This article considers how lenders can structure guarantees given by foreign entities or individuals to support Iraqi borrowers. Cross-border guarantees are common in Iraqi financing. A foreign parent company may guarantee its Iraqi subsidiary’s borrowings, a shareholder resident abroad may guarantee a family business or a foreign bank may issue a standby letter of credit or guarantee in favour of an Iraqi lender. These guarantees often carry significant weight in the credit decision, because the guarantor’s assets are perceived as more secure than the borrower’s.
The value of a cross-border guarantee depends on whether it is valid under the law of the guarantor’s jurisdiction, whether the guarantor had capacity and authority to give it and whether the lender could actually recover from the guarantor’s assets. Each of these questions involves more than one legal system. A guarantee that is enforceable in Iraq but not where the guarantor’s assets are located may provide limited practical protection.
The Iraqi Civil Code No. 40 of 1951 governs guarantees (kafala) where Iraqi law applies, including the relationship between the guarantor’s obligation and the principal debt. The Civil Procedure Law No. 83 of 1969 and the Execution Law No. 45 of 1980 govern proceedings and enforcement in Iraq. Iraq’s rules on the enforcement of foreign judgments and its participation in international arrangements on arbitration and judicial cooperation affect recovery across borders. The Central Bank of Iraq’s instructions may govern guarantees issued by banks. The law of the guarantor’s jurisdiction governs its capacity and corporate authority.
Confirming the guarantor’s capacity
A company’s capacity to give a guarantee is governed by the law of its place of incorporation and its constitutional documents. Some jurisdictions restrict guarantees that do not benefit the guarantor or require specific approvals. Financial assistance rules may restrict a company from guaranteeing debt incurred to acquire its own shares or those of its parent. The lender should obtain a legal opinion from counsel in the guarantor’s jurisdiction confirming capacity, due authorisation, execution and enforceability.
For individual guarantors, capacity and any marital property rules in the guarantor’s jurisdiction should be considered. Where the individual signs through an agent, the power of attorney should be verified.
Confirming authority and execution
The lender should verify that the guarantee was approved by the appropriate corporate body, that the signatories were authorised and that execution formalities were met. Documents to be used in Iraq, such as board resolutions and powers of attorney, may need to be notarised and legalised or apostilled where applicable, and translated into Arabic. Iraq’s position on apostille and legalisation should be checked for the relevant jurisdiction at the time of signing. Corporate advice in Iraq can confirm the documentation required for use in Iraq.
Choosing the governing law and forum
The guarantee’s governing law and dispute forum should be chosen with enforcement in mind:
- Governing law. A guarantee governed by the law of the guarantor’s jurisdiction may be easier to enforce there, while a guarantee governed by Iraqi law may align with the underlying loan.
- Forum. Courts in the guarantor’s jurisdiction may provide the most direct route to its assets. Arbitration may provide a neutral forum and an award enforceable in many jurisdictions under international arrangements.
- Consistency. The guarantee’s dispute provisions should be coordinated with the loan agreement to avoid parallel proceedings in different forums.
Arbitration advice for Iraqi disputes can help select a forum suited to enforcement against the guarantor’s assets.
Drafting the guarantee terms
Under general principles of guarantee law, the guarantor’s obligation is often linked to the principal debt, and changes to the debt may affect the guarantor. The guarantee should address:
- Nature of the obligation. Whether it is a guarantee of payment, an indemnity or an independent demand guarantee.
- Waiver of defences. Waiver of requirements to pursue the borrower first, to the extent permitted.
- Amendments to the loan. Confirmation that the guarantee continues despite amendments, extensions or refinancing.
- Currency and payment. The currency of payment, place of payment and gross-up for withholding.
- Duration and release. When the guarantee ends and how it is released.
Demand guarantees and standby letters of credit issued by banks are generally independent of the underlying debt, offering greater certainty, and are often subject to international rules incorporated by reference.
Assessing recovery prospects
The lender should assess where the guarantor’s assets are located and whether a judgment or award could be enforced there. For corporate guarantors, the lender should review financial statements and consider whether assets are held through subsidiaries or encumbered. For individual guarantors, assets may be difficult to identify. The credit decision should reflect a realistic view of recovery, not the guarantor’s apparent wealth.
Monitoring the guarantor
The guarantor’s position may change during the life of the loan. The facility can require the guarantor to provide financial statements, notify significant changes and maintain minimum net worth. A deterioration in the guarantor’s position can be made an event of default, allowing the lender to act early.
Considering regulatory and tax issues
Guarantees from foreign entities may have tax consequences, such as guarantee fees or withholding on payments under the guarantee. Payments from abroad to an Iraqi lender will be subject to banking documentation requirements. Tax advisory services in Iraq can identify tax implications.
Using bank-issued guarantees and standby letters of credit
Where the credit risk of a corporate or individual guarantor is uncertain, or enforcement abroad would be difficult, a lender may require a guarantee or standby letter of credit issued by a bank acceptable to it. A bank-issued instrument is typically payable on first demand, independent of disputes about the underlying debt, and the issuing bank’s creditworthiness can be assessed more readily.
Such instruments should specify the amount, expiry, demand requirements and governing rules. The lender should confirm that the issuing bank is acceptable under its own credit policies and that payment from the issuing bank to Iraq can be processed under applicable banking requirements. Where the issuing bank is foreign, a confirmation or counter-guarantee from an Iraqi bank may be considered.
Bank-issued instruments add cost for the borrower’s group, which must arrange the facility with the issuing bank. But they can significantly strengthen the lender’s position and may allow better pricing or terms on the underlying loan.
Illustrative example. An Iraqi bank lends to a local construction company on the strength of a guarantee from the company’s parent, incorporated in another country. When the borrower defaults, the bank discovers that the parent’s board never approved the guarantee and that the parent’s assets are held through subsidiaries in a third country. The guarantee was signed by a regional manager without authority. Had the bank obtained a legal opinion from the parent’s jurisdiction and verified the board approval before disbursement, it could have identified the defect and required a properly authorised guarantee or alternative support.
Conclusion & how Etihad Law Firm can help
Cross-border guarantees can significantly strengthen financing for Iraqi borrowers, but only if the guarantor had capacity and authority, the guarantee is properly drafted and recovery is realistic in the guarantor’s jurisdiction. Legal opinions, careful drafting and attention to enforcement are essential.
Etihad Law Firm advises lenders and borrowers on cross-border guarantee structures supporting Iraqi financings, working with counsel in other jurisdictions where needed. We help clients obtain guarantees that provide genuine recovery prospects.