A Closer Look at the First-Demand Guarantee

The "GAPD" (Guarantee on First Demand) has been recognized since 1982 by the French Court of Cassation as a security interest distinct from a traditional surety bond.

Definition

A first-demand guarantee is a self-executing guarantee—that is, one that is independent of the underlying contract—in accordance with the provisions of Article 2321 of the Civil Code.

This security constitutes a commitment whereby the guarantor undertakes, in connection with an obligation assumed by a third party, to pay a sum either upon the creditor’s first demand or in accordance with previously agreed terms.

Benefits

Originally, in business practice, contracting parties required their counterparties to deposit a sum of money with a bank as security. The deposit of this sum—which was sometimes substantial and burdensome—served as security in the event of a breach of the business partnership.

To ease this restriction, business practice has established the GAPD to provide the same security to the beneficiary of the guarantee.

Effects

The guarantor may not raise any defense based on the underlying contract (issuing contract) to exempt itself from its payment obligation, except in cases of manifest abuse or fraud on the part of the beneficiary or an unlawful collusion between the beneficiary and the principal. In other words, unlike a surety agreement, in the context of a first-demand guarantee, the guarantor must fulfill its obligation without being able to defer payment or raise any objection, defense, or challenge whatsoever relating to the underlying contract or the guaranteed obligation.

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