Bank Guarantee Letter and Noteworthy Issues

Lawyer Pham Quoc Tuan

Lawyer Than Trong Ly - Paralegal Hoang Thi Hoai Thu


In early 1970s, the rapid development of the oil producing countries in the Middle East made it possible for them to sign many large contracts with Western companies. For the sake to ensure safety and minimize risks in performing those contracts, a need arose for a guaranteed by a third party with good credibility and strong financial capacity. Therefore, bank guarantee was born as from this time[1].


Nowadays, this form of bank guarantee is applied to a lot of civil and commercial transactions, especially in the construction field. In Vietnam, although many legal documents have been issued on the guarantee matter, their implementation in practice shows a lot of inadequacies as mentioned in the following dispute case.

Dispute arising out of the unclear content of bank guarantee letter

Minh Nam Contractor[2] (“Minh Nam”) and Kyan Vina Company (“Kyan Vina") signs a contract for supply and installation of a firefighting system (“Contract”) for the latter’s factory in Dong Nai province. Under the Contract, the parties request a bank in Dong Nai province (the “Bank”) to issue a guarantee letter on Minh Nam’s obligation of one (01) year warranty with a guarantee value of 500,000,000 VND (“Guarantee Letter”).   

The Guarantee Letter prescribes, “The Bank undertakes to pay the creditor a sum not exceeding the guarantee amount in five (05) working days from the date the Bank receives the creditor’s following documents: (i) Original of the creditor’s demand, stating the obligor is in breach of its obligation under the contract; and (ii) Original of the guarantee letter”.  

On the final day of the validity period of the Guarantee Letter, Kyan Vina sends a dossier requesting the Bank to transfer all of the guarantee amount to Kyan Vina because of contract violation by Minh Nam. Afterwards, the Bank proposed Minh Nam to reply Kyan Vina’s request, at the same time, requesting Kyan Vina to provide additional evidence of the violation by Minh Nam before the Bank performs Minh Nam’s obligation.  

Minh Nam sends the Bank an official letter indicating violation by Minh Nam in executing the project not in compliance to the design. Also in its official letter, Kyan Vina affirmed that it was not responsible to prove that Minh Nam violated the specific warranty obligations but show that Minh Nam violated any obligations in the Contract and submits the full dossiers as prescribed in the letter of guaranty.

Minh Nam replies in writing to affirm:  (i) the violations raised by Kyan Vina are not related to Minh Nam’s warranty obligation; (ii) Minh Nam has fulfilled its warranty obligation; and (iii) Kyan Vina has accepted the work. Hence, Minh Nam does not allow the Bank to disburse the guarantee sum to Kyan Vina.

Risk to the parties…

In the above situation, how should the Bank make a decision ensuring the interests of the parties in accordance with to the law? Under Article 3.1[3], Article 3.12(a)[4] of Circular No. 07/2015/TT-NHNN dated June 25th, 2015 ("Circular 07"), the Bank has to perform the guarantee obligation in the case Minh Nam fails to undertake or inadequately completes the warranty obligation committed to Kyan Vina under the Contract. However, the question is (i) whether or not Kyan Vina must prove violation by Minh Nam of its warranty obligation; and (ii) whether the Bank has competence in considering evidence provided by the parties to decide if Minh Nam breaches the Contract or the Bank must transfer all of the guarantee money prescribed the letter of guarantee to Kyan Vina after receipt of the regular dossiers.

Regarding this matter, Article 15.1 of Circular 07 regulates that the parties must include condition of performance of guarantee obligation in the Guarantee Letter. However, this provision is just a general guidance and lets the Parties themselves mutually agree upon the matter, and does not prescribe in detail and clearly (i) conditions of performance of guarantee obligation; (ii) whether the creditors must prove that the obligor violates its obligation or not. Furthermore, the bank obviously has no right to settle the dispute like the court.

Therefore, in such case, there is no ground to define whether the Bank must perform its obligation of guarantee after receipt of the dossier un the Guarantee Letter.

Although Circular 07 stipulates that the guarantor performs its guarantee obligation only when the obligor [Minh Nam] does not undertake or inadequately completes the warranty obligation committed but if the Guarantee Letter does not clearly prescribe the conditions and documents which creditor must satisfy, especially the provisions on the rights and obligations of the parties in performance of the commitment of guarantee, the dispute may arise among those parties.

In such situation, the Bank decides to refuse disbursing the guarantee money to Kyan Vina. However, we can see that where the Bank bases on the letter of guarantee and the ideas of the parties after generating of dispute to agree or not in transferring guarantee amount to Kyan Vina, the Bank also faces some possible troubles of being sued by the parties relevant to the refusal of the Bank’s obligation or facing the claims for damage compensation.

To Kyan Vina, to protect its interests, Kyan Vina may incur a lot of expense and time to settle the dispute at the competent authorities but may not win the case.  

Minh Nam has to be on the rage edge of losing the guarantee sum, because it is highly likely that Kyan Vina will sue the Bank and if the Bank loses the case, Minh Nam must refund the guarantee money to the Bank.

Experience for similar situations

Experience by case above, to protect the parties’ interest when participating a guarantee relationship, apart from the provisions of guarantee scope, guarantee duration, it is strongly recommend that parties should prescribe conditions and documents requesting the bank to perform its guarantee obligation in detail and with clarification, such as the following provisions (i) the Creditor must provide evidence of  violation by the obligor in performing the obligations committed; (ii) the Creditor must inform the obligor about violation and reasonable time to fix such infringement; and (iii) after such time limit, if obligor fails to undertake or inadequately completes the warranty obligation, the creditor will have the right to request the bank to transfer the guarantee amount to it. 

Besides, Circular 07 should be amended and supplemented in such a way as to provide detailed stipulations as mentioned above. This supplement is basically in accordance with Article 3.1, 3.12(a) and Article 15.1 of Circular 07, but more important, it may help ensure the right and obligations of the parties and prevent disputes from arising between the parties related to the letter of guarantee in performing the contract.

[2] All companies and personal names used in this article are for illustrative purposes only, which do not point out, refer or relate to any companies or people with the same name in fact.


[3] Article 3.1 of Circular 07

Bank guarantee refers to a type of credit whereby the guarantor undertakes to act on behalf of the obligor to fulfill their financial obligations to the obligee in the event the obligor fails to fulfill or insufficiently fulfill their agreed-upon obligations to the obligee; the obligor must take on their debt obligations and repay the guarantor.

[4] Article 3.12(a)  of Circular 07

Letter of guarantee refers to the written commitment between the guarantor and the obligee to the guarantor's fulfilling the financial obligation on behalf of the obligor in the event the obligor fails to fulfill or insufficiently fulfill agreed-upon obligations to the obligee.