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Georges Affaki is global head of ECEP Legal Affairs at BNP Paribas (energy, commodities, export, project) in Paris. He is Vice-Chair of the ICC Banking Commission and Chair of the Task Force on Guarantees. He is author of A User's Handbook to the Uniform Rules on Demand Guarantees (ICC Publication 631), available at www.iccbooks.com.

DCI The ICC Task Force on Guarantees is more than three years old. As Chair of the Task Force can you sum up what you think are its main accomplishments?

Affaki We started in 2003 with members from 11 countries. Our members now represent 28 countries, spanning four continents. The terms of reference that were given to the Task Force when created were essentially two-fold: first, to monitor the worldwide practice of guarantees and second, to support the use of the Uniform Rules for Demand Guarantees (URDG) practice. The Task Force has admirably performed these tasks.

But in addition to that, the Task Force has become a forum where members can assess new trends in international guarantee practice, where each one contributes his or her views and helps through his or her own network to unravel problems that are facing other members. We've even had requests to issue opinions on disputed guarantee situations that do not involve the URDG.

The ICC Task Force on Guarantees is truly a success due to the dedication of its members.

DCI Can you point to a county where, because of Task Force efforts, the situation with regard to URDG guarantees has improved?

Affaki Iran, without any doubt. Iran has become a showcase for the URDG, and I would like to cite the Iranian member of the Task Force, Farideh Tazhibi, formerly a member of the Iranian Central Bank, whose leadership and that of ICC Iran has prompted a U-turn in the Iranian stance vis-à-vis guarantees. There used to be a time when Iranian banks and importers were referred to as hard-line beneficiaries in the matter of guarantees.

This changed in 2004. The Central Bank of Iran has issued a directive to all of its member banks, indicating that the URDG are in conformity with Iranian law. Today, we have reports of an increasing number of counter-guarantees and guarantees subject to the URDG issued and accepted by Iranian banks. One Iranian bank alone is reported to have issued over 150 guarantees subject to the URDG.

China is also very promising.

DCI In general, what are the problems in the Middle East with regard to guarantees that the Task Force has had to deal with?

Affaki For decades, the Middle East has been known for having a difficult practice as concerns the expiry of guarantees. More often than not, guarantees in the region had to be issued without an expiry date or an expiry event contrary to sound international practice. There was a largely held view that exporters and their banks had no choice but to yield, because it was thought there were mandatory laws in the Middle East outlawing expiry clauses.

The Task Force has worked diligently to show that in the majority of situations no such law exists. It is a matter of contract negotiations. Where exporters and their banks have challenged this wrongly held view and chosen instead to negotiate a win-win outcome with beneficiaries, expiry dates found their way into the guarantee.

DCI What contribution do you think that the World Bank's incorporation of the URDG in its unconditional guarantee forms has made to the increasing use of the rules?

Affaki It was a watershed event. Remember, when the URDG were adopted in 1991, the Banking Commission did not make a special effort to promote them. This was probably due to overconfidence; we thought that the mere label referring to a new set of ICC Banking Commission rules would suffice for the rules to take off. Unfortunately, we forgot that the URDG carried the legacy of the URCG 325, the ICC Uniform Rules for Contract Guarantees, now defunct, which went against market practice and were hardly used.

In 1999, the Federation of International Consulting Engineers (FIDIC), whose model construction contracts are used worldwide, moved to adopt the URDG in all their demand guarantee templates. That started to attract the attention of contractors, employers and banks to the rules.

The key event happened in April 2002, when the World Bank, with its hundreds of independent guarantees issued in support of major World Bank finance projects all over the world, moved to adopt the URDG. That was the fruit of a long and dedicated effort by officers of the ICC Banking Commission and the secretariat of the ICC. We had several sessions explaining to the World Bank the sound balance that the URDG achieve between conflicting interests. And because the World Bank was convinced that it was in the interests of contractors and employers to adopt the URDG rather than having to create from scratch a regulatory environment for their guarantees, it adopted the rules and we had overnight a strong increase in the number of URDG guarantees.

DCI You've said some very positive things about the URDG, but at the same time you have now asked the Banking Commission to give the Task Force a mandate to revise them. Why do you believe that there is a need for a revision at this time?

Affaki The URDG are now 15 years old, and guarantee practice has changed in many respects since 1991. This suggests a need to revise the URDG, even though the URDG provisions were drafted in a general style so as to be adaptable to changing practices. For the past ten or so years, officers of the Banking Commission and members of the Task Force have been touring the world, spreading education about the URDG and receiving feedback as to how the next generation of the rules could better answer the expectations of the market.

The Banking Commission has adopted more than 20 Opinions on the URDG. These are very useful, but they are not widely known outside the Banking Commission. The Task Force believes that we need to have a codification of the URDG Opinions, a review of the rules and a look into those provisions that have either been criticized as being outdated or need to be better explained for a more transparent and balanced guarantee practice. In short, it is time to move ahead to devise new rules for a changing world.

DCI What would be your overall strategy for a revision? Will you do it the same way the UCP revision was done, with a Drafting group and a Consulting Group to respond to early drafts?

Affaki There are many lessons to be learned from the 3 ½ years of the UCP revision process. I believe the revision structure of the UCP is a model to emulate, namely with a small number of dedicated people on the drafting level and then a sounding committee of experts available for continuing consultation. I could see the Task Force in its entirety playing this latter role, working with a smaller scale drafting group to shape the successive drafts of the new rules until they are mature enough to reach ICC national committees and the Banking Commission.

DCI In your revision process, you obviously will have bankers on your drafting group. Would you ask non-bankers to participate as well?

Affaki The non-banking professions have to be our partners in the revision process. Whether or not they sit on the drafting group or in the Task Force as observers is a question that remains to be answered. But a guarantee structure involves at least two non-banking members, usually an exporter and an importer. Often, the guarantor itself is not a bank. It would be wrong to exclude a key party in the structure from the debate on reshaping the rules.

I also believe the World Bank should be invited to participate in the revision process. They have gathered considerable expertise through five years of URDG practice in emerging market projects. We need this expertise to create the right rules for the decade ahead.

DCI Perhaps the most controversial article of the rules is article 20, which lays out the requirements for claiming a breach. Since a number of guarantees are being issued excluding article 20, do you now believe that that article has to be completely rewritten?

Affaki The single article that has generated the most comment in specialized publications appears to be article 20. Yet, when it comes to real-life cases, whether before the court or in the queries submitted to the ICC Banking Commission, one has to admit that article 20 has prompted only one query and hardly any litigation. When compared with other articles that have resulted in more controversy - such as applicable law, the concept of "writing" and the application of the rules to counter-guarantees - the debate about article 20 has to be put in perspective.

Having said that, I have heard many questions about how the minimum default standard of article 20 should be understood and applied. I accept that article 20 could be better drafted. Whether or not we change the approach which is currently chosen, i.e., a minimum standard of the two-fold breach statement, remains to be seen. UNCITRAL, for example, has chosen no such automatic statement but has opted for an implied denunciation of breach.

The standby rules, ISP98, have also chosen not to require any such statement of breach. But then ISP also govern direct pay standbys, which are not guarantees.

Whatever changes we may make to article 20, it is important that they meet the expectations of the market and, above all, be correctly understood. I would probably start by moving the provisions of article 20 to a different place in the rules.

DCI A member of your Task Force writing in this issue of DCInsight says that there is often confusion about the relationship between the ISP98 and the URDG 458. Are you going to have to confront the issue of whether or not to merge those two sets of rules?

Affaki I believe this is a very important issue. I have heard a number of times in international fora and in financial circles that it is difficult to justify the coexistence of three separate sets of rules from the ICC Banking Commission dealing with independent undertakings. As readers are aware, documentary credits, standby letters of credit and demand guarantees share a common concept of independence and a documentary character. Yet, the fact is that ICC has devised separate sets of rules for each of them.

I believe that in the longer term, the Banking Commission should explore the possibility of merging those rules. This could take the form, for example, of a set of general provisions which would apply to demand guarantees, documentary credits and standby letters of credit, followed by specific conditions that would apply to each instrument. Provisions on shipping documents would apply to documentary credits, specific rules to direct pay standbys, extend or pay provisions for demand guarantees, etc.

Remember, today these instruments are often managed by the same back office in the bank and the rules that regulate them worldwide are promoted by the same ICC Banking Commission.

We could probably start paving the way for such a major overhaul by a few simple steps. DOCDEX is open to URDG guarantees and to UCP letters of credit disputes, but not to ISP standbys. Moreover, no query under ISP98 can be presented to the Banking Commission for an opinion. This is regrettable, because the Banking Commission is uniquely qualified as an international body of experts to issue international Opinions as opposed to local Opinions on these issues.

I would suggest that we start by opening up DOCDEX and our Opinion service to ISP. This first step would allow us to unify the standard of service for all Banking Commission rules. We could then consider further steps.

DCI As you pointed out, the UCP revision took 31/2 years to complete. Do you anticipate that the URDG revision would take around the same amount of time?

Affaki If, as I hope, the Commission gives a mandate for the revision, I am determined to move the process on a fasttrack basis. The fact that the URDG are shorter than the UCP obviously makes things easier. This is the case even if you consider just the simple amount of paperwork to be processed. I am confident that we will need a maximum of 18 months after getting the go-ahead from the Commission to start the revision to have a full draft of the next URDG to submit to the Commission and ICC national committees for comments. (The Commission will be asked to give its go-ahead at its next meeting in Singapore.)

Georges Affaki's email is georges.affaki@bnpparibas.com