Obligation under the Swiss Code of Obligations
The legal basis of a surety is defined in Art. 492 ff. of the Swiss Code of Obligations:
«In a contract of guarantee (i.e. surety), the guarantor obligates himself toward the obligee of the principal obligor to answer for the latter's obligation.» (Art. 492 para. 1 OR)
The law as applied to sureties consists of numerous individual provisions which together form a close-knit structure. In banking practice, this has led to the use of standardized forms which contain references to the text of the law.
Contrary to the abstract payment undertaking or guarantee, the surety is not independent from, but accessory to the underlying contract and requires that there is a legally valid principal obligation.
Thus the surety functions in the same way as the principal obligation in terms of existence, scope and enforceability. If the principal obligation ceases to exist, the surety also becomes void.
According to Art. 502 para. 1 of the Swiss Code of Obligations, "the guarantor has the right and the obligation to raise against the obligee the objections and defences belonging to the principal obligor which are not based upon the principal obligor's insolvency."
Therefore, in case that the principal obligor raises any objection and the parties cannot find any agreement, the existence and scope of the claim will have to be determined in the course of normally lengthy and costly legal proceedings. Costs arising to UBS in such connection (lawyer, court fees) will be fully charged to UBS' ordering party.
The Swiss law on sureties is very complex and, especially with regard to joint and several sureties, characterized by numerous mandatory legal clauses which - especially foreign - beneficiaries are usually not familiar with. Therefore and because of the inherent potential for disputes, UBS, in principle, issues sureties only in connection with standard transactions concluded amongst Swiss parties and which, from experience, do not hold an increased potential for disputes. Besides, sureties are rarely accepted abroad, because foreign contracting parties do not want to deal with the particularities of the Swiss Code of Obligations. They are more interested in receiving an instrument that will ensure the rapid processing of any claims, such as the guarantee.
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