I. Introduction
In commercial transactions, ensuring the fulfillment of obligations by the parties plays a pivotal role in reducing risks and enhancing trust. Two commonly used methods in Vietnam are bank guarantees and asset mortgages. Each method has its own advantages and disadvantages regarding legal framework, enforcement efficiency, and costs, which directly impact business operations.
This study aims to analyze the legal basis, effectiveness, risks, and pros and cons of the two methods, thereby proposing the most suitable approach to ensure obligations in commercial transactions.
II. Legal Basis
1. Bank Guarantees
- Law on Credit Institutions 2023 (Article 115) stipulates the activities of bank guarantees, under which the bank is obligated to repay the beneficiary if the guaranteed party fails to fulfill its obligations.
- Civil Code 2015 (Article 422) and provisions on secured transactions set out the mechanism for securing obligations through guarantees, requiring that guarantee contracts be made in writing and clearly identify the guarantor, the guaranteed party, and the guaranteed obligation.
Legal Characteristics:
- Enforceability: If the primary obligation is not performed, the bank must pay the beneficiary immediately without the need to initiate a dispute between the parties.
- Risk mitigation: Reduces legal risks for the beneficiary and ensures high liquidity.
- Cost: Guarantee fees are usually high, depending on the risk profile of the guaranteed party and the bank’s credit limit.
2. Asset Mortgages
- Civil Code 2015, Law on Real Estate Business 2014, and Decree 102/2022/ND-CP on Registration of Secured Transactions regulate the execution of mortgage contracts, registration of secured transactions, and the rights and obligations of the parties.
- Article 317, Civil Code 2015: Mortgage is a form of securing the performance of an obligation through assets; if the obligation is not fulfilled, the secured party has the right to enforce and liquidate the mortgaged assets to recover the debt.
Legal Characteristics:
- Enforcement risk: Depends on the type of asset and the ability to liquidate it; for real estate, the procedures for releasing and enforcing the asset can be complex and time-consuming.
- Cost: Generally lower than bank guarantees, depending on asset value, liquidity, and market conditions.
- Risks for the mortgagor: The mortgagor bears the risk of asset depreciation and potential ownership disputes.
III. Analysis of Advantages, Disadvantages, and Effectiveness
- Immediate Payment Feasibility: Bank guarantees have a clear advantage because the bank is obligated to perform immediately upon the beneficiary’s request, without waiting for complex procedures. Conversely, asset mortgages rely on asset enforcement procedures, which may delay transactions and reduce flexibility.
- Legal Risk to the Beneficiary: Bank guarantees provide a high level of security as the bank is directly liable if the guaranteed party fails to perform. Asset mortgages, however, carry higher risk, depending on asset enforcement capacity and disputes over ownership or valuation.
- Cost Consideration: Bank guarantees often involve relatively high fees, influenced by the credit limit and risk of the guaranteed party. Asset mortgages incur lower costs, mainly related to registration and legal procedures, but risk asset depreciation or difficult liquidation.
- Impact on Business Relationships: Bank guarantees enhance credibility and build trust, especially in high-value or international transactions. Asset mortgages may restrict the flexibility of the asset provider in business operations because the asset must remain encumbered.
Overall, bank guarantees ensure higher efficiency and security, particularly for large or fast-paced transactions. Asset mortgages are suitable for long-term transactions with lower costs but come with legal risks and more complex procedures. Choosing the appropriate method should be based on transaction size, asset type, and the financial capacity of the parties, or a combination of both methods may be employed to optimize business effectiveness and reduce legal risks.
IV. Conclusion
Based on legal and practical analysis, the following conclusions can be drawn:
- Bank guarantees are an effective, secure, and rapid method for ensuring obligations in commercial transactions, particularly in international or high-value dealings.
- Asset mortgages are a cost-efficient solution but carry enforcement risks and depend on asset liquidation procedures and timelines.
- In practice, businesses should consider a combined approach depending on transaction size, asset type, and financial capacity of the parties to maximize legal security and business efficiency.
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1. Lawyer Vu Thi Phuong Thanh, Ha Noi Bar Association
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Khuong Ngoc Lan