Bank guarantee vs. Commercial surety Bond in Honduras

In Honduras, and internationally, it is usual that, at the time of public or private bids, it is established as an unavoidable requirement the submission of one or more bonds or bank guarantees that serve, at least the main one, to ensure the performance of the guaranteed contract. In the Honduran legislation both figures are regulated in the Code of Commerce, without making a clear distinction between one and the other guarantee, but, on the contrary, both are identified by the same characteristics and effects, being called commercial bonds, since the denomination bank guarantee does not appear in the Code of Commerce as a contractual species.

An important difference between both figures in practice is that surety bonds are issued by insurance companies and banking institutions issue bank guarantees. However, in both cases, the guarantors must be institutions supervised by the National Banking and Insurance Commission.

We consider it useful for our clients and the general public to define the referred concepts and study the treatment that our legislation gives to the referred legal figures.

Art. 1308 of the Code of Commerce provides when a surety bond is mercantile in the following terms:

“The surety contract constituted by companies that professionally practice this operation and the one granted by banking establishments shall be mercantile” (emphasis added).

From the aforementioned text, it is of great interest to note that, for practical purposes, in our mercantile legislation, the mercantile bond and the bonds granted by banking establishments are governed by the same provisions of art. 1308 to 1312 of the aforementioned Code, considering the bank guarantee as a mercantile bond. From the study of the mediate and immediate sources of Honduran commercial law (legislation of Mexico and Italy), no regulation like the one referred to above has been found, for which reason we assume that the phrase “and that granted by banking establishments” was a deliberate addition by the Honduran legislator at the time of drafting said body of law.

The following articles establish the particularities of a commercial surety bond, which we quote below:

    • 1309: In the mercantile bond the surety is liable for the principal, without the benefit of excusion.
    • 1310: The commercial surety shall be in writing, and, for this purpose, the surety shall issue a policy to the person with whom he has contracted and in favor of the oblige, in which all the elements necessary for the validity of the contract shall be summarily expressed.
    • 1311: The commercial surety may become a party and shall have all the rights inherent to this character in the business of any kind, and in the processes, lawsuits, and other judicial proceedings in which the surety grants a bond, in all that refers to the liabilities derived therefrom.

Our interpretation of the provisions referred to in this article is as follows:

    1. Commercial bonds and bank guarantees are governed by the same legal provisions.
    2. Both contractual species are differentiated by name and by the entity issuing them (insurance companies vs. banking institutions).
    3. The commercial surety is a commercial co-debtor, and this is confirmed by 1309 which eliminates the benefit of excusion, and Art. 1311 which empowers the commercial surety to participate in the processes, lawsuits, and other judicial proceedings in which it grants a surety bond.
    4. Being a commercial co-debtor, the obligation of the commercial surety is joint and several with that of the principal debtor (art. 711 of the Code of Commerce). In Honduran practice, we have found that, in the case of some bonds issued by insurance institutions, although legally they should not enjoy the benefit of excusion, contractually they include clauses that limit their execution until having exhausted the arbitration or judicial procedure that settles the controversy originated by the breach of the guaranteed contract.

On other occasions, in practice, it has been possible to enforce bank guarantees by simply requesting payment from the guarantor bank. In our experience, we have found that there may be both surety bonds and bank guarantees that establish a variety of conditions for their enforcement, so it is always advisable to have such documents previously reviewed by specialists in the field, whether you are in the position of beneficiary, ordering party or guarantor.

At the international level, this is a subject of wide doctrinal and jurisprudential discussion. The International Chamber of Commerce (ICC), in an effort to unify criteria, has implemented a set of uniform rules for the practice of first-demand guarantees and bonds. From 1992 to 2009 the Uniform Rules for Claims Guarantees (URDG 458) were in force. From 2010 to date, URDG 758 has been implemented, which is not limited to updating URDG 458, but is the result of an ambitious process that aims to provide a new set of rules for first demand guarantees in the 21st century, presenting rules that are clearer, more precise and complete.

According to the work “Las Garantías del Crédito” 2nd Updated Edition, Volume II, by author Carlos Alberto Villegas, “the ICC Uniform Rules for contractual guarantees (publ. 325), have been used and continue to be used to a certain extent, and try to solve the problem of abusive claims by requiring the beneficiary, in order to obtain payment of the guarantee, to present a court decision or arbitration award”.  Of course, the scope of application of such rules is limited to guarantees that expressly include it in their text.

Thus, we are dealing with an issue that is somewhat debatable as to the uniformity of criteria but that, as can be seen from the research carried out, has international instruments that allow to ensure prompt and efficient execution of this type of document so commonly used in local and international transactions.