1.            There may be a risk that the counter guarantee as defined in Circular 7/2015 dated 25 June 2015 (as amended) may not be considered as a guarantee under the Civil Code 2015 which may results in uncertainty as to the validity and enforceability of the counter guarantee under the Civil Code 2015. Specifically,

1.1.         under Article 335.1 of the Civil Code 2015, guarantee is defined as an undertaking made by a third person (hereinafter referred to as the guarantor) to an obligee (hereinafter referred to as the beneficiary) to perform an obligation on behalf of an obligor (hereinafter referred to as the principal) if the obligation falls due and the principal fails to perform or performs incorrectly the obligation. This suggests that a guarantee must satisfy the following conditions:

1.1.1.     there are three parties involving in a guarantee transaction (i.e. guarantor, principal, and beneficiary);

1.1.2.     there must be an underlying obligation between the beneficiary and the principal; and

1.1.3.     the guarantor shall carry out its guarantee obligation if the principal fails to carry out its obligation to the beneficiary.

1.2.         under Article 3.2 of Circular 7/2015, counter guarantee means a type of bank guarantee under which the counter-guarantor undertakes to the guarantor that it will fulfill the financial obligation to the guarantor in the event that the guarantor must implement the financial obligation on behalf of the guaranteed party being the client of the counter-guarantor; the guaranteed party must take on their debt obligations and repay the counter-guarantor.

This wording definition suggests that from its nature, the counter guarantor is not a guarantee as defined in Article 335.1 of the Civil Code 2015 but an undertaking of the counter guarantor to reimburse the amount already paid by the guarantor only because there is no direct underlying obligation between the guarantor and the guaranteed party.

2.            We however consider that the risk discussed above should not be significant because:

2.1.         Counter guarantee is specifically regulated and recognised by Circular 7/2015;

2.2.         Under Article 3.2 of Law on Credit Institutions of the National Assembly dated 16 June 2010 (as amended) (Law on Credit Institutions 2010), if there is difference between this Law and other laws on the establishment, organization, operation, special control, reorganization and dissolution of credit institutions, the Law on Credit Institutions 2010 will prevail; and

2.3.         Under Article 4.12, 4.14 and 8 of the Law on Credit Institutions 2010, issuing bank guarantees (including counter guarantees) is one of banking activities of credit institutions of Vietnam. Therefore, one can argue that the provisions of the Law on Credit Institutions 2010 (including its guiding regulations such as Circular 07/2015) on bank guarantees should prevail over the Civil Code 2015.

This post is written by Nguyen Hoang Duy and edited by Hoang Thi Thanh Thuy.