Independent guarantee issued by a State in favor of foreign banks

Facts

From 1979 to 1989, [A.] was the Consul of State X. in Geneva. In 1986 and 1987, [A.] signed guarantees on behalf of X. in favor of two X. companies, [C. SA] and E. SA, which had concluded contracts with Italian companies for the construction of factories. These guarantees, subject to Swiss law, were issued in favor of a group of Swiss banks (the plaintiffs) that had financed the loans granted to [C. SA] and E. SA. After the non-repayment of the loans by these two companies, X. contested the validity of its commitments. The banks then filed a claim with the Geneva judicial authorities.

Considerations

The Federal Tribunal first examined the issue of the applicable law. It considered that the guarantees issued by [A.] should be qualified as bank guarantees governed by Swiss law, in application of the conflict of laws rules. Regarding the external effects of representation, the Federal Tribunal also applied Swiss law, since Consul [A.] carried out his predominant activity in Switzerland.

The Federal Tribunal then rejected X.'s argument that [A.] had abused his powers. According to case law, when the representative abuses his powers, the bona fide third party is protected, provided that the represented party has communicated the representative's powers. In this case, the Federal Tribunal considered that…