Guarantees on First Demand in France

Until recently, it was French financial and banking practice to rely on the Civil Code's statutory guarantee or on letters of intent, support, or comfort in situations where a financial institution or company would not extend credit to one party without the financial backing of a third party. The letters of intent, support, or comfort is of doubtful legal efficacy and offers the least satisfactory remedy to the creditor upon default of the principal debtor. Influenced by the development in other industrialized countries of new security instruments, France's courts have recognized and circumscribed the guarantee on first demand, also called international guarantee letters. This device is viewed as autonomous, abstract, and unconditional, unlike a statutory guarantee. The courts have ruled uniformly that the only defense to payment under a guarantee on first demand is the manifest presence of fraud. The ability of French suppliers to obtain court injunctions against payment of these independent guarantees and the ensuring delays in payments have undermined foreign confidence in their ability to produce immediate payment.