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Solid Contractual Guarantees: Relevant in Times of Crisis
It is widely known the delicate economic situation currently affecting Brazil, attributable to various reasons. Recent statistical data on the GDP for the first quarter of the year, officially released by IBGE, confirms what economists had been predicting for some time: that 2015 will be a year of recession and therefore of tightening. It is feasible that, in the current economic scenario, parties often encounter difficulties in fulfilling contractual obligations timely and properly, either due to excessively onerous conditions originally agreed upon due to circumstances beyond their control, or due to inefficiencies in properly managing resources allocated for contractual fulfillment.
In the first case, it may happen, for example, that macroeconomic factors make contractual obligations excessively burdensome for one of the parties, such as in the case of an uncontrolled rise in raw material prices, which invariably increases production costs and thus creates a mismatch between the contracted price and projected results. In this sense, depending on the circumstances of the case and grounded in the theory of unforeseeability, parties are entitled to resort to doctrines such as resolution for excessive onerousness or contractual revision, under articles 478 and 480 of the Brazilian Civil Code of 2002.
It may happen, however, that the imbalance is caused by the non-performance of the parties themselves, such as in late payments by the contractor or non-compliance with the schedule by the contracted party, circumstances that often result in the counterparty's inability to fulfill the agreed-upon terms. Hence arises the inevitable concern, in the commercial scenario, due to the uncertainty of the future outlook and, above all, with the conclusion of new contracts, which implies a series of issues to be observed by the contracting parties.
For these reasons, it is imperative to establish an efficient system that ensures the regular performance of the contract and furthermore ensures that the performance meets the needs of the contracting parties in terms of form, quality, price, and deadlines agreed upon. Moreover, one must not neglect the concern for the efficient and secure satisfaction of any credits. In this regard, the concept of guarantee has been conventionally used to protect the credit of the parties since ancient Roman times, primarily aiming to ensure the fulfillment of the agreed obligations.
In this respect, doctrine and national legislation conceive the concept of guarantee under the division into two main groups: personal guarantee or suretyship and real guarantee. Personal guarantee involves a third-party guarantor assuming the obligation originally incumbent upon one of the contracting parties. Examples of this modality include suretyship, applicable to general contracts and regulated by articles 818 to 839 of the Civil Code, and endorsement, provided in credit instruments and regulated by articles 897 onwards of the same legal statute. It is crucial, when establishing this type of guarantee, to ensure that the guarantor, at the time of offering the guarantee, holds sufficient assets to satisfy the guaranteed obligation, an aspect to be evaluated during negotiation.
Regarding real guarantees, they are secured against movable or immovable property. With this type of guarantee, the property of the potential debtor is linked to the satisfaction of the credit with the faculty of erga omnes opposability, thereby limiting the exercise of its property rights. In the case of real estate, the mortgage is a notable example, alongside the anticrese, where the property is delivered to the creditor who receives "in compensation for the debt, the fruits and income" (article 1,506, Civil Code) of the property, as well as usufruct, real right of habitation, among others. Concerning movable property, common pledges are coupled with agricultural, livestock, industrial, and commercial pledges, as well as pledges of rights and credit instruments.
It should be noted that there is no legal prohibition against establishing atypical guarantees, provided they do not violate legal standards, allowing parties to agree on them as circumstances require. Thus, given the extensive range of options offered by national legal standards regarding guarantees, it is necessary to assess, on a case-by-case basis, the option that potentially presents the highest execution efficiency, whether judicially or extrajudicially.
Indeed, there are situations where the execution of guarantees becomes feasible extrajudicially, while in other cases, it will be necessary to litigate in court to enforce the guarantee, despite the specificity of the judicial enforcement procedure, which usually involves higher costs, direct or indirect, and a significant increase in time to obtain indemnification, aspects that must also be considered when contracting the guarantee.
Therefore, considering possible defaults, guarantees composed of a "letter of guarantee" or "bank guarantee," which proves the most advantageous means among other established guarantees in the market, such as corporate guarantees, insurance guarantees, etc., are efficient to a certain extent. It allows direct execution by the beneficiary administratively.
The letter of guarantee, as a form of suretyship, is regulated by article 818 of the Civil Code, according to which "a person guarantees to satisfy a creditor an obligation assumed by the debtor, in case the latter does not fulfill it." It constitutes a guarantee provided by a financial institution and is of an onerous nature, as the guaranteeing bank charges a commission from the client to provide it. It involves a specific legal relationship, involving the banking institution (guarantor, principal payer), who receives the guarantee (guaranteed party, with part of their assets immobilized to respond for any non-performance of the main contract that specifies the obligations and rights of the insured and the contractor) and who contracts the work, materials or services (creditor who, in the event of non-performance, will resort to the court for the work, goods or services to be delivered).
For your information, the bank guarantee letter is generally contracted for a specified period of validity, with the possibility of renewal. Financial charges include an upfront commission on the amount of the guarantee (usually not less than 30 days); security through promissory notes, securities, mortgages, or fiduciary alienation, and a requirement for insurance of the assets provided as collateral and interest. Its main benefit, if provided by a first-rate financial institution and within international standards, lies in liquidity and the practicality of execution, usually carried out administratively and occasionally judicially, requiring attention to the reliability of the guaranteeing financial institution.
To take advantage of this type of contractual guarantee, however, it is necessary to verify the conformity of the conditions stated in the letter with the real interests of the parties, so that an excess of conditions and/or formalities does not hinder the liquidity and eventual execution of the provided guarantee.
In this respect, due to the liquidity of the bank guarantee, the counter-guarantees requested by financial institutions for its issuance resemble the cautions required for granting a loan, and in some cases, a deposit in financial applications of the banking institution providing the guarantee may be required, the so-called cash collateral, which constitutes the main negative aspect of the guarantee in question: the high value for contracting.
In any case, there are other types of guarantees that are also advantageous in the commercial scenario. The insurance guarantee, for example, is a type of insurance contract provided by the parties as a guarantee, which effectively allows the continuation of the execution of the work, the supply of goods, or the provision of services, in case of non-fulfillment of obligations (claim). It also allows the release of bank credit from the taker so that they can perform other financial operations, such as financing for the execution of their contracts and projects. Among the main types of insurance guarantee, the most common are the advance payment insurance and the performance bond insurance, or performance insurance.
The insurance guarantee has reasonably low costs compared to bank guarantees but, in return, depends on the notification of the occurrence of the claim and the analysis by the insurer of the circumstances, responsibilities, and amounts involved. Such analysis, given the complexity of the facts involving large contracts, is usually time-consuming and often results in a denial of claim recognition, requiring the insured party to resort to the judiciary to claim the amount covered by the insurance guarantee.
It should be noted, for your information, that under Susep Circular No. 477/13, which governs this type of insurance, insurance policies generally follow standard guidelines, so they may occasionally be unsuitable for the specificities of the contract. For this reason, it is common for the insured contracting party not to pay attention to the "fine print" and real conditions imposed by the policy, which may become a hindrance to its execution.
Moreover, among the types of suretyship guarantees, there are guarantees provided by parent companies or controlling entities of the contracting parties, known as corporate guarantees or parent company guarantees. The main advantage of these guarantees under review, obviously, is that they do not entail any cost. However, the creditor may face obstacles when activating the guarantee, as extrajudicial execution depends on the good faith of the guarantors, often necessitating the creditor to resort to the judiciary to satisfy the credit.
Finally, another widely used contractual guarantee is the establishment of linked accounts or escrow accounts, where the guaranteed amount is deposited in a reputable financial institution, awaiting authorization from the other party for its effective payment. Neither party can withdraw the deposited amount without the other's authorization; thus, in the event of a dispute without consensus, the funds remain unavailable until a judicial – or arbitral – decision determines to whom they should be released, significantly ensuring its enforcement. The main negative aspect of linked accounts, however, lies in the excessive power granted to the contracting party, as the decision regarding the release of funds remains exclusively theirs, often used as a bargaining chip or leverage against the counterpart.
In conclusion, it is undeniable that the crisis, by itself, will not constitute an obstacle to the achievement of economic interests and intended businesses. Indeed, the enormous variety of typical contractual guarantees, as well as the freedom to establish atypical guarantees by the parties, given it is not prohibited by national standards, constitute versatile skills allowing parties to agree on the guarantee modality that seems most effective for each contract, as they see fit and respecting legal limits. However, it is necessary to weigh the advantages and disadvantages of each and pay attention to defining the one that best serves contractual interests, with appropriate legal guidance and a detailed analysis of all variables involved, both in the establishment of the guarantee and in its requirement.
Alexandre Sion, Maria Carolina Dutra, and Caio de Pádua