The Ethiopian ‘Law of Demand Guarantees’: The exceptions to the obligation to pay on demand

Abstract

Despite the widespread use of demand guarantees, also known as unconditional bank guarantees, a comprehensive legal framework regulating the same is barely available in Ethiopia. As a result, the operation and enforcement of demand guarantees are marred with legal uncertainty. The doctrine of autonomy, one of the principles governing demand guarantee, provides that payment of demand guarantee should be honored immediately. From the principal’s perspective, the doctrine of autonomy is unpleasant as it paves the way for payment of unjustified calls of guarantee. To deal with this discontent, in other jurisdictions, certain exceptions have been allowed. This Article tries to explore the kind of exceptions allowed under Ethiopian laws while entertaining unjustified calls of a demand guarantee. With a view to give a clear picture of legal aspects of demand guarantees, the Article tries to analyze the existing legal frameworks and relevant literature. By examining demand guarantee and the subsequent calls in light of law of contract and principles of law, this Article argues, in Ethiopia, demand guarantee calls taunted with fraud and illegality should be declined. To limit the scope of such exceptions and thereby maintain integrity of demand guarantees, it is also stated that what constitutes fraud and illegality should be construed narrowly. It is further recommended that admission or rejection of call of demand guarantees must be addressed under explicit provisions of the guarantee, the principle of contracts and case laws to the extent applicable. This will bring about predictability in the issuance and operation of demand guarantees which is dearly required in an emerging financial industry.