Comparative table different types of guarantees under Luxembourg law

First demand guarantee

(garantie à première demande)

Suretyship

(cautionnement)

Professional guarantee of payment

(garantie professionnelle de paiement)

Only defined by Luxembourg case-law, the first demand guarantee is « an undertaking to pay a certain sum, taken in consideration of a main contract and as a guarantee without performance, but constituting an independent obligation and characterized by the unenforceability of the exceptions drawn from that contract ».

The first demand guarantee creates an abstract, autonomous and independent contractual recourse by the beneficiary against the guarantor.

The suretyship is an agreement made between the surety and the debtor whereby the surety undertakes to pay the debtor's debt if the debtor is unable to make the payment.

The suretyship is a guarantee accessory to a principal commitment/obligation and can either be:

• created voluntarily by the parties (contractual guarantee);
• imposed by the law (legal guarantee); or
• settled by decision of the judge (judicial guarantee).
• The suretyship can have a civil or commercial nature.

The professional guarantee of payment is defined as a commitment by which the guarantor undertakes towards a beneficiary to pay, at the beneficiary or an agreed third party’s request, a certain amount, according to specific agreed terms, in relation to one or several claims or risks associated with those claims.

Statutory regime

The first demand guarantee is not governed by a statutory regime but has been developed by practitioners and case-law.

The suretyship is governed by the articles 2011 to 2043 of the Luxembourg Civil Code.

The professional guarantee of payment is governed by the Luxembourg law on professional guarantee of payment dated 10 July 2020 (the “PGP Law”) which introduces a contractual-based guarantee regime.

Form

The first demand guarantee may take the form of a letter or an agreement under private seal with no further formalities.

The first demand guarantee is not subject to any filing requirements.

The voluntarily suretyship may take the form of an agreement under private seal. Neither a notarial deed nor the consent of the principal debtor is required.

A suretyship granted by a natural person is subject to specific formalities.

The suretyship is not subject to any filing requirements.

The professional guarantee of payment agreement must be established in writing, either as a unilateral act of the guarantor or as an agreement between the guarantor and the beneficiary (including in electronic form or any other durable medium).

It can be concluded under private seal and is not subject to any filing requirements.

Differences

The first demand guarantee is a stand alone /self-sufficient security.

The first demand guarantee is characterised by two independent debts with two debtors.

It might however be re-qualified as a suretyship if it appears from the guarantee agreement that the guarantee is an accessory to the underlying debt arrangement and its related obligations.

• The surety undertakes to pay the debtor’s own debt only in case of default of the debtor.
• The obligation of the surety is accessory and depends on the main obligation as regards, in particular its validity, exigibility, performance and extinction.

The suretyship can be schematized by the presence of a single debt with two co-debtors.

The PGP Law creates legal certainty for the contractual conditions agreed by the parties, in particular with regard to the adjustment of the accessory nature of their guarantee, without the risk of requalification as a suretyship.

Regime

The main characteristics of the first demand guarantee are:

• a personal payment commitment, which is not a suretyship ("abstract" commitment), and
• which is not established in consideration of a principal obligation, but which is autonomous; the first demand guarantee has no accessory character or a very limited accessory character.

The absence of ancillary nature has several consequences:

• the inopposability of exceptions;
• no automatic transfer of the guarantee in the event of transfer of the "guaranteed" obligation.

There are two types of suretyship:

• in case of a commercial suretyship, joint and several liability is presumed;
• in case of a civil suretyship, where joint and several liability has to be expressly stipulated.

In theory, the suretyship is extinguished at the same time as the principal obligation. This will be the case on the occasion of payment by the debtor, novation (article 1281 of the civil code), remission of debt, set-off, confusion (article 2035 of the civil code) or measures in the context of over-indebtedness proceedings.

Opt-in regime: the parties must expressly submit the guarantee to the PGP Law.

The professional guarantee of payment may be granted in favor of:

• a person acting on behalf of the beneficiary(ies);
• a trustee; or
• a trustee, to secure the claims of an existing or future third party beneficiary, provided that the third party beneficiary is determined or determinable.

Such persons will benefit the same rights as those belonging to a direct beneficiary, without prejudice to their obligations towards the third party beneficiary.

The guarantor can be any company (including companies without legal personality, such as special limited partnerships), collective investment funds, as well as States, national public institutions, European and international, and individuals.

Regime

The parties may contractually:

• determine the object and terms of the guarantee, including the terms of the guarantor’s payment obligation; and
• refer to the claims or risks guaranteed expressly when determining the amount, terms and duration of the guarantee; and
• determine call events, including in the absence of default in payment of debts or realisation of risks.

The professional guarantee of payment can be granted on present of future claims provided that they are identified or identifiable at the time of the conclusion of the professional payment guarantee agreement in order to guarantee all kinds of obligations determined by the parties, including, without limitation, the payment obligations.

Pros and cons

The first demand guarantee is an autonomous guarantee detached from the principal obligation, of which it is not an accessory, even if the cause of this commitment must be sought in the main contract.

The guarantor of a first demand guarantee must perform upon the beneficiary’s demand. The guarantor can neither defer the payment or raise any objection, an

The main advantage of the suretyship is that it allows a second debtor to be set up for the benefit of the creditor.

The surety can however oppose the benefit of discussion against the creditor, i.e. the guarantor can be sued by the creditor only after the principal debtor has been sued. This is an essential right of the surety. The surety may also raise against the creditor all the defences that belong to the

The main advantages of the professional guarantee of payment are:

• flexibility without risk of requalification. This instrument offers the parties the flexibility necessary to achieve the objective, by modulating the accessory nature of the professional guarantee of payment and its drafting, without the risk of requalification

Pros and cons

exception or dispute arising from the contract or any dispute.

principal debtor, and that are inherent to the debt ( it cannot raise against the debtor those defences that are purely personal though).

by the judge into a completely accessory instrument (suretyship);

• guarantees may be granted in favor of an intermediary acting on behalf of the beneficiaries;
• protection in the event of insolvency or any other measure affecting the rights of creditors. The PGP Law confirms that the guarantor’s obligation will not be affected when the primary obligation is affected by insolvency or other measures affecting the rights of creditors, such as mandatory debt reduction/ conversion.

The parties will be able to combine the terms of existing personal guarantees (i.e. suretyship and the first demand guarantee) while benefiting from a special flexible and beneficiary-friendly regime, inspired by the law on security interests, in order to adapt the characteristics of the professional payment guarantee to their most specific needs.

Enforceability of these guarantees

The first demand guarantee may be enforceable towards third parties upon the contractually agreed conditions being met and regardless of the fate of the underlying obligations.

The suretyship is enforceable only if and to the extent the underlying obligations remain valid, due and payable.

A professional guarantee of payment can be enforced in any circumstances which are contractually agreed, even if there is no default in the enforcement of the guaranteed claims.