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Dr Georges Affaki is a member of the Executive Committee, Corporate and Investment Banking, Legal Affairs at BNP Paribas in Paris. He is Vice-Chair of the ICC Banking Commission and chairs the URDG Drafting Group.

DCI The Drafting Group, which you chair, has already sent out one draft of the revised Uniform Rules for Demand Guarantees (URDG). Have you been generally encouraged by the response to that draft by ICC national committees?

Affaki Very much so. Members of the ICC Task Force on Guarantees have been relentlessly promoting the URDG for many years. We have collected hundreds of comments, as well as feedback and live experience from the businesses and banks that use the URDG throughout the world. Collecting all of this information is one thing. It is a different thing and a challenge to synthesize this in a new set of revised rules. I would like to pay tribute to the commitment of my colleagues in the Drafting Group and in the Task Force, who have worked diligently with an outstanding commitment for ten months to put together the first comprehensive draft of the revised URDG.

Turning to your question, we received 37 sets of comments from national committees, which I found to be very encouraging. Comments range from expressions of support to very detailed comments accompanied by drafting suggestions, which we thought were very helpful. The Drafting Group has examined each single line of the comments we received. Some of these were also taken to the Task Force for discussion and policy decision. No effort has been spared to ensure that our approach is all-encompassing.

DCI Clearly, one of the aims of the revised URDG will be to align it more closely with the UCP. The question is whether this is a wise course when guarantees arise in a default situation and letters of credit are means of payment.

Affaki The idea came from feedback we have received in seminars, in workshops and in our practice as bankers or exporters. Guarantee users have expressed discomfort with the fact that documentary credits under the UCP and guarantees under the URDG - which share the same independent character, are essentially document-based and are often serviced in the same department - use different vocabulary to designate the same concepts.

More worrying is that some standards addressing the same situation lead to a different answer according to whether the UCP or the URDG are to apply. For instance, we have a preclusion rule in the UCP, but we do not have one in the URDG. Similarly, a non-documentary condition is of no effect under the UCP, but could lead to an uncertain situation in the URDG. In addition, the URDG do not contain explicit documentary standards such as those found in the UCP.

We thought that the revision of the URDG should build on the experience and wealth of ideas that we gathered in the revision of the UCP. We are hoping that this will render the URDG even more able to meet the expectations of the market.

DCI In that connection, can you summarize a few of the most important ways your current draft reflects provisions in the UCP?

Affaki With regard to form, we chose to start the revised URDG with definitions and rules of interpretation. We thought the UCP was a showcase of the usefulness of compiling definitions. We also made sure that the rules are drafted in a way that would leave no doubt about their application to counter-guarantees as well.

On questions of substance, the first comprehensive draft of the revised URDG brought clear standards inspired by the UCP for the examination of documents and their necessary corollary: a preclusion rule. We also underscored the necessity for URDG guarantees to express their independence by means of an exclusively documentary process. We followed up with the logical consequence that non-documentary conditions will no longer have effect, correcting conditions that have long plagued guarantee practice. Conditions for the presentation of a conforming demand, for increase or decrease of the amount and for the expiry now have to be spelled out by requiring the presentation of a document, as opposed to a fact-finding process. Nothing is more dangerous to the independent role of the bank acting as guarantor than having to conduct a fact-finding mission to ascertain the occurrence of a condition. This makes bankers go into the details of the commercial contract and turns the guarantee into an accessory suretyship, which is not something that banks are comfortable handling.

Every operative condition can be expressed by requiring the presentation of a document as opposed to assessing a fact, unless the occurrence of that fact can be ascertained from the guarantor's own records, such as a date or a payment to an account maintained with the guarantor. Instead of indicating that the guarantee will expire upon the arrival of the goods, you can, for example, better indicate that the guarantee will expire upon the presentation of a port authority certificate stating the date of arrival of the goods. Bankers will simply examine the conformity of the document on its face.

DCI What about this question of using the word "party" instead of "bank"? As you recall, the UCP Drafting Group wanted to do that with the UCP, but the idea was rejected by ICC national committees.

Affaki We have had a long discussion within the Task Force and also some valuable feedback from national committees on whether to keep the current URDG use of the generic appellation of "party". We decided eventually to do so, essentially in recognition of the fact that demand guarantees are issued by nonbanks on a much wider scale than documentary credits, which are generally issued, confirmed and advised by banks. Parent company guarantees covering their affiliates' obligations account for a large segment of guarantee issuance. DCInsight readers should remember, however, that "party" includes banks.

DCI Another issue is whether the URDG should be expanded to include payment guarantees in addition to demand guarantees. Won't this dilute the rules and make them too long?

Affaki There is a fine line between making the rules more comprehensive and keeping them concise, easy to carry and to use, which contributed to the success of the current URDG 458. The revised rules do not single out payment guarantees. The URDG are drafted to apply generically to all types of independent guarantees: tender guarantees, performance guarantees, advance payments guarantees, payment guarantees, etc.

A number of comments received from national committees queried the standards for the examination of documents that the first draft contained, some of which are customary for transport documents. They concluded that this must mean the new URDG will more specifically target payment guarantees. Let me be clear: there is no intention to bifurcate the URDG specifically towards payment guarantees. Rather, because we chose to underscore the exclusively documentary nature of URDG guarantees, we need to provide some directions for those who will be examining a demand from a documentary standpoint. We naturally turned to the wellknown UCP standards, such as inconsistency and linkage of documents, unsolicited documents and legalization requirements.

That said, we are open to reassessing the wisdom of this approach in our current work on the second comprehensive draft. We want to make sure that, while we offer the users of the future URDG practical standards, we add neither unnecessary rules nor rules that would apply only in the case of payment guarantees.

DCI The insertion in the first draft of the term "international standard demand guarantee practice" is obviously taken from the international standard banking practice terminology in the UCP. The URDG are only 17 years old. Isn't it premature to refer to an international guarantee practice at this stage?

Affaki I don't believe so. First, it is very important that "international standard demand guarantee practice so far as not inconsistent with the rules" not be considered to be one that prevails over the URDG. Hence, the addition of the phrase "so far as not inconsistent with the rules", which is an integral part of the new standard. No document should be rejected because it conflicts with an international standard demand guarantee practice if that document does not conflict with the URDG.

There is a clear hierarchy in the normative system built by the URDG: first, the text of the guarantee; second, the rules; third, and only to the extent that there is a gap not covered by the text of the guarantee or the rules, the "international standard demand guarantee practice". Here, we are taking the same approach that the drafters of UCP 500 took. With this new standard, ICC Opinions, DOCDEX decisions and other ICC position papers would bridge possible gaps by offering solutions that transcend national laws and local customs. This primarily serves the purpose of avoiding a situation where the parties are left in limbo with judges filling in the drafting gaps with local standards.

I accept that when the drafters of UCP 500 decided to bring in the novel concept of international standard banking practice, they already had a comprehensive body of standard practices from hundreds of Opinions built over decades of documentary credit practice. Clearly, we do not have that yet with the URDG.

But remember, it was 17 years before we undertook a revision of the URDG. Following this revision, I do not believe we will be revising the URDG for several years. Our bet is that between the time that URDG 758 are adopted and the time when we launch the next revision, there will be ample time for the existing body of Opinions, DOCDEX decisions and other position papers to develop so as to supplement the rules if need be.

But at this point nothing is set in stone, and we look forward to more comments in the next rounds.

DCI It seems that the old article 20 of URDG 458 concerning the requirement to present a statement of breach and the manner in which the guarantee was in breach - which was perhaps the most controversial in the old rules - has now been largely accepted. How has the Drafting Group improved the old article 20?

Affaki The Drafting Group and the Task Force decided to keep the essence of article 20 because it has become the standard for demands in the guarantee market. We thought that there was a slight margin to improve the drafting by merging what used to be the two-tier statement required under sub-article 20 (a) of URDG 458 (see box). In doing so, we considered that a statement indicating in what respect the applicant is in breach of its obligations (for example, the applicant is demanding payment because of a non-conforming delivery) indicates in itself, beyond doubt, that a breach has occurred. We wanted to avoid a situation of a too-rigid application of article 20 that could lead to rejecting a demand for payment that would have stated, for example, that a demand is made because of a non-conforming delivery, but not also stating explicitly "that the principal is in breach". This approach endorses Banking Commission Opinion TA 612 (2006). I believe that, in its true interpretation, article 20 should be read in this manner, and I am pleased that an overwhelming majority of ICC national committees expressed their support for this approach.

DCI You will have a second revised draft out during the summer. Can you hazard a guess as to how many drafts you will need before the rules go to a vote on final approval?

Affaki As many as are needed to make sure that we get it right! I would like very much for both ICC Commissions and all involved stakeholders to take the time to make comments, revisit previously made comments and provide us with guidance to make sure that when we finally believe that the draft has matured and is ready for adoption, all of us stand firmly and proudly by the new rules. The URDG are, and will remain after the revision, the best balance amongst the interests of the beneficiary, the applicant and the guarantor.

Georges Affaki's e-mail is georges.affaki@bnpparibas.com