a loss that he tries to avoid in advance, by submitting a claim to enforce the LBG. Under a different opinion, abuse in LBG enforcement may consist of an actual abuse of rights if a beneficiary claims LBG enforcement by taking advantage of its automatism and by the bank’s inability to perform a substantive examination of the pre-existing legal relationship, even though it is certain that the right no longer exists or it no longer exists at the time of the claim for payment. 

    On the other hand, fraud has been most often analysed by reference to the legal institution of fraud. Therefore, in contrast to abuse, fraud should imply an intentional element on the part of the beneficiary, expressed by the presence of fraudulent manoeuvres with the aim of wrongfully enforcing the LBG. This may also be expressed as concerted action by both the beneficiary and the main debtor against the issuer.[7]

    Regarding the concept of fraud, there are opinions that it also concerns private interests and not only fraud in law. Therefore, regarding fraud in terms of private interest, doctrine consistently states that the concept of fraud should not be considered only in terms of intention to prejudice, but also in terms of debtors (banks) being aware that they may prejudice creditors (main debtors) through this act. Regardless of whether a claim is abusive or fraudulent, bad faith on the part of a beneficiary that is at least aware of the possibility of prejudicing the main debtor is enough reason for declining enforcement[8].

    According to published literature on the difference between the two concepts, compared to clear fraud, abuse requires the existence of a right that is used in breach of its limitations, while fraud is manifested as a lack of the beneficiary’s right to claim payment.

    The law in force does not clarify whether banks are entitled or obliged to decline payment if aware that a claim for payment is abusive or fraudulent. There are two possible interpretations: (i) declining payment is just a possibility, a right on behalf of the bank but not a duty (which means banks may enact payments even in case of a clearly fraudulent or abusive request) and (ii) declining payment is a duty, an obligation for banks if aware that a claim is abusive or fraudulent, so it is not just a right.

    Regarding the latter interpretation, national jurisprudence states that in order for banks to decline an enforcement request, it is necessary that there be irrefutable proof of abuse or fraud by the guarantee beneficiary, so that banks may consider the payment request non-compliant. Otherwise, refusal of payment by banks will be considered abusive.

    Regarding abuse on the part of the beneficiary, violating LBG terms of an agreement generating pre-existing legal relationships may attract liability of the beneficiary for abusive cashing in of an LBG guarantee, if done only to enforce the LBG according to the agreement.

    Another important aspect regarding abuse and fraud is the requirement of good faith and fair dealing, or contract loyalty. These are also expressly mentioned under the Uniform Rules for Demand Guarantees in terms of limiting the number of risky requests by beneficiaries.

    However, the question is whether enforcing the LBG is not abusive and/or fraudulent in the current context of: (i) temporary interruption of retail activities as a result of a decision by the authorities, (ii) Landlord’s inability to secure use of the rented asset according to the terms of the agreement, (iii) the existing rule of contract risk being barred by the obligor of an unenforceable duty.

    We consider that each case should be approached differently, according to the agreement terms, negotiations, provisions of the LBG, as well as in consideration of the factual situation. The last of these is the main aspect according to which one may appreciate if enforcing an LBG by landlords could be abusive or fraudulent, especially considering their inability to carry out their main duty ‒ namely, to ensure the use of the leased area according to the contract terms.

    Junior Associate, Petunia Enciu

    Partner, Vlad Cîrjan

     

    [1] Military Ordinance no. 2 / 21.03.2020 on measures to prevent the spread of COVID-19 interrupted retail commercial activities of products and services within shopping centers (except certain activities mentioned by it and by Military Ordinance no. 3 / 24.03.2020 on measures to prevent the spread of COVID-19) – selling of food, veterinary preparations, pharmaceuticals, cleaning, selling of electrical and household electrical appliances by operators that ensure home delivery, as well as the selling of optical products.

    [2] Art. 1557, Law 287/2009 regarding the Romanian Civil Code.

    [3] Art. 2321, Romanian Civil Code.

    [4] Decision no. 1140 as of June 20, 2017, pronounced by Civil Section II of the Romanian High Court.

    [5] Decision no. 2008 as of 2013, pronounced by Civil Section II of the Romanian High Court.

    [6] Art. 2321(3), Romanian Civil Code.

    [7] Lucian Bercea, Banks Code of conduct in case of abuse or clear fraud while enforcing letters of autonomous guarantee (Standardul de conduita al bancii in caz de abuz sau frauda vadita in executarea scrisorii de garantie bancara autonoma), in F.I. Mangu, L. Bercea, In Honorem Ion Lulă. Abuse of right (Abuzul de drept), Universul Juridic Editure, Bucarest, 2016

    [8] Ph. Simler, Ph. Delebecque quoted in Civil Right Handbook (Tratat elementar de drept civil – Obligatiile), L. Pop, Universul Juridic Editure, 2015

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    Slovakia: Non-payment of rent during the Corona crisis

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