Date of publication: 7 July 2025
Oleksandr Kamsha, Attorney at Law, Insolvency Receiver, Head of Dnipro Office
Source: Yurydychna Gazeta
One of the important issues when performing a large number of legal transactions (agreements, contracts) is ensuring their effective performance by the parties. For this purpose, there is an institution of securing the performance of obligations, which, among other measures to secure the performance of obligations, includes such a measure as a “guarantee”. That is, a “guarantee” is one of the ways to secure the interests of the creditor during the performance of obligations under a legal transaction.
Key Conditions for Receiving Payment Under a Guarantee
Under a guarantee, a bank or other financial institution (guarantor) guarantees to the creditor (beneficiary) that the debtor (principal) will fulfil its obligation. The guarantor is liable to the creditor for any breach of obligation by the debtor [1]. Thus, Ukrainian legislation defines a special entity for the guarantor, which can only be a bank or other financial institution. Not just anyone can act as a guarantor in an obligation. For a guarantee agreement, as for any security agreement, the written form of the agreement is mandatory, otherwise the agreement will be null and void [2].
Another feature of a guarantee is that it does not depend on the principal obligation (its termination or invalidity), even if the guarantee contains a reference to the principal obligation [3]. Therefore, this type of security for the performance of obligations, such as a guarantee, can be considered more reliable, since even the termination of the principal obligation should not affect the validity of the guarantee.
As for the essence of a guarantee, it should be noted that it is actually the guarantor’s obligation to pay the creditor a sum of money in accordance with the terms of the guarantee in the event of a breach by the debtor of the obligation secured by the guarantee [4]. In other words, securing the performance of obligations under a transaction consists in receiving monetary compensation if the debtor under the transaction has breached its obligations to perform the obligation properly.
In order to receive funds under the guarantee, the beneficiary must submit a written request and documents specified in the terms of the guarantee to the guarantor. When concluding a guarantee agreement, both the guarantor and the beneficiary should pay special attention to the terms and documents that may be required in the future to receive funds, as well as the term of the guarantee. This is important because if the claim or the documents attached to it do not comply with the terms of the guarantee, or if they are submitted to the guarantor after the expiry of the guarantee, the guarantor has the right to refuse to satisfy the beneficiary’s claim.
Payments Under a Guarantee: Court Practice
As noted by most courts until 2024, in accordance with the established practice of the Supreme Court, which is common in disputes over debt collection under a guarantee, the guarantor’s obligation to pay the beneficiary a sum of money in accordance with the terms of the guarantee arises if the principal breaches the obligation secured by the guarantee and the beneficiary sends the guarantor a written demand together with the documents specified in the guarantee. If one of these conditions is not met, the guarantor is not liable [5].
In 2022, the Supreme Court even emphasised the legality of the guarantor (bank) going beyond purely formal requirements when the bank verifies the authenticity of the beneficiary’s claim, and concluded that the guarantor has the right to refuse to perform its obligations under the guarantee if there is no confirmation of the guarantee case. The Supreme Court ruling states: “The Supreme Court has repeatedly noted that when resolving a dispute over the existence of the guarantor’s obligation to pay under the guarantee, the subject of proof includes, first and foremost, an examination of the existence or absence of the relevant obligation – the guarantee case (breach by the debtor of the obligation secured by the guarantee), rather than a formal examination of the mere existence of a claim for payment under the guarantee” [6].
In other words, the answers to the following questions were important for the guarantor’s performance of its obligations under the guarantee agreement: whether the claim and the documents submitted by the beneficiary comply with the terms of the guarantee agreement, whether a guarantee case has occurred under the guarantee agreement, and whether the beneficiary has provided sufficient evidence to confirm the occurrence of a guarantee case. In a situation where the beneficiary had not provided sufficient evidence to prove the occurrence of a guarantee event under the guarantee agreement, there were grounds for the guarantor to refuse to make a cash payment under the agreement.
Position of The Supreme Court after 2024: The Guarantor Has no Right to Investigate the Circumstances of the Occurrence or Non-Occurrence of a Guarantee Event
The approach of judicial practice to the issue of the guarantor’s right to refuse to pay funds under the guarantee in the event of failure to prove the occurrence of a guarantee event changed in 2024, when a resolution was adopted by the Joint Chamber of the Commercial Court of Cassation (hereinafter referred to as the Resolution of the Joint Chamber of the Commercial Court of Cassation) [7].
According to the conclusions in the Resolution of the Joint Chamber of the Commercial Court of Cassation: “The Supreme Court (…) concluded that the provisions of the Commercial Code of Ukraine and the Civil Code of Ukraine, which regulate the enforcement of obligations by a guarantee and its legal nature, should be understood to mean that the guarantor is not entitled to make its own conclusions regarding the existence or absence of the principal’s obligation, but is obliged to pay under the guarantee if the claim and the attached documents (if provided for by the terms of the guarantee) externally comply with the terms of the guarantee. Article 565 of the Civil Code of Ukraine provides an exhaustive list of cases in which the guarantor has the right to refuse to satisfy the creditor’s claim. This list, in particular, does not contain such grounds for the guarantor’s refusal to pay as the absence or failure to prove by the beneficiary of a breach of the principal obligation by the debtor” [8].
In other words, the Supreme Court stated that the guarantor has no right to investigate the circumstances of the occurrence or non-occurrence of a guarantee event under the guarantee agreement, but instead must only verify the beneficiary’s submission of a proper claim and the documents provided for in the guarantee agreement. As stated in the Resolution of the Grand Chamber of the Supreme Court: “When resolving a dispute over the existence of the guarantor’s obligation to pay under the guarantee, the subject of proof does not include an investigation into the existence or absence of a breach by the debtor of the obligation secured by the guarantee” [9].
In fact, it was stated that a purely formal approach must be followed when deciding on payment under the guarantee. If the claim and the documents attached by the beneficiary comply with the terms of the guarantee, the payment must be made by the guarantor. Otherwise, if, for example, the beneficiary has not submitted the mandatory documents under the terms of the guarantee agreement, the guarantor will have the right to refuse to make the payment. And even in a situation where the beneficiary has not proven the occurrence of a guarantee event under the guarantee agreement, this does not give the guarantor the right to refuse to make a guarantee payment, since the beneficiary is not obliged to prove a breach of the principal obligation by the debtor.
Risks for Banks in Guarantee Agreements: Recommendations
Previously, banks prioritized verifying the principal’s breach of obligation and checking the evidence provided by the beneficiary. However, it is now critically important for financial institutions to carefully and thoroughly specify in the terms of the guarantee agreement the requirements regarding the form and documents that must be submitted to the beneficiary in order to receive payment.
In practice, Ilyashev & Partners Law Firm advises clients on preventing risks arising from the conclusion of guarantee agreements. In particular, in one case, the Ilyashev & Partners team assisted a client in developing the terms of the agreement, which made it possible to minimise potential disputes regarding the form and content of the guarantee requirements. Such preventive measures allow for effective protection of the guarantor’s interests in court.
That is why it is advisable to consult legal advisors, such as lawyers who specialise in the analysis and development of guarantee agreements, as well as in court practice in disputes related to the performance of guarantee agreements, in order to obtain legal assistance in the process of preparing an agreement to protect the interests of the guarantor. An experienced lawyer will be able to provide recommendations on how to protect the guarantor’s interests in light of the current conclusions of the Supreme Court.
[1] Civil Code of Ukraine No. 435-IV of 16 January 2003, Art. 560.
[2] Ibid., Art. 547.
[3] Ibid., Art. 562.
[4] Ibid., Part 1 of Article 563.
[5] Resolution of the Commercial Court of Cassation dated 18 October 2018 in case No. 910/21641/17: https://reyestr.court.gov.ua/Review/77247874; Decision of the Commercial Court of Cassation dated 21 December 2021 in case No. 910/17772/20: https://reyestr.court.gov.ua/Review/102147703.
[6] Resolution of the Commercial Court of Cassation dated 8 June 2022 in case No. 910/9397/20: https://reyestr.court.gov.ua/Review/104896138.
[7] Resolution of the Joint Chamber of the Commercial Court of Cassation dated 17 May 2024 in case No. 910/17772/20: https://reyestr.court.gov.ua/Review/119618126.
[8] Ibid., para. 102.
[9] Ibid., para. 84.
