A conflict of interests between the guarantor and the obligor in bills of exchange

In the Central European countries, a surety for a bill of exchange has been a frequent and - of course, only for creditors - attractive instrument of securing the relationship relating to bills of exchange. In the past, people did not make use of this instrument so frequently as nowadays, using more often the surety effects of other declarations on bills of exchange. Paradoxically, they did so because of the features for which surety is so attractive nowadays.

A need for an additional surety with using such a specific instrument made the potential buyers of a bill of exchange more suspicious than confident. Thus, it was more discouraging than appealing for them when deciding whether to invest in the bill or not. The modern practice has moved quite far away from this business subtlety. A guarantor present on a bill of exchange is commonplace in the post-Communist countries.

As the law relating to bill of exchange in these countries is unified by the Geneva Bill of Exchange Model[1], it is extremely useful for the jurisprudence to follow the current case law. This paper is intended to familiarize the reader with the current challenge faced by the Czech courts: the misuse of surety by a dummy (simulated) guarantor who will sign the bill without the principal obligor's knowledge. This is a somewhat peculiar "Central European" contribution to the mosaic of the case law relating to bills of exchange.

Generally, there is a view that the guarantor can only assert such claims that are based on his own relationships with the owner of the bill of exchange but not on the relationships of the person for whom he stands surety (the obligor) in relation to the creditor.

The guarantor may contractually "assume" the claims of the obligor by stipulating them in his own agreement with the creditor[2] - these are then claims derived secondarily from "his own relations". Without such an agreement[3], the guarantor is subject to the creditor's claim without a material defense which is used by the obligor against the creditor[4].

So far, this has been a predominant opinion in both the legal theory and practice, but a different view cannot be excluded to appear in the future. Art. 1 32 (1), according to which the guarantor is bound as the person who stands surety, allows for it. It is also a matter of consideration whether the pitiful weak position of the guarantor as far as claims are concerned cannot be mitigated by the fact that an agreement between the guarantor and the creditor (about "assuming" the obligor's claims) will be taken more as a standard and not as an extraordinary exception.

Regardless of the outcome of these discussions, there will be a breakthrough into the causal and other claims of the obligor where the guarantor is a consumer (cf. the above-mentioned ruling of the Constitutional Court of 16 September 2015, sp. zn. I. ÚS 290/15[5], even in the context of a more general groundbreaking judgment of the Supreme Court of the Czech Republic, sp. zn. 29 Cdo 1155/2014, dated 17 December 2015[6]).

The same can be said, at least partly, in the case of surety given in a (blank) bill of exchange by the one who was at the same time a representative of the obligor: an example may be the aval of a member of a statutory body who signed the bill for the corporation as its representative, while at the same time guaranteeing it as a natural person.

Although he is not a consumer, as confirmed by the case law of the Court of Justice[7], he negotiates a bill of exchange contract for the corporation in question and it can reasonably be expected that he has negotiated the use of the bill on the same conditions as against himself (e.g. the Supreme Court judgment of 30.6. 2009, sp. zn. 29 Cdo 3727/2007 which concerns a blank bill of exchange, though).

The purpose of this paper, however, is not to answer the question whether a guarantor is entitled to assert his "own" claims as a guarantor. Therefore, the reader should take the short summary mentioned above as an indicative and preliminary one, as these complex questions deserve a more detailed analysis.

The summary was only meant to be the starting point for considering another problem: how can the obligor for whom a bill of exchange has been guaranteed by another person without his knowledge and against his will defend himself?

Considering the consequences, the person who should pay the most attention when there is a requirement for guaranteeing a bill of exchange is the one for whom the guarantee is being made, i.e. the obligor.

In the case of bills loaded with this principal obligor's claims, it is possible that the owner of the bill of exchange will only exercise the rights against the guarantor and will avoid the obligor - being afraid of his relevant claims, of course[8].

The guarantor cannot defend himself with these claims unless he has stipulated them in a special agreement with the creditor in question (i.e. in his own contract on the bill of exchange) - with the exception of one of the specific cases mentioned above.

If the guarantor loses in the dispute and pays, he will, of course, assert his right to recover against the obligor. The obligor will not be able, within this recourse, to bring such claims that he could have been able to bring against the original creditor (suppose the absence of a bills of exchange contract to the contrary). There is a prevailing opinion that the guarantor, having paid, does not acquire the bill of exchange derivatively. The defense of the obligor against the recourse of "his guarantor" is only possible under the conditions defined in Article I § 17 (acting willingly to the detriment of the debtor being proved)[9].

In practice, the result will be that the principal creditor will have his own way at the expense of the principal debtor. The bill charged with claims will be paid, in the end, by the main debtor – i.e. indirectly through the guarantor. Eventually, the debtor will be affected as he has actually lost his claims from this own relationships to the creditor. This is not a consequence of endorsing, as the same conclusion applies to bills of exchange transferrable by assignment of the debt (i.e. bills to name).

In the Czech Republic, unfortunately, the above mentioned claim restriction is sometimes misused. Typically, it may look like this: the drawer signs and duly emits a confirming bill of exchange. The basic bill of exchange includes, among other things, a clause making it a bill to name; it is then a bill to name that will be transferred by assignment of the debt. The clause has been included in the bill by the drawer so as not to get in trouble if the bill were transferred to a third person (see Article I § 17 of the Act on Bills of Exchange and Checks). The bill is not guaranteed by anyone, which was not even thought of at the time of drawing nor has it been agreed upon or planned to be done in the future. Then a dispute will arise between the parties about the validity of the claim which is confirmed by the bill. According to the drawer, the bill should be returned or officially destroyed.

Therefore, the drawee (in order to prevent potential claims from his own relationships which have a great chance of succeeding) has an affiliated dummy person "to guarantee" the bill. This person has no connection with the drawer: the drawer does not know him at all and would have never agreed with the guaranteeing. The drawer will refuse to pay the bill, and only when the bill is presented he finds that an aval - provided by a completely unknown person – is on the bill.

This unwanted guarantor will "pay" for this (confirming and now also securing) bill. He will do so either without speaking - as the approach of courts to causal objections from the debtor makes any defense useless - or he will play a role in a pretended dispute which is aimed at a quick loss.

Subsequently, this unwanted guarantor conducts his own recourse. In the ordinary surety it applies that if the guarantor makes the creditor whole without the debtor's knowledge, the debtor has got, in principle, all the claims he could have brought against the creditor (except for those that were not notified in due time, cf. § 2024, Czech Civil Code). Nevertheless, how will we deal with this situation in the law of bills of exchange?

Let us first try to consider whether Article 69 (1) Act on Bills of Exchange and Checks on changes to the text of the bill of exchange applies to the situation in question. The above-mentioned provision recognizes effects of each signature on the bill of exchange on the basis of the context of the bill at the time when the statement was made on the bill. If the text has changed in any way, it cannot retroactively have effect to the detriment of the already signed debtor. Unauthorized changes to the text (which theoretically include an "unwanted aval") are not relevant to the previously signed person.

I consider an argument based on Article I § 69 unjustifiable. Any other statement on the bill cannot be automatically understood as a "change" in the sense of Article I § 69. For example, perhaps it is possible, purely technically, to view an endorsement that is in favor of the new acquirer of the bill as a "change" of the text, however, from the viewpoint of Article I § 69 it would be absurd: the debtor would argue that he was liable according to the original text (i.e. still to the drawee) and that any endorsements were not relevant to him.

Thus, in the case of the "imposed guarantor" it depends on what we will regard as a text in the sense of Article I 69 (not Article I § 32 Act on Bills of Exchange and Checks). More arguments are for the conclusion that this "text" means a context which is relevant to the debtor, i.e. the text with which he identifies. For example, for the drawer it is the entire bill of exchange. In the case of the guarantor what is decisive is the basic bill of exchange (which is the starting point, the presupposition and the condition of the existence of his duties under the bill of exchange), supplemented with his own surety statement. However, other parts of the bill of exchange resulting from additional declarations of other persons - for example, the acceptor, the endorsers, or the guarantor - cannot be considered to be the context of the guarantor's statement pursuant to Article I § 69, Act on Bills of Exchange and Checks.

Nevertheless, I hold the view that even within the recourse of the "unwanted" guarantor the debtor may assert all the claims which he might assert against the drawee of the bill of exchange. The starting point is the application of general corrections: the proven[10] unwanted guarantor does not become a protected acquirer after a fake payment for the bill. These collusive steps of the drawee and the "guarantor" are a clear example of a situation where someone is trying to benefit from his dishonest and unlawful conduct and it is also a manifest abuse of the right to recourse (see § 6, Para 2, and § 8 Czech Civil Code). The third person who plays the role of a dummy guarantor is not the acquirer of the bill of exchange who is protected by the Act on Bills of Exchange and Checks. On the contrary, such a person is himself subject to a subsequent sanction - and perhaps not just within the private law.

The debtor's objections may be supported by the provision of Article I § 17[11], even if it is not the standard context in which this provision is applied. Even when signing[12] - and at the latest "when acquiring the bill" after the alleged payment[13] - the guarantor acts deliberately to the detriment of the debtor. The situation is basically the same as if a bill of exchange were transferred by endorsement while knowing that the debtor will be deprived of causal defense (but the misuse of the bill of exchange will work, unfortunately, also with bills to name, i.e. where the debtor prevents, in other ways and relatively efficiently[14], the effects of the transfer by endorsement).

Regardless of the exclusion of the objection of unauthorized changes to the text, I hold the view that even in the case of a proven, unwanted and unapproved intervention in the form of a dummy surety, the debtor retains, even within the recourse conducted by his "cunning helper", all the causal defense that belongs to him against the drawee of the bill of exchange.

However, the burden of proof that the aval is a fake only to deprive the debtor – i.e. involuntarily guaranteed obligor - of causal defense lies with the debtor himself. However, depending on the circumstances, such a burden can be almost the same as the proof of consciously acquiring a bill of exchange by the endorser to the detriment of the debtor.

[1] In most countries on the Continent the legal regulation of bills and checks is based on the model "Geneva" law (The Uniform Law of Bills of Exchange) which was one of the results of the Geneva Conference held in 1930. The Czech, Polish, Slovak and Hungarian laws are no exceptions in this regard. In these countries the relevant provisions concerning bills of exchange adopt the Uniform Law of Bills of Exchange (or the Uniform Law of Checks) and differences are almost negligible.

[2] The High Court Prague stated in its decision of 17 September 2001, sp. zn. 9 Cmo 44/2001, that "in order for the guarantor (the defendant) to assert a claim arising from his own relation to the owner of the bill of exchange, he must have made an agreement with the owner, specifying the conditions under which he assumed the surety obligation. If the guarantor has made an agreement with another person than the owner of the bill of exchange (...), he cannot assert claims arising from this agreement against the owner of the bill of exchange."

[3] This contract relating to a bill of exchange can also be concluded implicitly (see Baumbach, A., Hefermehl, W., Casper, M. Wechselgesetz, Scheckgesetz, Recht der Kartengestützten Zahlungen, p. 297).

[4] These conclusions are based on not an entirely reliable a fortiori argument  to Article I § 32 - if the material deficiencies do not matter in the obligor (being not bound due to being forced to sign,  legal incapacity, even a false signature, etc.), then the guarantor cannot raise objections as for deficiencies of "inferior kind" - such as the causal defense of the obligor (in German literature, see the summarizing arguments in Baumbach, A., Hefermehl, W., Casper, M. Wechselgesetz, Scheckgesetz, Recht der Kartengestützten Zahlungen, p. 296).

[5] What follows from the reasoning is, among other things, that: "The general courts are also obliged to take into account the circumstances of a particular matter even if respecting the specific, strictly formal nature of the bill of exchange and its historical roots. In the case of consumers who were also affected by the conduct of the drawee (the first owner as the creditor) of the bill of exchange in the given case, the general courts must not disregard their specific interests and status, either. In their decision-making practice, they must seek such interpretative and application bases that prevent the abuse of rights due to the institutes relating to bills of exchange being applied inappropriately to the detriment of any of the participants in the bill of exchange relationships. These premises will also be fully applied when deciding on the admissibility of the guarantor's causal claims asserted in proceedings before the ordinary courts".

[6] The legal sentence in the decision reads as follows: "If an endorsed bill of exchange secures the claim of a drawee for the drawer of a promissory note a consumer contract, the drawer is entitled to claims against the purchaser of the promissory note, those being based on his relations with the drawee, regardless of whether the new owner consciously acted to detriment of the debtor (Article I § 17, Act on Bills of Exchange) ".

[7] Cf., inter alia, the judgment of the Court of Justice of 14 March 2013, C-419/11.

[8] Cf. Kotasek, J., the Act on Bills of Exchange and Checks. Commentary. Prague: Wolters Kluwer CR. 2012, p. 179.

[9] See also Baumbach, A., Hefermehl, W., Casper, M. Wechselgesetz. Scheckgesetz, Recht der Kartengestützten Zahlungen, p. 297.

[10] The burden of proof is borne, in this respect, by the debtor, and, hopefully, it will be sufficient to prevent the speculative application of the objection that the debtor did not give his consent to the aval, or that he did not know about it.

[11] See also Baumbach, A., Hefermehl, W., Casper, M. Wechselgesetz. Scheckgesetz, Recht der Kartengestützten Zahlungen, p. 297.

[12] By this, he does not acquire the bill yet.

[13] This moment is decisive.

[14] Cf. an explanation of the "primary exclusion" of objections in the case of bills of exchange published in Kotásek, J. Kotásek, J. The Act of Bills of Exchange and Check. Commentary. Prague: Wolters Kluwer CR. 2012, p. 138.