Guarantee bonds, such as performance bonds and advance payment guarantees, are critical in construction and commercial contracts to mitigate risks of non-performance or financial default. Governed primarily by the Ethiopian Civil Code, their legal interpretation has been shaped by landmark cassation cases. Below are 15 key legal principles derived from these cases, organized by case number and legal rule.
Cassation Case No. 106994
Guarantor’s Liability Despite Contract Amendments: A guarantor remains liable under a guarantee if they renew it with knowledge of amendments to the underlying contract (e.g., delivery period extensions). The guarantor cannot claim exemption due to such amendments if they consented to the renewal.
Penalty Limitation: Penalties must strictly adhere to contractual terms, including duration limits (e.g., 0.07% per day for a maximum of 70 days). Arbitral awards exceeding these limits are legally flawed.
Interest Commencement: Interest on debts under a guarantee runs from the date of a legally sound decision (e.g., Regional Supreme Court’s ruling post-remittal), not the initial lawsuit filing if prior decisions were overturned.
Cassation Case No. 116714
Limited Liability Under Advance Payment Guarantee: The guarantor’s liability is confined to ensuring the advance payment is used for the project. If fully utilized, the guarantor is not liable for repayment, though they remain liable under a performance bond for losses due to non-performance, up to the bond’s limit, per Civil Code Articles 1790, 1791, and 3292.
Cassation Case No. 139969
Strict Compliance with Conditions Precedent: Beneficiaries must strictly adhere to guarantee conditions, such as providing written notification of defects within specified timeframes. Non-compliance releases the guarantor from liability, regardless of the principal debtor’s breach.
Cassation Case No. 156960
Conditional Liability of Guarantor: A guarantor’s liability depends on the beneficiary’s compliance with guarantee terms (e.g., timely notice of delays). This is distinct from the principal debtor’s direct contractual obligations, and failure to meet conditions absolves the guarantor.
Cassation Case No. 158350
Implied Duty of Timely Notification: Even without explicit terms, beneficiaries may have an implied duty to notify the guarantor of a breach or abandonment within a reasonable timeframe. Failure to do so can release the guarantor from liability.
Cassation Case No. 168954
Civil Code Governance of Insurance Guarantees: Guarantees issued by insurance companies, including performance guarantees, are governed by the suretyship provisions of the Civil Code (Articles 1920 et seq.), distinguishing them from unconditional bonds based on specific terms.
Cassation Case No. 191402
Primacy of Arbitration Clauses: Valid arbitration clauses in contracts oust regular court jurisdiction unless the arbitration agreement is invalid or incomplete. Courts are limited to referring parties to arbitration.
Strict Conditions for Injunctions: Injunctions against unconditional bank guarantees are exceptional, requiring a filed lawsuit (or justified delay) and proof of irreparable harm to prevent payment.
Cassation Case No. 211616
Uniform Civil Code Framework: All guarantee bonds, including advance payment and performance bonds, are governed by Civil Code Articles 1920–1951, ensuring a consistent legal framework.
Purpose of Advance Payment Guarantee: The guarantee ensures reimbursement of advance payments if the contractor fails to fulfill contractual obligations.
Cassation Case No. 211694
Injunctions to Preserve Status Quo: When a guarantee’s validity is disputed, and the guarantor faces irreparable harm (e.g., collateral auction), an injunction should be maintained until the dispute is resolved, preventing immediate enforcement actions.
Cassation Case No. 215239
Investigation of Breach for Unconditional Bonds: Even for “unconditional” performance bonds, courts must investigate breach, contract termination, and damages in disputes between contractors and beneficiaries, as the unconditional nature applies only to the guarantor’s payment obligation.
Cassation Case No. 219793
Distinct Formal Payment Demand: Forwarding a debtor’s notice to the guarantor does not constitute a valid payment request. A separate, formal demand is required to trigger the guarantor’s obligation.
Cassation Case No. 228619
Independence of Guarantees: Each guarantee bond (e.g., advance payment or performance) operates independently with distinct conditions. Compliance with one guarantee’s conditions (e.g., notification) does not satisfy another’s requirements.
Cassation Case No. 233005
Distinction Between Suspension and Payment Requests: Requests to suspend a guarantee are separate from payment demands and have distinct legal consequences, preventing conflation of the two actions.
Cassation Case No. 211616
Invalidity of Freeze Requests as Payment Demands: Requests to freeze or hold a guarantee do not qualify as valid payment demands and do not trigger the guarantor’s payment obligation.
Cassation Case No. 47004
Performance Bonds as Suretyship: Performance bonds are classified as suretyship agreements under Civil Code Articles 1921 et seq., not insurance contracts, determining the applicable legal framework and parties’ obligations.
These cassation rulings establish a robust legal framework for guarantee and surety bonds under the Ethiopian Civil Code. They emphasize strict compliance with guarantee conditions, the distinct roles of conditional and unconditional bonds, and the procedural limits on penalties, interest, and court jurisdiction. These interpretations guide employers, contractors, and financial institutions in managing risks and ensuring fair application of guarantee bonds in contractual relationships.