Thursday, February 19, 2009

Swedish Law – Aval

I was recently asked by a client what ”aval” or “avalize” meant. A foreign manufacturer had asked his customers for “avalized banker’s drafts”. From my legal studies – in a long distant past – I seemed to remember that it had something to do with guarantees of drafts or checks.

From the excellent Investopedia I obtained the following information:

What Does Aval Mean?
A guarantee added to a debt obligation by a third party who ensures payment should the issuing person default.

Investopedia explains Aval
The debt obligation could be a note, bond, promissory note, or draft. The third party providing the aval is usually a bank. Since avals can be forged, caution should be taken when accepting these notes. Banks usually only provide an aval to issuers with very good credit ratings.

The process of avalizing is performed mainly in Europe. In the United States, banks have restrictions as to what instruments may be provided an aval.

What Does Avalize Mean?

The act of having a third party (usually a bank or lending institution) guarantee the obligations of a buyer to a seller per the terms of a contract such as a promissory note or purchase agreement. The bank, by "avalizing" the document (usually "by aval" will be written on the document itself), acts as a cosigner with the buyer in the transaction.

Investopedia explains Avalize

To avalize means "to give one's accord". It is a rarely used but is an effective method of securing the rights of the receiving party in the transaction. This is an obligation that a bank will only take on with lucrative customers. It is seen as an act of good faith by both parties.

In Sweden you will find the rules about “aval” in the 4th chapter of the 1932 Draft Act and in the same chapter of the 1932 Check Act.

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