New Act On Professional Payment Guarantees

The law of 10 July 2020 on professional payment guarantees has just been published and will enter into force on 17 July 2020. It provides for the creation of a new type of payment guarantee (garantie professionnelle de paiement) under Luxembourg law which will supplement the existing range of guarantees, such as the suretyship (cautionnement) and the first demand guarantee (garantie à première demande), and provides greater freedom of contract and flexibility for parties in the context of personal guarantees governed by Luxembourg law.

• The law defines a professional payment guarantee as a commitment whereby a guarantor undertakes to pay a beneficiary, at the request of the latter or an agreed third party, an indicated amount, in connection with certain claims or related risks.
• The guarantor can be either a legal entity (with or without legal personality) or a natural person.
• Although not expressly provided for by the new law, the new professional payment guarantee can cover all claims, regardless of their nature or origin, provided they are identified or identifiable, subject to the limits imposed by rules of public policy.
• Parties can contractually determine the terms of the professional payment guarantee, such as the amount, the duration, the conditions for payment under the guarantee, etc.
• One noteworthy characteristic is that the professional payment guarantee can be granted in favor of a (security) agent or trustee acting on behalf of (identified or identifiable) third-party beneficiaries, as is already the case for security granted under the Luxembourg Collateral Act of 5 August 2005. This feature makes the new guarantee a useful tool in the context of multi-lender credit transactions whereby a security agent typically holds the security/guarantee for the benefit of all secured parties.
• Unless the parties agree otherwise, the guarantor remains liable to the fullest extent under the professional payment guarantee, even if the debtor is subject to a reorganization, liquidation or other national or foreign measure affecting the rights of creditors.
• The new guarantee is only available if the parties expressly provide for its application in their guarantee agreement, which must be in writing (including in electronic form or any other durable medium). This requirement is intended to eliminate the risk of recharacterisation of the guarantee. Parties can make an existing personal guarantee subject to the new legislation by amending their agreement to include an express reference to the law.

The new law on professional payment guarantees, which aims to create greater freedom of contract whilst ensuring legal certainty in the provision of personal guarantees governed by Luxembourg law, is undoubtedly a welcome addition, especially in times of heightened uncertainty, and demonstrates once again Luxembourg's attractiveness as a forward-looking and business friendly financial centre.

Originally published 14 July, 2020

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