In the current context, public procurement represents one of the most transparent areas of contractual relations. There have been certain financial protections put in place as part of the commercial legislation to ensure that such procurement can function smoothly. A bank guarantee is the most common one among them.
Its concept is about the customer being given an assurance that the contract will be fulfilled. Should the supplier be in breach of the contract, the bank will have to compensate the loss. However, the situation can look different from a practical perspective. It is often the case that a guarantee turns out to be a way of putting pressure on the counterparty or even lead to abuse, rather than protection: customers apply to the bank having no actual reasons for this or refuse to return the security instrument after the works or services are completed/provided in full.
Consequently, a bona fide contractor faces difficulties: the customer retains the money that in fact were not payable at all. Thus, there is the issue of how the supplier can defend its rights and get back the money unreasonably paid.
Legal Nature of a Bank Guarantee
A bank guarantee - is a written unilateral commitment issued by a bank or other financial institution on behalf of the obligor (debtor) to and for the benefit of the beneficiary (creditor). This document proves that the bank has committed to pay certain amount if the conditions expressly stated in the guarantee are met.
As Alva Privacy's business lawyers note, an essential feature of the guarantee is its abstract nature. This means that its existence does not depend on the underlying contract: the bank does not verify whether there is in fact any violation but merely responds to a request correctly executed by the customer. Such an approach is intended to simplify the creditor's process, although the supplier or contractor is exposed to the risk that the customer can misuse this instrument.
In terms of its legislative basis, a guarantee is governed by Articles 560 to 569 of the Civil Code of Ukraine. In addition, there is a dedicated law – Public Procurement Law – setting out details how a guarantee should be used in bidding and tendering procedures. Article 563 (1) of the Civil Code of Ukraine states that the bank makes payment only if the contract is actually violated. If there is no violation the customer's claim is not legally valid.
Thus, considering that a guarantee is a binding instrument of abstract nature, the obligor may resort to legal remedies. If funds are debited wrongfully the supplier may seek their refunding pursuant to Article 1212 of the Civil Code of Ukraine by way of reclaiming the property acquired without a sufficient legal ground.
When a Bank Guarantee Must Be Returned
As part of public procurement, a bank guarantee is usually used as a security that the successful bidder will perform the contract. The law is clear about when the buyer is required to return such security instrument.
Article 27(2)(1) and (4) of the Law of Ukraine on Public Procurement states that the guarantee must be returned:
- after the contractor fulfilled in full its obligations under the contract;
- within the time limits set forth in the contract but no later than five banking days after the relevant circumstances occurred.
The proper performance of the contract is decisive in this rule. The legislation distinguishes between two different concepts:
- non-performance, i.e., none of the actions specified in the contract is taken;
- improper performance, i.e., the actions taken have certain shortcomings that affect the outcome.
The Supreme Court's resolution of 15/1/2025 in case No. 910/2024/24 states that the legal rule governing relations arising out of public procurement explicitly provides when the buyer must return the contract security, that is, once the successful bidder has properly performed the contract. In addition, it states that the buyer may retain such instrument only if the bidder has not complied with the terms of the contract. The Supreme Court arrives at a similar conclusion in resolution of 25/9/2024 in case No. 910/12114/23.
In the resolution of 10/11/2022 in case No. 910/11504/21, the court stresses that the non-performance means a complete lack of action required under the contract, while the improper performance is about an obligation being fulfilled but not exactly in compliance with the existing terms and conditions.
Moreover, in the resolution of 25/3/2025 in case No. 10910/11352/24, the Supreme Court reiterates that the obligor's failure to perform the contract is the only lawful ground to retain the bank guarantee.
Therefore, for example, if the suppler has failed to deliver in a timely manner the products (goods) under the supply contract, the buyer (customer) may not rely upon such failure to justify the retention of money, provided that the supplier fulfills in general its contractual obligations (or the agreement as a whole).
Accordingly, once the contract has been actually fulfilled, the customer (buyer) must take action to terminate the guarantee. Any subsequent attempts to retain the security should be treated as unlawful.
Proper Remedies Against Wrongful Collection of the Guarantee
If the customer files a request and the bank pays the requested money, the supplier actually suffers financial loss. In this situation the proper remedy is to bring an action for recovering the property wrongfully acquired (Article 1212 of the Civil Code of Ukraine).
The problem is that, having remitted money to the beneficiary, the bank files a recourse claim against the obligor. As a matter of fact, it is the supplier who compensates the bank's expenses, while the customer (buyer) receives money, despite having no proper legal basis.
As the United Chamber of the Supreme Court explains in its resolution of 17/5/2024 in case No. 910/17772/20, if there is no underlying obligation (for example, such obligation is terminated, invalid or ceased to be effective for other reasons) but the beneficiary applies to and receives funds from the guarantor, the property so received is treated as acquired without a sufficient legal basis. Considering the guarantor's right to recourse against the debtor (obligor) for the amount paid, it is the obligor who actual suffers the loss and, in return, has the right to seek the refunding of such amount from the beneficiary, relying upon provisions in Chapter 83 of the Civil Code of Ukraine.
Therefore, a refund claim will be effective if:
- the contract is fulfilled in full;
- there is no evidence of a violation that can be qualified as non-performance;
- the customer's (buyer's) claim against the bank was of technical nature or reduced to an abuse of its right.
Courts are focusing their attention on the actual performance under the contract, rather than formalistic elements (such as time limits).
The Alva Privacy team deals with such cases as one of its key practice areas. Our lawyers manage commercial disputes involving the return of bank guarantees, including cases over the guarantees already paid by banks and the customers (buyers) strongly rejecting their return. As it is mostly the case, we succeed in obtaining a positive outcome for the client yet in the court of first instance.
Guarantee Coverage as a Factor Originating Risks to the Supplier
A bank guarantee in public procurement is an instrument that can drive financial stability for the project owner but expose the supplier to certain risks at the same time. If the contract is performed in full, it is no longer lawful to retain or collect the guarantee.
As evident from commercial case law, any misuse of a guarantee may be contested in court. A court action for recovering wrongfully acquired property is an effective remedy to restore justice.
For businesses, this means one thing: if your customer (buyer) acts unlawfully, you have no time to waste and should immediately use all legal remedies available to protect your interests.
Written by Andrii Pisotskyi, Lawyer.
