Securing obligations of a trade
association

Slavomír Halla - Radka Chlebcová

Masaryk University, Faculty of Law, Czech Republic

Abstract in original language

Příspěvek pojednává o možnostech zajištění závazků sdružení zřízeného dle § 829 an. zákona č.
40/1964 Sb., občanský zákoník, ve znění pozdějších předpisů. Sdružení dle § 829 an. občanského
zákoníku nemá vlastní právní subjektivitu.Přesto se jedná o hojně používanou formu spolupráce v
případě realizace rozsáhlých a odborně vysoce specializovaných veřejných zakázek. Nabízí se proto
otázka, jak zajistit splnění závazků sdružení vůči zadavateli veřejné zakázky navenek a jak upravit
vztahy mezi členy navzájem uvnitř sdružení. Příspěvek se bude věnovat možnostem zajištění závazků
sdružení bez právní subjektivity vůči třetímu subjektu (zadavateli veřejné zakázky). V tomto ohledu
budou rozebrány jednotlivé bankovní záruky, zejména bankovní záruka sdílená nebo dílčí bankovní
záruky jednotlivých členů sdružení, jejich výhody, nevýhody a rizika pro členy sdružení i
zadavatele veřejné zakázky. Druhá část příspěvku bude věnována možnostem omezení odpovědnosti či
zajištění jednotlivých členů sdružení pro případ, kdy by k uplatnění práva z bankovní záruky došlo
převážně jednáním jednoho z členů sdružení. Jako vhodné zajišťovací instituty se jeví dílčí
bankovní protizáruky zajišťující bankovní záruku sdílenou, ručení členů sdružení, případně
vystavění směnky.

Key words in original language

Sdružení; zajištění závazku; veřejná zákazka; bankovní záruka; záruka; právo rozhodné.

Abstract

The conference paper surveys possible ways how to secure an obligation of a trade association
established under Section 829 of Act No. 40/1964 Coll., Civil Code. Although, the trade association
under Section 829 is not regarded as a legal entity, it is a widely used form of business
cooperation, especially in complex and technologically sophisticated public procurements. It is
therefore of an utmost importance to secure the fulfillment of obligations towards a public
authority, as well as in-between the members of the association. First part of the paper will
discuss the issue how to secure an obligation towards third entity (public authority). In this
regard, the paper will focus on collaterals (bank guarantees), either shared or separate,
discussing advantages and disadvantages for the members of the association and for the public
authority itself. Second part of the paper will discuss the issue how to limit the liability of
members, if the collateral was drawn by the public authority due to the prevailing fault of one
member of the association. In this case, partial reverse collateral, contractual guarantee or bill
of exchange may be regarded as suitable instruments.

Key words

Trade associaction; securing obligation; public procurement; collateral; guarantee; applicable law.


Introduction

Tenders are considered to be an effective tool for obtaining best priced and best quality services
or goods. Tender enables a principal to choose from the best bid; i.e. that best suits the needs
and requirements of the principal. The needs and requirements are basically projected to tender
conditions, which may be as complex as the subject of the tender itself. Generally, subject of the
tender may vary both in an extent and complexity. The more complex and extensive work should be
carried out, the more challenging conditions are placed on tender applicants. Therefore, it may be
the case when entrepreneurs must join forces and cooperate by submitting a single tender
bid.

There are numerous ways how such cooperation might be based upon. Basically, there are two poles.
One stands for a general contractor who submits the bid as a single entity, but some part of goods
are delivered or works and service are partially provided by a third party – a subcontractor. From
the perspective of the principal, the overall liability is on general contractor who is responsible
for actions of its subcontractors (culpa in eligendo). However, for various reasons, the principal
may ban the use of subcontractors.

Second pole is for prospective bidders to create a separate legal entity which is subsequently
provided with necessary assets, permits, licenses etc. to fulfill the conditions of a particular
tender. Czech law offers various types of business companies, as well as a special association of
artificial persons[1] (including business companies) which may be suitable for this purpose.
However, creating such an artificial body requires certain amount of assets, administrative effort,
and last but not least sufficient time.

As a third option, we may recognize a simple contract based association to be formed by the
perspective bidders. Internationally, this solution resembles joint ventures, more specifically so
called strategic alliance. However, strategic alliance is a more sophisticated form of cooperation
with the foreign partner.[2] A strategic alliance is a formal relationship between two or more
parties to pursue a set of agreed upon goals or to meet a critical business need while remaining
independent organizations.[3] These are often called as “contractual joint ventures”. In contrast
to the joint ventures, the partners do not create a separate and independent legal entity. This is
also the case regarding association under Czech law, which will be surveyed in the second part of
this contribution.

Plurality of subjects working jointly during the realization of the public tender, and missing
legal personality of the association (and thus the absence of only one responsible contracting
party) gives rise to the issue of securities for the duly and timely performance of the contractual
duties, which will be surveyed in third and forth part of the contribution.

Final part will briefly describe some issues of conflicting national laws in cases where the
relationship includes foreign elements.

Association according to the Section 829 of the Civil Code

Association under 829 of the Civil Code may pursue various, even non-economic, activities.
Informality and freedom of contract are considered to be its main advantages. On the other hand, by
contracting for this type of cooperation, contracting partners cannot create an independent legal
entity.[4]

Civil Code does require a simple condition to form a contract of association - parties must set a
common goal which should be achieved. Civil Code offers few provisions that regulate both the
internal and external relationships of contracting parties; however, it is presumed that more
detailed provisions shall be negotiated by the entrepreneurs themselves. In this regard statutory
provisions form the basic level of regulation that is set as mandatory. Moreover, as this is a
purely contractual cooperation, general provisions on contract law shall also apply.

The form for creation of this type of association is not set; it may be concluded even orally. Time
horizon for cooperation is not limited either; it may be a short term for a specific goal or as
well an unlimited time period for a continuous cooperation. Number of contracting parties is not
limited but of course a contract of association requires at least two subjects. Origins of parties
are not regulated; it may be domestic, as well as foreign entity, either natural or artificial
person.

However, restrictions arising out of various public law provisions must be considered when a
foreign entity enters into this kind of contract.[5] Certain aspects regarding the regulations of
trade activities must be mainly stressed. As was stated earlier, the association is not a separate
legal entity; it is a mere cooperation of entrepreneurs on a contractual basis. This means that if
statutes require specific trade licenses or certificates, they must be obtained by contracting
parties themselves.

Contracting parties pledge to work in mutual cooperation to achieve a common goal set in the
contract of association. They are obliged to make all efforts to achieve the goal – the internal
responsibility is not therefore for outcome, but for the effort itself. Similarly, contracting
parties are contractually prevented from taking any action that may interfere or contravene marked
goals.

Moreover, contracting parties may be bound to provide specific tangible or intangible assets. If
that is the case, than financial or generic assets become a joint property of all contracting
parties; individually designated items become free for use by any contracting party.

Any assets that are gained by the activity of the association will also become a joint property of
all contracting parties; the ratio depends on each of parties’ proportional share.

Regarding decision making, the basic rule, which may be modified, requires a unilateral decision of
all contracting parties. If contract of association modifies the default rule and sets majority
vote principle, than no matter what the partner’s shares are, each contracting party has one vote
only.

The way the association deals with third parties should be regulated primarily in the contract of
association, too. There are basically three main ways:

            - Each contracting partner is acting by himself as an attorney acting on the behalf of
all contracting parties;

            - One of contracting parties (leading associate) is entitled to act as an attorney on
the behalf of all contracting parties.

            - Contracting parties are entitled to act only by their mutual consent.

However, if contracting party acts by itself, with no clear reference to the association, such acts
are accountable to this party alone. On the other hand, if one contracting party uses a designation
of, or a reference to its association,[6] it is presumed it acted on the behalf of this association
and all contracting parties must bear joint liability.

Finally, as was stated at the beginning of this part, any obligation forms a joint liability of all
contracting parties. This means that an obligee is entitled to pursue the claim against any of
liable parties in full amount. However, if the contract of association does not provide otherwise,
each contracting party is, internally, liable for equal share. This implies if the obligee requires
higher payment (even full payment) against one of such contracting parties, this party is required
to inform other parties and allow them to carry their portion of liability. However, in case other
parties are not willing to do so, and the obligor is made to pay, he than steps into obligee shoes
and is entitled to the compensation against other associated parties (statutory subrogation of the
rights). This liability scheme cannot be derived from by the agreement of the parties; however, it
is advisable to provide more detailed procedures how the parties should proceed against raised
claims and subsequently how the parties should deal with the subrogation.

To summarize, basic advantages and disadvantages of the association may:[7]

Business and capital power may be pooled relatively easily and swiftly, without the necessity to
register a separate company.

Entrepreneurs may associate for a single cause, limited period of time or set goals.

No minimal membership contribution is required.

Each contracting partner is liable for the obligations of the association by its whole company
assets; the liability last even if the association is terminated.

Each contracting partner is responsible for the obligations of other contracting partners.

As the association has no legal personality, one or more contracting partners must act on the
behalf of others.

If at least one contracting partner is a VAT payer, other partners should register for VAT.

Securities overview – Possibilities of ensuring the performance obligations

Taking regard to the specific nature of the association, especially to the fact that it is an
alliance without legal personality, it might be difficult to ensure efficiently the duly
performance of the obligations. Because of the missing legal personality, association itself cannot
be a party of any suretyship guarantee agreement, parent company guarantee or bank guarantees. The
members of the association could certainly agree to provide separate securities for the respective
parts of work they are obliged to perform, but this solution appears to be extremely
disadvantageous for the public tender authority. In such case, the public tender authority would be
obliged to prove who broke its duties which might be abnormal difficult if not impossible.

The next section of the paper deals firstly with kinds of securities which might be suitable to
ensure the obligation of Association and then examines the ways how the security can be established
– using the example of bank guarantee.

Suretyship guarantee:

The suretyship guarantee is accessory to the underlying contract[8]. This means on one hand that
the beneficiary must establish default by the principal before he can demand, from the guarantor
payment or performance[9] of the obligation which had not been performed by the principal. On the
other hand, the accessory character of the suretyship guarantee enables the guarantor to invoke all
defenses which the principal debtor can raise against the beneficiary in accordance with the
underlying contract[10]. Therefore, if default is established, the guarantor becomes liable for the
amount of the loss suffered as a result of the principal’s default, within a maximum amount stated
in the guarantee, but subject to any defenses available to the principal.

Parent company guarantees:

The parent company guarantees is special kind of suretyship guarantee which is provided by the
parent company on behalf of the daughter company. Guarantor (parent company) guaranties in this
case a contractor (daughter Company) shall duly perform all its obligations contained in the
contract. In case of any failure of any of its obligations under the contract, the parent
undertakes, on written notice by beneficiary, to perform or to take whatever steps may be necessary
to achieve performance of said obligations under the Contract. The guarantor shall be also
responsible for any loss, damages, claims, costs and expenses which are incurred by beneficiary by
reason of any such failure or breach on the part of the daughter company but only to the extent
that such losses, damages, claims, cost and expenses are recoverable under the contract.[11]

This kind of guarantees is used quite often to ensure the obligation of SPV[12] (single purpose
vehicles - companies established for the ultimate purpose of executing one single project and being
liquidated afterwards).

Bank guarantees:

A contracting party who wishes to have security that the other contracting party will perform its
contractual obligations can ask to provide a bank guarantee[13]. Bank guarantee is a written
undertaking by a guarantor, usually a bank, to pay the beneficiary up to the maximum sum quoted on
the guarantee upon presentation of written demand[14], presumed the principal failed to perform its
obligations under the contract. In such way the beneficiary may recover some or all of his loss
and/or may make and pay for alternative arrangements to complete the work in question.[15]

Despite the fact that these guarantees are intended to apply only if the principal fails to perform
the obligations in the underlying contract[16], in which case the beneficiary can call on the
guarantee, the Bank guarantees are independent from the underlying contract[17]. This means that
the obligations and liability of the guarantor are solely defined by the terms and conditions
mentioned in the guarantee without the necessity of proving default or the defenses which the
principal could raise[18].

Types of bank guarantees:

There are a number of varieties of this form of guarantee. The main distinctive feature is whether
or not the beneficiary is required to present any documentation with his demand, and which kinds of
documents or proves may be required[19] by the bank.

Based upon the necessity to provide any documentation or to prove the failure of the contract we
may distinguish between “conditional” and “on demand”[20] guarantee.[21] Whereas in case of the “on
demand” guarantee, the beneficiary has only to announce to the bank the breach of contract and the
failure to fulfill the contractual obligation in order to request the payment, in case of
conditional guarantee the beneficiary must fulfill additional requirements contained in the
guarantee. This might be e.g. requirement to provide the bank with documents proving the actual
breach of contract, written notice to the principal containing a call appeal to fulfill the
contractual duties, judicial or arbitration award etc.

Despite the fact the conditional guarantees are able to minimize the risk of intentional abuse of
guarantee when the guarantee is called without the principal being in default, they are not as
common as on demand guarantees. The banks are usually not willing to take over the responsibility
for examining the reasonableness of claiming bank guarantee by the beneficiary and to assume the
risk of paying the requested amount without good reason. In case of the conditional guarantee it is
upon the bank to decide whether the documents provided as prove of the failure are correct, sound
and sufficient. As this is quite difficult and dangerous judgment, the banks are logically
resistant to accept such a responsibility.

Another possible distinction is between direct and indirect guarantees. This distinction is based
upon the number of banks involved in the bank guarantee. A direct guarantee is provided by the
principal’s bank directly to the beneficiary. The principal must provide the bank either with
sufficient funds, or an indemnity, or other form of security, against the cost of meeting the
beneficiary’s claim. In this scenario, there are three distinct contracts: The underlying contract
between the principal and the beneficiary (e.g. purchase contract), the counter-indemnity
(reimbursement contract) between the principal and the bank and the guarantee between the
principal’s bank and the beneficiary.[22]

An indirect guarantee is provided by the beneficiary’s bank or the bank in the beneficiary’s
country. In this case, the principal’s bank will provide a counter-guarantee to the local bank. The
principal has must provide the bank either with sufficient funds, or an indemnity, or other form of
security, against the cost of meeting the beneficiary’s claim. Hence, there are four distinct
contracts: The underlying contract between the principal and the beneficiary (e.g. purchase
contract), the counter-indemnity (reimbursement contract) between the principal, the
counter-guarantee between the principal’s bank and the bank in the beneficiary’s country and the
bank and the guarantee between the principal’s bank and the beneficiary.[23]

Bank guarantees are commonly used in Public tenders for works or construction to ensure obligations
to pay customs or taxes, not to withdraw from a tender after the tender closing date, to perform
properly contractual obligations, to ensure the performance in case of advance payment or to ensure
the performance of the warranty. Therefore, we may differentiate between following kinds of bank
guarantees[24]:

Customs, tax and/or similar guarantee: These securities are issued to guarantee the payment of
import duties, excise and related taxes in accordance with the legal requirements governing the
entry of goods into a country.

Contract[25] or Performance guarantee:

These bonds secure due performance of a contract. The main categories of such bonds are bid,
performance, payment and advance payment bonds. Performance guarantee protects beneficiary against
non-performance, or failure to proper execute and complete the contract involving the proper
performance in respect of each and every obligation in accordance with the terms of that
contract.[26]

Tender or Bid guarantee: This guarantee safeguards the party inviting to the tenders against the
withdrawal from these after the tender closing date or the non-signing of the contract by the
successful tenderer. It is also provided to safeguard against the successful tenderer signing the
contract but not providing the agreed performance guarantee.

Advance Payment Guarantee:

Safeguards the beneficiary against an advance payment and the principal subsequently failing to
perform the contract. An advance payment would have to be returned by deductions from monies that
would become due at a later stage or in accordance with a schedule of repayments. Any default in
the agreed program for repayments would have to be safeguarded by the issue of such payment
guarantees.

Warranty Guarantee safeguards the beneficiary against the non-performance of the warranty by the
principal and protects against defective materials and workmanship arising during the defect
liability period of the contract.

Assurance of public tender’s obligations by Performance guarantee in case the contracting party is
Association according to the § 829 of the Civil Code

After providing a brief overview of the most common securities used in public tenders to ensure the
obligation of the contractor, let us scrutinize closer the bank guarantee (performance guarantee)
and the ways how the performance guarantee might be established to fulfill the requirements and
needs of both contracting parties – public tender authority and the members of the association.

Public tender authority is usually either state authority or international company with much
stronger market position than the members of association. Performance guarantee (especially on
demand guarantee) provides an excellent means of securing the obligations of the contracting party
under the contract. The public authority bears in such case no burden of proving the real breach of
contract - it must only announce the bank of their claim. The public authority is not interested in
loosing this advantage only because there are more subjects (members of an association) performing
the works. Therefore, the question might arise how the performance guarantee should be
hand-tailored in order to meet the requirements and expectations of the public authority on one
hand and to respect the internal relationships between the members of an association on the other.

Considering this issue we should bear in mind that:

The association has no legal personality, and therefore it might be difficult to organize one joint
performance guarantee for the obligations of the association as whole,

The members are jointly and undistinguishable liable for the obligations of association towards
third parties[27] (one for all, all for one). The public tender authority may also claim the
performance or damage from every member of the association disregarding their task distribution in
the performance of the work,

The members of an association regulate the responsibility against each other in the association
agreement (regress claim against each other which may be based upon the culpability).

We can distinguish three models how the performance guarantee might be tailored:

Each of the association members bears liability for and ensures the performance of the respective
part of work he is responsible for, in conformity with the scope of work.

In this situation, each of the association members shall negotiate performance guarantee regarding
its own part of work. Such partial guarantee shall safeguard the duly performance of the part of
performance in question up to the amount of this part of work. The public tender authority will be
provided with partial separate guarantees which in total sum equal to the required amount of
guarantee.

Disadvantage for the public tender authority:  As the association members are jointly and
undistinguishable liable towards third parties, the public tender authority should in no case be
forced to investigate which member is actually in breach of the contractual obligations. The mere
fact that any contractual obligation was broken should constitute the right to claim the
performance guarantee. However, as the performance guarantees are separate from each other and each
of them secures only the breach of the specific member of association, the public authority might
be forced to investigate which member broke its duties. Otherwise, the bank could refuse the
payment under the guarantee. Therefore, despite the fact that the members of the association
agreement are jointly and undistinguishable liable for the obligations of association, the public
tender authority might get into the troubles claiming the rights from performance guarantee.

Advantage for the association members reflects the disadvantage for the public tender authority. As
far as the performance guarantee is concerned, the joint liability of association members might
turn out to be unenforceable and the member of the association might be liable only if he failed to
perform any of its own contractual obligations.

Disadvantage for the association members: The member of association cannot be sure that the bank
will consider the performance guarantee inapplicable in case another member of the association
broke his contractual duties. Therefore, the respective member might be “fined” for mistake of
another member.

All in all, the separate performance guarantee constitutes legal unpredictability and uncertainty
in issues of liability for both, the public tender authority and the members of association.

One member of the association will ensure the performance guarantee for the obligations of the
whole association in total sum equal to the amount of guarantee required by the public tender
authority.

Choosing this possibility, one of the members of the association will negotiate with its bank the
performance guarantee on behalf of the whole association. The members of the association should
regulate this option in the association agreement, inclusive the sharing of direct costs related
with the issuance of this guarantee, reward for the one member and regress payments process in case
the public tender authority claimed its rights under the guarantee. The performance guarantee must,
of course, state that it safeguards the performance of all respective members of association
connected with the contract.

Advantage for the public tender authority:  Should the performance guarantee be tailored in this
manner, the public authority might be sure to get the expected payment. The only requirement for
claiming its rights under the performance guarantee (demand guarantee) is to announce the bank the
breach of contract by the association or to be more precise by the one member.

Disadvantages for the one member: Unfortunately, there are number of disadvantages for the
providing member. Despite the fact that the members of an association shall share the cost of
issuance of the performance guarantee, it is only this member whose liquidity and banking covenants
are affected. Therefore, because of negotiating an extensive performance guarantee, the providing
member might be hindered from getting any other bank guarantee or credit in the future (till the
end of validity of this performance guarantee). Moreover, should the public tender authority make a
use of the performance guarantee, it is this member who has to bear the financial burden resulting
from this claim, because the claimed amount of the performance guarantee will be deducted from its
own account. Subsequently, he has to require proportional regress of the paid amount from the
others.

The best way how to ensure the financial regress of providing member is to require the other
members to issue partial counter-performance guarantees. In such a case the partial performance
guarantee should state expressly that the principal issuing member is entitled to claim the
respective amount only if the public tender authority claimed payment from the main performance
guarantee and up to the proportional amount of the claim.

Whereas this possibility appears to be extremely advantageous for the public tender authority and
for some of the association member, the disadvantage for the issuing member who is responsible for
negotiating the main performance guarantee and bearing the risk connected seems to be hardly
acceptable. Therefore, neither the first nor this second solution can be recommended as the ideal
ones.

Shared (joint) performance guarantee:

Shared performance guarantee presumes that the member of association who is pursuant to the
association agreement entitled to deal on behalf of the others will start to negotiate the
performance guarantee with the designated bank. Nevertheless, the performance guarantee will not be
negotiated in the name of this member (as in the previous case) but on behalf of all the members.

In this situation, the performance guarantee must state expressly the names of all the members and
thus it ensures the joint performance of all of the members of the association.  Moreover, it must
state the covenant of a bank to pay the public tender authority up to the agreed amount if any of
the members fails to perform any of its obligations under the contract. As the public authority may
claim the performance guarantee in case any of the members breaks its duties or obligations under
the contract without proving which of the members failed, this joint performance guarantee reflects
precisely the joint and undistinguishable liability of the association members. Therefore, it
provides high degree of security and expect-ability to the public tender authority.

The members of the association bear the costs connected with the issuance of the guarantee
proportionally. In case the public tender authority makes a use of the performance guarantee, a
proportional part of the payment is deducted from the bank accounts of all of the members. The
right to claim regress payment is not excluded – it depends upon the wording of the association
agreement and upon the possibility to prove the sole liability of one of the members for the breach
of contract.

Based upon the risk distribution between the members of association and the advantages of this
solution for the public tender authority, the shared performance guarantee seems to be the best way
how to ensure the obligations of the association.

Conflict of law issues in the globalized world


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The all above mentioned issues may gain a new dimension within EU. With European information system
on public procurement, it is relatively easy for a Czech company to submit a bid to a procurement
announced by a German entity. As the work should be carried out in Germany, but near Polish
borders, the Czech bidder may seek out a Polish entity to provide ancillary services. German client
requires a bank guarantee that is eventually issued by a Czech bank. Although not too common so
far, such situation may occur and bring important issues concerning the law governing individual
issues that need to be considered. As the scheme above shows us, there are several relations
involved.[28]

Firstly, there are relations “within” the association itself. Even though the association may
externally resemble a business company, we must not forget that it is still nothing more than a
contractual relationship. As such, we may consider the application of regulation No. 593/2008 on
the law applicable to contractual obligations (Rome I. Regulation).

However, we may soon encounter an obstacle if we consider Article 1, subsection 2, letter f) of the
Rome I. Regulation. Quoted article excludes from the scope of the regulation those relations
arising out of company law and/or, more importantly, other bodies, corporate or unincorporated. As
may be derived from other language versions,[29] regulation seems to exclude question of societies
and associations even if based on the pure contractual nature. Initial legislative text of the
regulation[30] seems to put it clearly when stating: “Also excluded are questions governed by
company law and the law relating to other bodies corporate or unincorporated.” The legislative text
and English text of the regulation uses the word “body”, which may in the context suggest that
exclusion of only subjects possessing legal personality. The Guliano-Lagarde report[31] on
Convention on the law applicable to contractual obligation (Rome Convention)[32] provides that:
“certain relationships will be regarded as within the scope of company law or might be treated as
being governed by that law (for example, société de droit civil, nicht-rechtsfähiger Verein,
partnership, Vennootschap onder firma, etc.) in some countries but not in others.” Therefore, it
will be for each jurisdiction to primarily characterize the relationship either as falling into
company law or connected areas, or not.

From the perspective of the Czech law, we may conclude that association under Section 829 should
fall within the scope of Rome I Regulation, because from our point of view, Czech law recognizes
even associations with legal personality, but provides also a “version” lacking it – association
under Section 829, which is moreover methodically put into part of the Civil Code that is
regulating obligation arising out of contractual relationships.

Once we establish the applicability of regulation, we may seek for governing law. It is most proper
for the parties to utilize their right under Article 3 and choose the law that would govern their
relationship. If the parties fail to choose the applicable law, or cannot agree on one, they soon
encounter several problems. Even though, the regulation provides conflict rules for several types
of contracts, association is not included. We cannot apply various sets of conflict-of-law
provisions for various relations that may exist between contracting parties, as that would
contradict the principle of predictability and conflict justice.

Therefore, the answer must be derived firstly from the Article 4, subsection 2 which calls for the
law of the country where the party required to effect the characteristic performance of the
contract has his habitual residence. This conflict solution may be helpful in situations where
there is one leading party in the association which may render relatively substantial part of
association’s performance. This might be the case in our made-up scenario. As the Polish party
renders only ancillary services and the main task is to be carried out by Czech party, law
governing the association should be the Czech law.[33]

However, in situation when no leading party is recognized, we must move on to subsection 4 of the
same article and thus govern the contract of association by the law of the country with which it is
most closely connected. The closest connection may be derived from various factors[34] e.g. state
where the common activity of the parties are focused on, or a state where the prevailing portion of
assets is invested, or even a state where the seat from which the association is factually governed
is located.

Secondly, there is a main contractual relation between the German client and the association. In
this regard, we may freely apply Rome I. Regulation,[35] and apply the law that is either chosen by
the parties (again recommended) or determined according to regulation’s conflict-of-law rules.
However, there are two crucial questions.

First, whether such relation must be, basically, regulated only by one applicable law, as we should
not forget that association has no legal personality and only the associated parties are parties to
the underlying contract. But, as the predictability of conflict result and inner harmony of
relationship must be preserved, such reasoning has to be refused. Moreover, reaching dissimilar
results how different substantial laws would treat the parties, which are joined in the same
association subjected to the same law, cannot be sustained.[36]

Second, if we decided that just one governing law shall apply, the question would then sound -
which one it should be. Similar considerations as in first issue may be applied even here. Final
judgment may be dependent upon the fact if there is a leading associate, or not, where the services
are rendered etc. However, we should not consider law governing the contract of association to be
applicable, ipso facto, for the underlying contract as well because it is the law of parties
rendering characteristic performance. In that limited sense, lex causae for association shall be
primarily restricted for “internal” use.

Thirdly, association must contract with a Czech bank that shall issue the guarantee. Such contract
will regularly deal with the conditions upon which the bank issues the guarantee (e.g. payment by
bank’s client), what the content of the guarantee itself is (type and kind of guarantee), and last
but not least provisions concerning the reimbursement of any sum paid to a beneficiary (client).
Once again Rome I Regulation will be applicable; the bank will regularly make the client agree to
choice of law provision subordinating the relation under the law of bank’s seat. This solution is
in line even with the basic presumption under Article 4 subsection 2, as it is the bank which
renders characteristic performance.

Lastly, what is the governing law in relation between the bank and the client, in case the client
decides to exercise the rights from the guarantee? Basically, securities should share the fate of
the main obligation they secure. If that is the case, bank guarantee shall follow the fate of
underlying contract between association and beneficiary (client). However, there are two important
remarks to be made.

First, if the bank issues a guarantee for a foreign beneficiary (client), it will regularly insert
a choice of law provision, too; such provision shall be deemed as accepted by beneficiary, at the
latest, when he starts exercising right from the guarantee. Second, absent choice of law
provisions, bank guarantee is a specialty regarding securities, as was demonstrated in previous
text. It is not, contrary to a simple guarantee, an accessory obligation governed independently.
Most appropriate will once again be the law of issuing bank’s seat.

In a result, it is ordinary cause of business, that the bank guarantee shall be governed by a
different law than the underlying obligation itself. Such law shall be primarily determinative for
any objections bank may make against the client (beneficiary).

To summarize, by this brief survey, it was presented prima facie that described situation is of a
most complexity. There are several issues which may be treated independently and courts may reach
different results. Therefore, it is highly advisable that parties utilize the rights Rome I
Regulation offers and favors – autonomous will of parties to choose their “fate” by picking law
(preferably one) governing various parts of this complex case.

Before ending the conflict section, we shall briefly point out reader’s attention to jurisdictional
issues.[37] In this regard, regulation No. 44/2001 on jurisdiction and the recognition and
enforcement of judgments in civil and commercial matters (Brussels I. Regulation), which provide
uniform rules to determine the jurisdiction in wide scope of commercial and civil matters within
the EU. As the basic rule reads, the courts of defendants’ domicile shall have the jurisdiction for
a dispute. Moreover, parties may employ alternatives under Article 5 (e.g. place of performance),
or chose a specific jurisdiction under Article 23.

Article 6 provides special rules which may be found useful in above described situation.

Subsection 1 provides for cases with more than one defendant, i.e. if the client would sue the
associated parties. As the claims may be so closely connected that it is expedient to hear and
determine them together to avoid the risk of irreconcilable judgments resulting from separate
proceedings. If that is the case, all defendants may be sued before one court in order to reach
cohesive and just decision.

Subsection 2 contains the rule when third parties are concerned; which might be the case of bank
providing the guarantee. The rules enables, for similar reasons as in subsection 1, the claimant to
sue the third party – bank in the court seized of the original proceedings, unless these were
instituted solely with the object of removing him from the jurisdiction of the court which would be
competent in his case.

Similarity, even though Brussels I. Regulation provides wide scope of jurisdiction may be chosen
from, it is also advisable to tailor prorogation agreements in individual relationship to ensure
that the claims are considered at same forum.

Final Remarks

The aim of this article was to show the reader the complexity of various problems when an
association is considered. Although, the trade association under Section 829 of Civil Code is not
regarded as a legal entity, it is a widely used form of business cooperation, especially in complex
and technologically sophisticated public procurements.

It is therefore of an utmost importance to secure the fulfillment of obligations towards a client,
as well as in-between the members of the association. The paper introduced the security measures
which are widely used to secure the fulfillment of obligations in public tenders and concentrated
in detail on the bank guarantee. In this regard, the paper focused especially on different types of
collaterals (bank guarantees), discussing advantages and disadvantages for the members of the
association and for the client itself.

In the last part of the paper, a new dimension of issues emerged once foreign elements entered into
our consideration. To this regard, the results may be articulated as such that promotion of a
unified solution should be preferred, either in conflicts-of-law as well as jurisdictional issues.
To that extent the best practice is to use a choice of law and choice of forum provisions that help
create single legal frame even in these complex relationships.


Literature:

-    Bunni, N. G.: The FIDIC Forms of Contract, Great Britain: Blackwell Publishing, 2005, third
edition, 872 p., ISBN: 13: 978-14051-2031-9.

-    Chlebcová, R.: The Movement Of Legal Entities: Joint Ventures. In: Dávid R., Neckář J.,
Sehnálek D., (Editors). COFOLA 2009: the Conference Proceedings, 1. edition. Brno : Masaryk
University, 2009, ISBN 978-80-210-4821-8.

-    Hökl, G.S.: Zur Absicherung der Verpflichtungen aus einem FIDIC-Bauvertrag durch Bankgarantien
und Bürgschaften in der internationalen Praxis. In: ZfBR 2003, s. 527 an.

-    General Principles for the Use of Parent Company Guarantees and Performance Bonds, Available
at: http://www.logic-oil.com/PCGs_and_PBs_Aug07.pdf , accessed on date 25. 8. 2009.

-    Jehlička, O., Švestka, J., Škárová, M. et al. Občanský zákoník. Komentář. 9. vydání. Praha :
C. H. Beck, 2004, p. 1440, ISBN: 80-7179-881-9.

-    Kučera, Z. Mezinárodní právo soukromé. 6. edition. Brno : Doplněk, 2004, p. 457, ISBN:
80-7239-167-4.

-    SITPRO Simplifying International Trade, Trading Advice, Demand Guarantees, available at:
http://www.sitpro.org.uk/trade/demandguar.html,

accessed on date 25. 5. 2010.

-    The Guliano-Lagarde report on Convention on the law applicable to contractual obligation,
available at: http://www.uninova.sk/pf_bvsp/pdf/Text_GiulianoLagardeReport.pdf, accessed on 31. 5.
2010.

-    Štenglová, I., Plíva, S., Tomsa, M. et al. Obchodní zákoník. Komentář. 12. edition. Prague :
C. H. Beck, 2009, p. 1397, ISBN: 978-80-7400-055-3.

Legal Texts:

-    Act No. 40/1964 Coll., Civil Code,

-    Act No. 513/1991 Coll., Commercial Code,

-    Regulation No. 44/2001 on jurisdiction and the recognition and enforcement of judgments in
civil and commercial matters,

-    Regulation No. 593/2008 on the law applicable to contractual obligations.


Contact – email

134878@mail.muni.cz, radka.chlebcova@mail.muni.cz
________________________________

[1]     See Section 20f et seq. of Act No. 40/1964 Coll., Civil Code (hereinafter “Civil Code”).

[2]     Chlebcová, R.: The Movement Of Legal Entities: Joint Ventures. In: Dávid R., Neckář J.,
Sehnálek D., (Editors). COFOLA 2009: the Conference Proceedings.

[3]     Wikipedia: Strategic Alliance, [cited 22. 5. 2008]. Available at:
http://en.wikipedia.org/wiki/Strategic_alliance

[4]     For that cause, a similar association may be considered. Under Section 20f et seq. of the
Civil Code, artificial persons can constitute an interest association.

[5]     An example may be made regarding the purchase of immovable properties, where several
restrictions are imposed on foreigners.

[6]     Section 835 of Civil Code and Section 10 of Commercial Code.

[7]     Available at http://business.center.cz/business/pravo/formypodn/sdruzeni-fo/shrnuti.asp,
accessed on 28. 5. 2010.

[8]     Hökl, G.S.: Zur Absicherung der Verpflichtungen aus einem FIDIC-Bauvertrag durch
Bankgarantien und Bürgschaften in der internationalen Praxis. In: ZfBR 2003, p. 527 et seq.

[9]     Option of performing the obligation can be exercised by the guarantor only if it is
specifically permitted in the form of a bond.

[10]    Bunni, N. G.: The FIDIC Forms of Contract, Great Britain: Blackwell Publishing, 2005, third
edition, p. 269 et seq., ISBN: 13: 978-14051-2031-9.

[11]    General Principles for the Use of Parent Company Guarantees and Performance Bonds,
Available at: http://www.logic-oil.com/PCGs_and_PBs_Aug07.pdf , accessed on 25. 8. 2009.

[12]    Chlebcová, R.: The Movement Of Legal Entities: Joint Ventures. In: Dávid R., Neckář J.,
Sehnálek D., (Editors). COFOLA 2009: the Conference Proceedings, 1. edition. Brno : Masaryk
University, 2009, ISBN 978-80-210-4821-8.

[13] Note the ICC Uniform Rules fo Demand Guarantees (ICC No. 458) which are widely accepted and
used all around the world. Another ICC Uniform Rules regarding the Ban guarantees: ICC Uniform
Rules for Contract Guarantess (ICC No. 325) and  ICC Uniform Rules for Contract Bonds (ICC No.524).
Compare Hökl, G.S.: Zur Absicherung der Verpflichtungen aus einem FIDIC-Bauvertrag durch
Bankgarantien und Bürgschaften in der internationalen Praxis. In: ZfBR 2003, p. 527 et seq.

[14]    SITPRO Simplifying International Trade, Trading Advice, Demand Guarantees, available at:
http://www.sitpro.org.uk/trade/demandguar.html , accessed on 25. 5. 2010.

[15] General Principles for the Use of Parent Company Guarantees and Performance Bonds, Available
at: http://www.logic-oil.com/PCGs_and_PBs_Aug07.pdf , accessed on 25. 8. 2009.

[16]    The bank guarantee is in this respect dependent on the underlying contract.

[17]    Bunni, N. G.: The FIDIC Forms of Contract, Great Britain: Blackwell Publishing, 2005, third
edition, 269 et seq., ISBN: 13: 978-14051-2031-9.

[18]    As opposed to the suretyship guarantees, bank guarantees are direct charges on the balance
sheets of contractors and suppliers, thus affecting their liquidity and banking covenants. General
Principles for the Use of Parent Company Guarantees and Performance Bonds, Available at:
http://www.logic-oil.com/PCGs_and_PBs_Aug07.pdf , accessed on 25. 8. 2009.

[19]    For example, the guarantee may simply be payable on first written demand, or it may be that
the demand be accompanied by a statement that a default has occurred, or it may further require
that the default be identified.

[20]    SITPRO Simplifying International Trade, Trading Advice, Demand Guarantees, available at:
http://www.sitpro.org.uk/trade/demandguar.html , accessed on 25. 5. 2010.

[21]    Bunni, N. G.: The FIDIC Forms of Contract, Great Britain: Blackwell Publishing, 2005, third
edition, p. 269 et seq., ISBN: 13: 978-14051-2031-9.

[22]    SITPRO Simplifying International Trade, Trading Advice, Demand Guarantees, available at:
http://www.sitpro.org.uk/trade/demandguar.html , accessed on 25. 5. 2010.

[23]    SITPRO Simplifying International Trade, Trading Advice, Demand Guarantees, available at:
http://www.sitpro.org.uk/trade/demandguar.html , accessed on 25. 5. 2010.

[24]    Bunni, N. G.: The FIDIC Forms of Contract, Great Britain: Blackwell Publishing, 2005, third
edition, 269 et seq., ISBN: 13: 978-14051-2031-9 and SITPRO Simplifying International Trade,
Trading Advice, Demand Guarantees, available at: http://www.sitpro.org.uk/trade/demandguar.html ,
accessed on 25. 5. 2010.

[25]    Hökl, G.S.: Zur Absicherung der Verpflichtungen aus einem FIDIC-Bauvertrag durch
Bankgarantien und Bürgschaften in der internationalen Praxis. In: ZfBR 2003, s. 527 et seq.

[26]    This may be interpreted to mean that the beneficiary is covered for latent defects in the
works during the period of validity of the bond and, hence, careful consideration should be given
to the date of release of the bond and whether it should extend beyond the date of the defects
liability period.

[27] Compare Section 835, paragraph 2 Civil Code.

[28]    Conflict of law issues may be treated differently in various jurisdictions; therefore, we
would like to analyze them only from the perspective of Czech courts.

[29]    In German language version: “Fragen betreffend das Gesellschaftsrecht, das Vereinsrecht und
das Recht der juristischen Personen, … Vereinen und juristischen Personen …“; in French language
version: “les questions relevant du droit des sociétés, associations et personnes morales …“; in
Czech language version: “otázky upravené právem obchodních společností, sdružení a jiných
právnických osob…“

[30]    Accessible from:
http://www.europarl.europa.eu/oeil/resume.jsp?id=5301232&eventId=922934&backToCaller=NO&language=en
; accessed on 31. 5. 2010.

[31]    Accessible from: http://www.uninova.sk/pf_bvsp/pdf/Text_GiulianoLagardeReport.pdf; accessed
on 31. 5. 2010.

[32]    Rome Convention is a predecessor of Rome I Regulation, and both instruments are nearly
similar in their content, as the regulation is the result of convention being converted into EU
instrument.

[33]    However, argument can be made, that without such ancillary services the leading party would
not be able to carry out his obligations to the principal. Therefore, it may be truly relativistic
result.

[34]    Kučera, Z. Mezinárodní právo soukromé. 6. edition. Brno : Doplněk, 2004, p. 317.

[35]    Of course, it must always be considered if the regulation is applicable for the particular
relationship, by submitting such relation under scrutiny by test of applicability (time and scope).

[36]    However, should it be the case if parties provide similar and strictly delimited parts of
overall works?

[37]    Other aspects may be surveyed if some of the contracts include an arbitration agreement.
With that regard interesting issue of multi-party arbitration and extension of arbitration
agreement may arise. See e.g. Hanotiau, B.: Complex Arbitrations: Multiparty, Multicontract,
Multi-Issue and Class Actions. Kluwer. 2006. or Permanent Court of Arbitration: Multiple Party
Actions in International Arbitration. Oxford University Press. 2009.