Article

URDG 758: the balance sheet after two years

by Georges Affaki

July 1st of this year marked the second anniversary of ICC's revised rules on demand guarantees, URDG 758, the first revision of the rules for 18 years. The response to the revised rules has far exceeded expectations. The URDG 758 were an instant success from the time they came into effect in July 2010. Almost immediately - and in at least one case, even before 1 July 2010 - demand guarantees and counter-guarantees started being issued worldwide subject to the new URDG 758. The transition provision in article 1(d) greatly facilitated the move. The percentage of guarantees subject to URDG 758 compared to those subject to URDG 458, or to no rules at all, has never stopped increasing since. Note the following developments:

• On 5 July 2011, the General meeting of the United Nations Commission on International Trade Law endorsed URDG 758.

• On 14 March 2012, the International Federation of Consulting Engineers upgraded the model guarantee forms used in connection with their model construction contracts to include the new URDG 758.

• The World Bank followed suit in July 2012. Other multilateral development banks are in advanced discussion with ICC to upgrade likewise their model guarantee forms from the current reference to URDG 458 to URDG 758.

• Bank regulators, including Bank Markazi of Iran, recommended their use by national banks. Lawmakers, including the Organisation for the Harmonisation of Business Law in Africa (OHADA), approved URDG 758 and used them as model for national statutes now in force in 16 countries.

• In Western Europe, guarantees and counter-guarantees governed by URDG 758 now account for 20 to 70% of the aggregate guarantee volume. The leading French, Italian and Spanish banks and savings and loan institutions are reported to offer URDG guarantees and counter-guarantees by default, i.e., systematic offering subject to their customers requesting an opt-out where mandatory guarantee forms are imposed by public beneficiaries. A number of the UK banks have also adopted URDG 758 as their default position.

• In the Middle East, reports from Turkey, Egypt and Jordan show an increase of 35 to 50% in the use of URDG 758.

• Bank of China reported that the Supreme People's Court of the PRC is examining the possibility to update its interpretative rulings on independent guarantees and considering the URDG as a restatement of customs and practice in international guarantees.

• URDG 758 are now available in 21 languages officially approved by ICC: Portuguese, Mandarin, Croatian, Czech, Finnish, French, German, Hungarian, Italian, Japanese, Arabic, Polish, Russian, Serbian, Slovanian, Spanish, Swedish, Turkish, Ukrainian, Bulgarian, and traditional Chinese.

Comprehensive

The URDG 758 do not merely update URDG 458; they are the result of an ambitious process that seeks to bring a new set of rules for demand guarantees that are clearer, more precise and more comprehensive. By offering a muchneeded clarification of the presentation and examination process and excluding imprecise standards, URDG 758 foster certainty and predictability. Some examples of provisions in the revision include:

• strict time durations for the examination of a demand, the extension of the validity period in the case of force majeure, and the suspension of the guarantee in the case of an extend or pay demand;

• the inclusion of important practices that had been left out of URDG 458, including the advice of guarantees, effectiveness of amendments, standards for examination of presentations, partial, multiple and incomplete demands, linkage of documents and transfer of guarantees;

• a number of innovations, such as the new rule that proposes a substitution of currencies when payment in the currency specified in the guarantee becomes impossible and the new termination mechanism for guarantees that state neither an expiry date nor an expiry event.

In June 2011, as a companion to the new rules and their embedded model forms, ICC published The Guide to ICC Uniform Rules for Demand Guarantees, ICC Publication 702, now in its second print run. This publication gives practitioners all the tools they need to apply URDG 758 in practice.

Queries on URDG 758

In the two years of use of URDG 758, the ICC Task Force on Guarantees received a number of queries regarding the proper interpretation of certain URDG 758 provisions. The majority of those queries were submitted before the release of the Guide to ICC Uniform Rules for Demand Guarantees and found an answer in the Guide. Other queries were considered by the Task Force as educational in nature or involving an ongoing dispute. Under the terms of reference of the ICC Banking Commission, no such queries can be processed as official opinions of the Commission. Following are excerpts of those queries, given their educational value:

Q. A guarantee stipulates that it expires on a specific calendar date but that notwithstanding the expiry date, the beneficiary may present documents to the guarantor until 30 days after the expiry date. Is it complying with URDG 758?

A. Article 14 provides that a presentation shall be made to the guarantor on or before expiry. After expiry, the guarantor is automatically released of its obligations under the guarantee and no longer has authority to receive, examine or act upon a presentation made after expiry. The guarantee referred to in the query is in conflict with URDG 758 and should not be made subject to the rules.

Q. A beneficiary is insisting on introducing into the guarantee a political risk clause covering the risk of currency control. Is there a need for such a clause where the URDG apply to the guarantee?

A. The independent nature of the guarantee, explicitly acknowledged in article 5, bars the guarantor from asserting a currency control regulation in the country of the applicant to escape its payment undertaking. A political risk clause adds little value in such a case. If the currency control is imposed in the country of the guarantor and results in the prohibition of payment in the currency of the guarantee being a foreign currency, article 21 requires the guarantor to pay in the currency of the place for payment.

Admittedly, if the place of payment is in the country that has imposed the currency control, the beneficiary would have no choice but to accept payment in the local currency. This is the case with or without the URDG.

Q. A guarantee is issued without any indication of an expiry date but stipulates one of the following clauses: "This guarantee will expiry upon Final Acceptance", "This guarantee is valid until completion of the contract" or "This guarantee is valid until released by the beneficiary". Does the three-year termination date in article 25 (c) apply?

A. All three clauses stated in the query are nondocumentary conditions, since they do not specify any document to indicate compliance with these conditions. Accordingly, article 7 requires that they should be disregarded except for the purpose of determining whether data that may appear in a document specified in and presented under the guarantee does not conflict with data in the guarantee.

Q. A counter-guarantee is issued through SWIFT MT760. Field 40C (applicable rules) indicates URDG but field 77C (details of the guarantee) indicates: "Our counterguarantee and your guarantee will be governed by Ruritanian law and place of jurisdiction Rurville." Is there a conflict with URDG articles 34 and 35?

A. Where the counter-guarantor has chosen the applicable law to both the counter-guarantee and the guarantee and has explicitly so indicated in the relevant field in the SWIFT message (40), the counter-guarantor's choice will prevail over the default rules in the URDG, i.e., articles 34 and 35. The counter-guarantor need not repeat its choice of law in the open message field 70c.

Q. Is a guarantor entitled to directly pay an extend or pay demand even without the consent of the instructing party?

A. Article 23 (a) provides the guarantor with the choice to extend or to pay upon its receipt of a complying extend or pay demand. If the guarantor has decided to suspend payment, it has to wait for the end of the suspension period that the guarantor has chosen in accordance with article 23 before the guarantor decides to extend or to pay. If the instructing party refuses the extension requested by the beneficiary, the guarantor remains free to extend the guarantee nonetheless but risks losing any right to be reimbursed by the instructing party for acting in breach of its mandate (unless it is authorized to do so in the application).

The future

Guarantee Task Force members are often asked whether the ICC Banking Commission will compile and release in the form of a booklet the International Standard Demand Guarantee Practice referred to in URDG 758 article 2. There is a consensus that any such publication would be premature at this stage. It took ICC ten years between the drafting of the then-novel concept of international standard banking practice in UCP 500 and releasing the first compilation of ISBP (ICC Publication 645, now updated to ICC Publication 681).

That said, the Task Force is regularly compiling practices fed back to its members through the numerous workshops organized around the world on URDG 758, the queries submitted to the ICC Banking Commission and its own members' experience as demand guarantee experts. In due course, those practices would likely evolve into a compilation of ISDGP. In the meantime, readers should remember that the International Standard Demand Guarantee Practice - like the International Standard Banking Practice for UCP - are a method to identify on a case basis the proper international practice to answer a question not covered in the terms of the guarantee or the URDG. Even when codified and released, the International Standard Demand Guarantee Practice will not - and should never be - an exhaustive recital of all guarantee practice, for that would jeopardize the adaptability of the URDG to the evolving operational context.

Two years in use, URDG 758 have achieved the status of a market standard. ICC will continue advocating for a universal use of URDG 758 especially in public procurement where the rigidity of governmental regulation made the acceptability of the rules more limited. The joint work currently in progress with The World Bank and the Asian Development Bank aiming to achieve a wider use of the URDG 758 is likely to enhance that prospect. l

Dr Georges Affaki is a member of the Executive Committee and Head of Structured Finance, Corporate and Investment Banking, Legal Affairs at BNP Paribas in Paris. He is Vice-Chair of the ICC Banking Commission and was Chair of the URDG Drafting Group. His e-mail is georges.affaki@bnpparibas.com

URDG 758 and The Guide ICC Uniform Rules for Demand Guarantees can both be ordered at www.iccbooks.com