Unconditional Bank Guarantees Issued Under Kazakhstan Law: Practical Difficulties Which Foreign Creditors Should Be Aware Of.

Introduction

A guarantee, as a means of securing the performance of a commercial obligation, is widely applied among businesses operating within the territory of Kazakhstan and abroad. In our practice, we come across many instances where domestic Kazakhstani companies obtain guarantees to secure the performance of their obligations to foreign creditors. Generally, foreign creditors prefer a guarantee to be issued by a reliable bank in Kazakhstan. It is also important for foreign creditors that the bank guarantee is unconditional, i.e. payable on first demand. On a number of occasions, we have seen that guarantees issued under Kazakhstan law were not as effective as expected by foreign creditors - they were not always payable on first demand. In this article, we would like to share some thoughts on the legal aspects of unconditional bank guarantees (hereinafter "UBG") issued under the laws of Kazakhstan and practical difficulties associated with their use which foreign creditors should be aware of.

It is generally envisaged that a bank which issued a UBG must satisfy a creditor's demand without raising any counter conditions to a beneficiary (creditor) demanding the payment. Under the UBG, the bank should not examine existence of grounds for payment under the UBG. In order for payment under the UBG to be made a creditor's written demand to the bank would be sufficient. In the case of the UBG, a creditor does not bear the burden to prove that a default under the main obligation has occurred. It is, therefore, presumed that the UBG is less risky to creditors willing to receive payment under a guarantee, as compared to an ordinary bank guarantee.

Practice shows, however, that the UBG contains substantial risks to creditors to receive payment quickly - this is not always possible. In a number of situations, UBGs proved to be insufficiently effective under the laws of Kazakhstan which effectively means that, in practice, UBGs issued by banks in Kazakhstan do not materially differ from ordinary bank guarantees. This may come as a surprise to foreign creditors not accustomed to a situation when recovery of funds under the UBG, in a number of situations, can only be ensured following protracted and costly litigation, provided that at the end of it, the demand for payment is recognized by court as being legitimate. In our opinion, these practical difficulties with the exercise of creditors' rights derive from inadequacies in the Kazakhstani laws of civil procedure.

Below, we briefly discuss the regulation of the UBG under Kazakhstan law and international experience, providing examples of cases in Kazakhstan, and propose possible modifications of the law which could improve the situation.

Legal Regime of UBG in Kazakhstan

Kazakh law does not distinguish the UBG as a separate category of guarantee. General rules governing the issuing of a guarantee are set forth in Chapter 18 "Security of Obligations" of the RK Civil Code (the "Civil Code"). Requirements applicable to a bank guarantee are provided for in "Regulations Governing Issue of Bank Guarantees", as approved by Resolution of RK Financial Monitoring and Supervision Agency dated April 28, 2008 No. 55. Given that laws of Kazakhstan do not distinguish the UBG as a separate category of a guarantee, UBGs offered by banks in Kazakhstan are a product of...