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FIRST DEMAND BANK GUARANTEES First demand bank guarantees are more commonly used every day, in both

private and administrative contracts (those entered upon with public entities), usually just to satisfy a formal requisite, but without measuring or understanding the risks associated to its inappropriate structuring, which are very high due to the first demand bank guarantees inherent characteristics. Stricto Sensu, and in its broader meaning, bank guarantees are securities given by a bank to warrant compliance of any obligation. Usually they are requested by clients in benefit of their creditors and by demand of these. Bank guarantees are structured by Banks according to their clients needs, respecting -of course- certain limitations set forth in regulation, but without having to follow a specific model, or imperative legislation regulating the subject in a special or rigorous fashion, as happens with the insurance contract. It is of common occurrence, thus, that the definition of characteristics and reach of the guarantee result from the position of the party that requests it, so that it satisfies its needs and provides cover for the level of risk derived from an eventual default of the main obligation. This implies, hence and by general rule, that the guarantee is an accessorial compliance mechanism, linked precisely to the outcome of the secured main obligation. But in the guarantees' evolution process and in a growing tendency to favor more efficiently the beneficiarys position, first demand guarantees are being used more and more. These guarantees are, unlike their predecessors, issued independently and irrevocably, allowing to be made effective by the creditor

through a mere request, and the presentation of certain previously agreed upon documents, without having to prove default of the main obligation, nor allowing for the applicant-debtor to invoke in his defense the fact of compliance. When issuing a bank guarantee of this nature, according to legal or contractual requirements, one must bear in mind that this is not made merely to comply with a formal requisite but to obtain real coverage for risks that are implicit in its issuance, as well as know the vicissitudes that could eventually affect the guarantees effectiveness despite its apparent strength. In the last years, Rodrguez-Azuero Abogados has taken part in the study of several cases related mainly with two typical risks derived from the use of first demand guarantees: the apparent excess in the guarantees executions for its total amount, against the debtors interest, or the executions delay by the bank despite of the request, against the creditors position. The first hypothesis may appear more frequently when the guarantee is issued to secure long term contracts such as public work contracts, since the alleged default that allows the beneficiary to make the guarantee effective could occur when the project has been almost fully completed, situation that would make the debtor feel that an execution for the complete guarantees amount is excessive if compared to the controversies arising between the parties. The opposed situation appears when, despite being a first demand guarantee, it is structured and issued in a way making it no longer independent and hence having its execution directly or indirectly connected to the main contract, opening a space for the bank to refrain from paying when his client (debtor)

claims that no breach has taken place and thus no execution may occur. This would imply for the creditor a loss in the guarantees pursued efficacy. Given the above, it is mandatory for both creditors and debtors alike to have in-depth knowledge of details and particularities concerning bank guarantees, in order to avoid making common and recurrent mistakes which end-up causing complex and expensive conflicts which could be avoided with an adequate structuring of both contract and guarantee.

IMPORTANT FINANCIAL REGULATIONS IN THE NEAR FUTURE Numerous regulatory texts and initiatives should be expected in the forthcoming months Dynamism in the financial activity, true backbone of a countrys economy, periodically demands a revision of regulation, despite the desire to maintain high stability in this and all topics related to entrepreneurial development. In Fact, the Estatuto Orgnico del Sistema Financiero has become an example of stable and complete regulation that must be upheld, since it compiles, so to say, all dispositions ruling the sector. Nonetheless, a series of recent circumstances would make one think on the need to introduce certain adjustments. These are linked with the recent merger of the Superintendencia de Valores and the Superintendencia Bancaria (Colombian agencies formerly charged with surveillance and control over the stock market Valores- and banking and other financial institutions Bancaria), the new capital markets law, the entry into force of Basel II in regulatory issues, the adoption of the FTA, as well as technological and consumer-

protection related issues that have been vigorously developing in these last years. The new capital markets law alone will require numerous regulations that invite, as we shall proceed, to make a close follow-up on new developments and precisions that shall be made, along with projects that shall come on the aforementioned subjects. Si requiere informacin adicional sobre cualquiera de los temas contenidos en este boletn, no dude en contactarnos en abogados@rodriguezazuero.com

Should you require further information concerning any of the subjects addressed herein, do not hesitate to contact us at

abogados@rodriguezazuero.com

This bulletin was made by the Editorial Board of Rodrguez-Azuero Asociados S.A. for an informative and academic value; therefore its content does not constitute legal advice. The publication of this bulletin is only authorized quoting the source.