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by N. D. George, CDCS (Distinction)

URDG 758 is certainly an improvement over the one it replaces, and hence the authors deserve appreciation for the good work they did. First, URDG 758 tracks UCP 600 in format and style. This makes it easy for practitioners to understand various terms with a lot more clarity than in URDG 458, since practitioners see things in a format and style they are accustomed to. Second, the relationship between counter-guarantor and guarantor has been detailed, bringing the applicant nicely into the equation. Third, the force majeure provisions are now broad-based so that, to a great extent, no one particular party is advantaged at the cost of another party. Fourth, a bold decision to introduce the concept of transferability to guarantees has been taken. I could go on singing the praises of URDG 758, but the purpose of this article is not that. Instead, I will look at provisions where I believe improvement and/or more clarity could have been possible.

Non-documentary conditions

I find article 7, "Non-documentary conditions", to be somewhat odd. Article 7 says: "If the guarantee does not specify any such document and the fulfillment of the condition cannot be determined from the guarantor's own records or from an index specified in the guarantee, then the guarantor will deem such condition as not stated and will disregard it ... ". A guarantor is the creator of the guarantee, as it is the issuer of the instrument. Why create it, then disregard it? Perhaps the authors meant that the beneficiary is entitled to disregard such conditions appearing in the guarantee or that the guarantor will disregard such instructions appearing in an instructing party's request to issue a guarantee.

Article 9

I believe article 9 could have been drafted differently. It reads: "Where, at the time of receipt of the application, the guarantor is not prepared or is unable to issue the guarantee, the guarantor should without delay so inform the party that gave the guarantor its instruction." Surely, banks would be required to do so only if they have an ongoing banking relationship with the applicant, such as providing it with credit lines.

Article 15

Sub-article 15 (c) seems a bit of an anticlimax after reading sub-article 15 (a). Sub-article 15 (c) reads: "The requirement for a supporting statement in paragraph (a) or (b) of this article applies except to the extent the guarantee or counter-guarantee expressly excludes this requirement. Exclusion terms such as 'The supporting statement under articles 15 [(a)] [(b)] is excluded' satisfy the requirement of this paragraph" [emphasis added].

Sub-article 15 (a), which can be excluded, reads: "A demand under the guarantee shall be supported by such other documents as the guarantee specifies, and in any event by a statement by the beneficiary, indicating in what respect the applicant is in breach of its obligations under the underlying relationship. This statement may be in the demand or in a separate signed document accompanying or identifying the statement" [emphasis added]. The italicized portions of the wording of sub-article 15 (a) suggest that the requirement of producing a statement of breach is mandatory. If it is mandatory, I am not able to understand the logic of allowing its exclusion, as provided under sub-article 15 (c).

The other sub-article that can be waived, sub-article 15 (b), reads: "A demand under the counter-guarantee shall in any event be supported by a statement by the party, to whom the counter-guarantee was issued, indicating that such party has received a complying demand under the guarantee or counter-guarantee issued by that party. This statement may be in the demand or in a separate signed document accompanying or identifying the demand." I wonder what the "demand" under a counter-guarantee would state to the instructing party if sub-article 15 (b) is waived in terms of subparagraph (c).

The question is: can a guarantee subject to URDG 758 be used as a payment mechanism to support positive performance instead of a breach? According to sub-article 15 (a), it appears that it cannot be. But sub-article 15 (c) seems to suggest that a way around this is possible simply by excluding sub-article 15 (a). Is this the intent of the authors? If it is not and if guarantees can only be used to cover a breach or default or non-performance, then my analysis of the rules leads me to conclude that URDG erred in taking for granted that everyone understands that guarantees are meant to cover breach and not performance.

In my view, it would have been better if the URDG had included in clear terms in the beginning of the rules the concept that guarantees are meant only to cover breach or default on non-performance. Instead, one is required to stumble on a requirement of a statement of breach halfway through the text, and inside a subparagraph in sub-article 15 (a).

On the other hand, the content of sub-article 15 (c) that follows paragraph (a) leaves this reader at least in a confused state, as there is nothing in the rules prior to article 15 or after that suggests that URDG should only be used to cover breach or default. If a guarantee is to be an instrument of payment against breach, default or performance, I would like to indicate below where I believe this could have been introduced early in the rules.

Breach or default

To begin with, I would have liked to have seen in article 1 a clear statement to the effect that a demand guarantee is an instrument of payment to secure payment in the event of a breach or default, or words to similar effect.

Second, article 2 defines a "Complying presentation" as follows: "Complying presentation under a guarantee means a presentation that is in accordance with, first, the terms and conditions of that guarantee, second, these rules so far as consistent with those terms and conditions and third, in the absence of a relevant provision in the guarantee or these rules, international standard demand guarantee practice" [emphasis added]. According to this definition, the guarantee text takes priority over both the URDG and international standard banking practice. Further, the definition makes it clear that URDG terms and conditions should be applied to the text of the guarantee only if, in doing so, no inconsistency occurs between the guarantee text and the URDG. If it does, the text of the guarantee supersedes the URDG.

Taking into account this definition, it seems to me that it is perfectly all right to use a URDG 758 guarantee to secure payment based on documents evidencing performance instead of non-performance. For example, if Party A wants Party B to perform some service, Party B will not want to knock on Party A's doors for payment after completion of the work. It wants to be able to go directly to a bank and produce evidence that it has performed and to receive payment. Suppose Party A and party B agree to use a bank guarantee as the method of payment with the only document needed to be presented being a certificate issued by a designated architect confirming the completion of the work. Given the definition of "Complying demand" in URDG 758, there is nothing to suggest that this arrangement would not work. If it did, it would be a better option than going for a credit subject to UCP 600, since the need to exclude various articles of UCP 600 would be eliminated.

In article 2, "Definitions", a total of 26 words and phrases have been listed and defined. None of these includes "Statement of breach", which, in my view, should have been inserted here. At best, it could have been made part of the definition of the words "Demand" and "Presentation" instead of making an indirect reference to the relevant sub-article 15 (a) under the definition of the phrase "Supporting statement".

Or consider article 8, "Content and instructions and guarantee". In this article, a list of 11 ideal attributes for the content of a guarantee has been listed; none of these includes the requirement for a "statement of breach". I would have liked to have seen it listed here as one of the "must-do" things in line with the obligatory language "shall be" and "in any event" in sub-article 15 (a).

If the statement of breach is not mandatory, would not it have been better for sub-article 15 (a) to have simply read: "A demand under the guarantee shall be supported by such other documents as the guarantee specifies", leaving it to parties to decide what is required? Sub-article 15 (c) could then have been dispensed with altogether. This would have introduced more versatility into the URDG, as it could safely be used to support both performance and non-performance (not as a competition to UCP 600, but as a solution for deals that cannot be accommodated under UCP).

Other articles

In sub-article 19 (c) (i), I believe there is wording that could have been strengthened. The article reads "the guarantor will accept the document as presented if its content appears to fulfill the function of the documents required by the guarantee and otherwise complies with sub-article 19 (b)" [emphasis added]. The italicized words should have been "guarantor must accept", as the guarantor is the author of the instrument and, as such, should be compelled to take up the documents if it stipulated a document but failed to stipulate whether it needs to be signed, by whom it is to be issued or signed or its data content. Another problem with sub-article 19 (c) (i) is how to reconcile its content with sub-article 17 (e) (ii) reading: "A demand is non-complying if any supporting statement or other documents required by the guarantee indicate amounts that in total are less than the amount demanded" [emphasis added]. It seems to me that one is not allowed to discard such documents, but is required to scan through them to ensure that an amount that in total is less than the amount demanded does not appear anywhere.

Sub-article 28 (a) reads: "The guarantor assumes no liability or responsibility for the consequences of delay, loss in transit, mutilation or other errors arising in the transmission of any document, if that document is transmitted or sent according to the requirements stated in the guarantee" [emphasis added]. I think that the italicized words should have read: "in the instructing party's application for the guarantee".

Finally, sub-article 28 (b) reads: "The guarantor assumes no liability or responsibility for errors in translation or interpretation of technical terms and may transmit all or any part of the guarantee text without translating it." First, a guarantor is the person who "issues" the instrument, not "transmits" it (see the definition under article 2). Second, surely the guarantor ought to know what it is signing and should take some responsibility for its own creation.

N. D. George is a Vice-President of Arab Banking Corporation, BSC, Kingdom of Bahrain, where he heads Loans and Trade Finance Operations. His e-mail is cochin1949@gmail.com. The views expressed in this article are the author's and do not necessarily represent those of Arab Banking Corporation, which accepts no liability for them.