Kuwait Court of Cassation principle number 267

Summary: - Letter of guarantee. Its nature. An undertaking that itself creates against the issuing bank an original, abstract or direct obligation to pay its value to the beneficiary whenever so requested within the period specified therein, without regard to any objection by the instructing party, and the bank is discharged like the beneficiary if it does not receive a request for payment from the beneficiary within a validity period. Exception. Express agreement to renew the letter of guarantee before expiry of its term at the beneficiary’s request without the consent of the customer, the “instructing party.” - Absence from the letter of guarantee of automatic renewal or the beneficiary’s right to request its renewal for another period before expiry of its term. Effect thereof. The bank may extend it only with the customer’s consent and at his request. Reason therefor. Extension of the term is established for the benefit of the instructing customer. Extension of the term without his consent and despite his objection. Its import. The bank’s liability. Rule: The provision in Article 382 of the Commercial Code that “A letter of guarantee is an undertaking issued by a bank at the request of its customer (the instructing party) to pay a specified or ascertainable amount to another person (the beneficiary), without restriction or condition, if so requested within the period specified in the letter ....” and the provision in Article 386 thereof that “The bank shall be discharged vis-à-vis the beneficiary if it does not receive a request for payment from the beneficiary during the validity period of the letter of guarantee, unless renewal of that period is expressly agreed before its expiry” indicate—as established in the jurisprudence of this Court—that a letter of guarantee is a personal and final undertaking that itself creates against the bank an original, abstract and direct obligation to pay its value to the beneficiary whenever so requested within the period specified therein, without regard to any objection by the instructing party. The bank is discharged vis-à-vis the beneficiary if it does not receive a request for payment from the beneficiary during the validity period of the letter of guarantee, unless it is expressly agreed that such period shall be renewed automatically without any need for the consent of the customer (the instructing party), or it is expressly agreed that the letter of guarantee shall be renewed before expiry of its term at the beneficiary’s request without the consent of the customer (the instructing party). Accordingly, where the letter of guarantee contains no provision for automatic renewal or for the beneficiary’s right to request its renewal for another period before expiry of its term, the bank in such circumstances may extend the letter of guarantee only with the customer’s consent and at his request, since extension of the term is established for the benefit of the customer (the instructing party). If renewal takes place without his consent and despite his objection, the bank is liable for it.