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The URDG in a Nutshell

2.1 What are the URDG?

2.1.1 The URDG are a set of contractual rules that apply to demand guarantees and counter-guarantees

62 Because the URDG are contractual by nature, they apply only if the parties to a demand guarantee or counter-guarantee so choose. The URDG require in article 1(a) that this choice be expressed by means of a reference to the URDG in the text of the guarantee or the counter-guarantee (but see also the case of article 1(b) and application as trade usage, at paragraphs 73 et seq.). The parties to the guarantee are the guarantor and the beneficiary, and the parties to the counter-guarantee are the counter-guarantor and the guarantor. It is their decision whether to incorporate the URDG in their agreement. For instance, if an agreement in the underlying relationship between the applicant and the beneficiary to the effect that the guarantee will be subject to the URDG is not followed by a reference to the URDG in that guarantee, the URDG do not apply to the guarantee. That being said, a guarantor (or a counter-guarantor) that would take the initiative of incorporating the URDG in its commitment without proper instructions to that effect (whether such instructions are given before issue or by way of ratification after the guarantee is issued) risks being deprived of its reimbursement claim against the party from which it received its instructions.

2.1.2 The URDG are the only contractual rules devoted to demand guarantees and counter-guarantees

63 No other ICC or other non-governmental organisation rules are devoted to demand guarantees and counter-guarantees, including the following sets of rules:

- Uniform Customs and Practice for Documentary Credits (ICC Pub. No. 600) govern documentary credits.

- International Standby Practices ISP98 (ICC Pub. No. 590) govern standby letters of credit.

- Uniform Rules for Contract Bonds (ICC Pub. No. 524) govern accessory guarantees.

- Uniform Rules for Contract Guarantees (ICC Pub. No. 325) govern guarantees of a hybrid nature that combine characteristics of independent undertakings and accessory undertakings. The URCG are no longer published by ICC or serviced by the ICC Banking Commission. They are rarely, if ever, encountered in practice.

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The UN Convention on Independent Guarantees and Stand-by Letters of Credit (1995), which applies to demand guarantees and counter-guarantees, in fact consists of legislative rules primarily aimed at adoption by states. It does not offer contractual rules to be chosen by the parties to a particular guarantee or counter-guarantee.

2.1.3 The URDG are neither a law nor an international treaty

64 The URDG are privately developed rules of a contractual nature. Accordingly, if the parties choose to apply the URDG, they should simply indicate this by referring to the URDG in their guarantee or counter-guarantee. The parties need not consider whether the URDG have been enacted as a law or ratified as a treaty, either in their own country or in the jurisdiction whose law they chose to apply to their undertaking¹⁸.

2.2 Are there conditions for the URDG to apply to a guarantee?

65 To fall within the rules, the guarantee or counter-guarantee must satisfy six conditions:

(1) It must embody a signed undertaking (see the definition of “signed” in article 2 of the URDG 758).

(2) The undertaking must be for the payment of money, not for other kinds of performance. Non-payment undertakings, such as the guarantor’s undertaking to step in to complete an underlying construction contract in lieu of the defaulting contractor, are outside the scope of the URDG even though the guarantor’s failure to perform may itself attract the duty to pay damages.

(3) The payment undertaking must be for a specified amount or maximum amount, as opposed to a sum fixed by reference to the amount of the beneficiary’s loss.

(4) The undertaking must be documentary in character, that is, conditioned solely on presentation of a demand in a signed document (as defined in article 2) and such other documents as may be specified in the guarantee or the rules, without the need to show actual default on the part of the applicant. Accordingly, the URDG do not apply to suretyship guarantees, which are payable only on proof of default.

(5) It must be the intention of the applicant and the beneficiary that the guarantee will be invoked only if there has been default in the underlying contract or other relationship. It is this that distinguishes the demand guarantee from the documentary credit (see further paragraphs 19 et seq.) or direct-pay standby letters of credit (see further paragraph 23).

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(6) The guarantee or counter-guarantee must expressly indicate that it is subject to the URDG, or, alternatively, the URDG must in some other way have effect under the applicable law (see paragraphs 72 et seq.).

66 Any undertaking that fulfils these six conditions is a guarantee or counter- guarantee covered by the URDG, whether described as a guarantee, bond, letter of credit or otherwise and whether issued by a bank, insurance company or other body or person. Demand guarantees are issued to support any type of obligations, whether performance obligations or payment obligations, in much the same way as letters of credit. There is, indeed, a confirmed practice of utilising a demand guarantee as a substitute for a letter of credit in order to benefit from the reduced cost resulting from the fact that the guarantor is intended to be only the second port of call for payment because the underlying contract makes the applicant/purchaser the party primarily liable. Furthermore, undertakings fulfilling the above six conditions are within the rules for whatever stage of the underlying contract to which they may relate, from the pre-contract tender (or bid) guarantee at one end to the warranty guarantee at the other.

2.3 How do the URDG apply?

67 The URDG apply to a guarantee or counter-guarantee:

- where they are expressly incorporated into the guarantee or counter- guarantee (article 1(a));

- absent such an incorporation, as a result of the application of the rule in article 1(b) on asymmetrical guarantees; or

- if the applicable law so permits, as trade usage or through a course of prior dealing in which they were consistently applied to guarantees or counter-guarantees between the parties.

This is explained in the following paragraphs.

2.3.1 Application by express contractual incorporation

68 As rules of a contractual nature, the URDG apply to any demand guarantee or counter-guarantee where the parties so choose. Their choice should take the form of a simple reference to the URDG in the particular guarantee or counter-guarantee. This reference need not be in any particular form. “This guarantee is governed by the Uniform Rules for Demand Guarantees of the International Chamber of Commerce, Publication No. 758”, “Subject to URDG” or even simply “URDG” lead to the same result, which is to bring all 35 articles of the URDG into the guarantee or counter-guarantee as if they had been physically inserted into its text. Strictly speaking, the reference to the publication number of the URDG “758” is not necessary, since article 1(d) provides that the new 758 version shall apply where a guarantee issued on or after 1 July 2010 indicates that it is subject to URDG without indicating that the 458 version applies.

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Can the URDG be excluded or modified?

69 Because the URDG are contractual rules and rely for their effectiveness on the parties’ agreement, it is open to those parties to exclude or modify one or more of the provisions of the URDG when incorporating the rules in the guarantee or counter-guarantee (article 1(a)). This can be achieved either explicitly, by indicating, for example, “this guarantee is subject to URDG except for article 25(c) which is excluded”, or implicitly, by including in the guarantee a provision that in some way departs from a rule (see paragraph

1.24 in Chapter 4 below). For example:

(i) A guarantee that indicates that no document shall be dated before the guarantee’s date of issue modifies article 15(d) and excludes its second sentence without the need to indicate expressly that it does so.

(ii) A guarantee that allows the beneficiary to present only one demand excludes article 17(b) without the need to indicate expressly that it does so.

(iii) A guarantee that requires the guarantor to determine if a demand is a complying demand within one business day of presentation modifies article 20(a) without the need to indicate expressly that it does so.

(iv) A guarantee that indicates that the guarantor shall assume no responsibility for the consequences arising out of the interruption of its business by force majeure excludes article 26 without the need to indicate expressly that it does so.

70 However, there are three limitations to this rule.

71 First, to fall within the scope of the URDG, the undertaking must be an independent guarantee or counter-guarantee as opposed to a suretyship. Parties seeking to exclude or modify any of the key rules of the URDG, such as article 5 or article 7, should be cautioned against doing so, as this could lead a court to conclude that their URDG guarantee now contains terms that are indicative of an accessory suretyship. The second exception is the requirement for a supporting statement under article 15, which must be expressly excluded. It is not sufficient that the guarantee states that it is payable on demand without making reference to the requirement of a supporting statement (see paragraphs 15.4 et seq. in Chapter 4). The third exception is the banning in article 7 of non-documentary conditions whose fulfilment cannot be determined from the guarantor’s own records or from an index specified in the guarantee. The inclusion in a guarantee or counter- guarantee of a non-documentary condition does not in itself exclude article 7. The non-documentary condition is deemed as not stated and will be disregarded (see paragraphs 7.7 et seq. in Chapter 4).

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2.3.2 Application of the URDG absent express incorporation

72 The URDG can apply without the need for express incorporation in the following two cases: in indirect asymmetrical guarantees and, where the applicable law so permits, as a trade usage or a consistent course of dealing.

(1) Application of the URDG in asymmetrical indirect guarantees

73 This case arises where the counter-guarantor requests the guarantor (or another counter-guarantor) to issue the guarantee (or another counter- guarantee) subject to the URDG but fails to indicate in its counter-guarantee that it is subject to the URDG. Such an asymmetry causes an imbalance between the duties and expectations of the parties that is likely to lead to uncertainty and possible litigation. An example of this would be the inconsistency in the payment terms between a guarantee subject to the URDG and a counter-guarantee that is not. The guarantor would be expected under article 15(a) to require the presentation of a statement of breach by the beneficiary, while the counter-guarantor would not be entitled to require the guarantor to state that it had received a complying demand under the guarantee. The result is that the guarantor’s duty is left uncontrolled unless the counter-guarantee includes a clause explicitly requiring the guarantor to state that it received a statement of breach from the beneficiary and setting out the terms of such statement.

74 The URDG remedy the consequences of such asymmetry. Article 1(b) states that where, at the request of a counter-guarantor, a guarantee is issued subject to the URDG, the counter-guarantee shall also be subject to the URDG, unless it expressly states otherwise. Indeed, where the counter-guarantor has prompted the guarantor to issue its guarantee subject to the URDG, it is only reasonable that the counter-guarantor should be required to accept the obligations imposed on counter-guarantors by the URDG. While the counter- guarantor could argue that the URDG are inapplicable to its counter-guarantee absent incorporation by an express reference, such an argument, in the context, would be in bad faith and should not be allowed to prosper. Indeed, a counter-guarantor that intends not to be bound by the very rules that it expects the guarantor to be bound by can be expected at a minimum to exclude the rules from its counter-guarantee completely. Any other solution is destined to become a trap for the guarantor.

75 The rule in article 1(b) does not apply where the counter-guarantee is expressly governed by the URDG but the guarantee is not. In such cases, the guarantee is not subject to the URDG. This rule does not apply both ways. The reason for this is that many guarantees in the field of public procurement are issued according to a mandatory model form imposed by mandatory regulation. A rule to the effect that a guarantee is deemed to be subject to the URDG merely because the counter-guarantee incorporates the URDG could result in State-owned beneficiaries rejecting URDG guarantees for modifying the imposed template. In practice, however, it will almost always be the case that a counter-guarantee subject to the URDG will indicate in the issue of guarantee instructions a requirement that the guarantee is also subject to the URDG.

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(2) Application of the URDG as a trade usage or as a result of a consistent course of dealing

76 Like all other sets of ICC rules, such as the UCP and Incoterms, the URDG can also have an effect on or apply to a guarantee or counter-guarantee absent express incorporation. This is the case where a judge or an arbitrator considers the URDG as evidence of a commercial usage in the matter that is in dispute. In that case, the URDG are conferred a normative force similar to the one that contract terms enjoy and are even considered part of the parties’ agreement by implication rather than incorporation.

77 The main legal systems of the world (civil law, common law, and Islamic law) accept that, in the matter of commercial transactions, trade usages are a key source of law and have normative force. Judges and arbitrators have the authority to identify in ICC rules – as well as in the rules drafted by other professional organisations – evidence of established trade usage for the matter in hand, thus supplementing legislation or contracts. Where this is so, the URDG can be regarded as implied terms in the guarantee or counter- guarantee, as if they were explicitly incorporated in its text. Take the example of a guarantee that does not refer to the URDG and provides in its text a termination date as well as indicating that it will cease to have any effect upon the presentation of a delivery certificate. If the parties disagree as to which condition – the advent of the specified date or the occurrence of the specified event – leads to the expiry of the guarantee, the judge is at liberty to draw evidence of relevant usage from the definition of “expiry” in article 2 of the URDG, which indicates that where an expiry date and an expiry event are stated in the guarantee, the guarantee expires upon the occurrence of the earlier of the two (see paragraph 79).

78 Even where they are neither expressly incorporated into the guarantee nor regarded as evidence of trade usage in a particular case, the URDG can still take effect as part of a course of dealing if they were incorporated consistently in previous guarantees (or counter-guarantees as the case may be) between the parties, so that the parties may reasonably be taken to have intended the URDG to govern the guarantee (or counter-guarantee).

Preparatory works

79 Both the first and second drafts of the revised URDG indicated in article 1 the following paragraph: “Nothing in these rules shall preclude their taking effect as trade usage or by implication from a consistent course of dealing between the parties to the demand guarantee or the counter- guarantee where so provided by the applicable law, even where there is no reference to the rules”. The explanatory note accompanying the drafts indicated that the aim was not to compel a mandatory application of the URDG to a guarantee or counter-guarantee absent express incorporation. Rather, it was to set aside any erroneous reading of article 1 that might lead to considering that the URDG, where not expressly incorporated in the guarantee, cannot be referred to by the parties, a judge or an arbitrator as an aid for interpretation. References to the effectiveness of trade usages

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are quite customary in international commercial law and practice codifications (see for instance ISP98 Rule 1.03 and article 13(2) of the UN Convention on Independent Guarantees and Stand-by Letters of Credit). Furthermore, such references reflect approaches consistently taken by courts and arbitral tribunals dealing with international commercial contracts and deciding that ICC rules embody trade usage in the relevant sector and, as such, can be used as an aid for the interpretation of contracts. Specifically, courts in France, Belgium and the People’s Republic of China, as well as numerous arbitral tribunals, have recognised in the URDG 458 a source of customs and usage in independent guarantees¹⁹.

However, during the course of the revision, a majority of the comments received on this paragraph expressed discomfort as to its potential misuse and the uncertainty that could result from the “surprise” application of the URDG to a guarantee lacking a reference to the rules. Further, it was observed that the URDG are not limited to international commercial transactions and can be validly used in any demand guarantee, including a guarantee securing the performance of a consumer’s obligation. In such cases, it may be considered inappropriate for the URDG to apply as trade usage. In its meeting in Dubai on 10-13 March 2009, the ICC Banking Commission opted to delete this paragraph from the draft rules, while accepting that the URDG could take effect as a trade usage where the applicable law so permits. This is what the introduction to the URDG 758 and this chapter in the Guide seek to underscore.

2.3.4 ICC lists of adherence

80 The ICC Banking Commission had a practice of asking its members and ICC national committees to express their “adherence” to its newly adopted or revised sets of rules. Displaying impressive lists of “adhering” banks was expected to encourage the use of the rules. In 1995, an adherence list was launched for the URDG, resulting in seven national committees expressing the collective “adherence” of their members to the rules, as well as 25 banks from other countries expressing their “adherence” on an individual basis²⁰. This has prompted the legitimate question as to whether a bank expressing its adherence by joining the ICC list should be considered to be bound by the URDG even if the URDG are not incorporated in a specific guarantee or counter-guarantee. The answer is no. At best, an “adherence” expresses a bank’s support for the rules, but it does not result in a legal obligation. In order to be binding, the URDG have to be specifically agreed between the two parties to a guarantee (the guarantor and the beneficiary) or a counter- guarantee (the counter-guarantor and the guarantor). Ultimately, the Banking Commission decided in its meeting of 21 November 2000 to eliminate adherence lists to avoid any party being misled²¹.

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2.3.5 Can the URDG apply to guarantees or counter-guarantees that involve terms not covered in the rules?

81 This would be the case, for instance, if the URDG were to be incorporated in a guarantee that calls for its confirmation by another obligor, as in the case of documentary credits, or in a guarantee providing for payment by acceptance of a bill of exchange. While confirmations and bills of exchange are outside the scope of the URDG, this does not preclude the application of the URDG to the other aspects of the guarantee covered in the rules. In the example above, if a URDG guarantee were to provide for its payment by acceptance of a bill of exchange, its issue, entry into effect, reduction of amount, expiry and the guarantor’s notification duties thereunder would be covered by the URDG without any limitation, while aspects specific to the inclusion of the bill of exchange (mandatory requirements of form, aval, rights of endorsees, holders in due course, etc.) would be governed by the law applicable to that bill. In such cases, once the guarantor has accepted the bill of exchange, the guarantor’s obligations under the guarantee are suspended pending maturity of the bill and are only revived if the bill is dishonoured, in which case the beneficiary has the option of suing the guarantor on the bill or suing on the guarantee (in addition to its recourse against the applicant under the underlying relationship).

2.4 The URDG and the law

82 The URDG are not themselves rules of law but constitute a set of rules that take effect through incorporation into guarantees and other independent undertakings. They are therefore necessarily limited in scope to matters for which the parties are free to make contractual provision under the applicable law. As such, they take effect subject to any domestic mandatory rules of the applicable law, that is, rules that the parties cannot exclude by contract, and to any overriding mandatory rules of the forum, namely rules that apply regardless of the otherwise applicable law.

2.4.1 Does the inclusion of a governing law clause in the guarantee conflict with a reference to the URDG in that guarantee?

83 The answer is no. This is the reason why article 34 offers the parties the possibility to agree on a governing law and, absent such an agreement, designates a law to govern the guarantee. This coexistence between the URDG and a governing law is a matter of necessity. Indeed, the URDG are contractual rules. As such, they supplement the parties’ agreement in all areas that are open to the parties’ agreement. This basically includes all the operative stages of the lifecycle of a guarantee: issue of guarantee, amendment, presentation of demand, examination, payment and expiry. Conversely, there are issues that are regulated by mandatory laws and not open to the parties to modify by agreement. Examples include the requirement of valid consent, capacity and authority to enter into the guarantee agreement, rules on illegality, fraud and waivers of the right to seek injunctions to stop the payment of the guarantee. Those issues cannot

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possibly be covered in a set of contractual rules such as the URDG. They can only be covered by law. Hence the need for both the URDG and a governing law to cater for all issues that might arise under a guarantee.

2.4.2 Is there a law banning the URDG?

84 It has been reported that certain parties – often local banks acting as guarantors upon the instruction of foreign counter-guarantors – claim that their national laws preclude them from accepting the URDG in the counter- guarantee or from incorporating them in the guarantee. In many such cases, applicants and instructing parties feel that they have no choice but to abandon the URDG and to start negotiating the terms of the counter- guarantee and the guarantee from scratch or, more frequently, to simply adhere to the model forms imposed by the local banks. Such arguments should not be accepted without scrutiny for at least two reasons:

- First, no law that specifically outlaws the URDG has ever been reported to ICC and the authors are not aware of the existence of any such law.

- Second, to the extent that a mandatory law (whether statutory or case law) might conflict with an article of the URDG,²²the following should be noted:

(i) Such laws would only supersede the contradictory provision in the URDG but would not overrule the URDG as a whole. Few contradictions (if any) can be expected to exist between the URDG and mandatory national laws, because the URDG avoid dealing with areas traditionally considered to be within the scope of such laws, such as those concerning authority or fraud.

(ii) Experience shows that such arguments are often made too hastily:

- Where a State-owned entity claims a local ban on the URDG, this argument often hides imposed guarantee forms that the entity is not empowered to modify. In such cases, agreeing on the use of the URDG is not a matter of conformity with local laws but rather a matter of bargaining power and, ultimately, of getting the necessary permission to amend the imposed forms.

- Alleged local bans on the URDG are also likely to stem from a superficial analysis of the applicable law. Most national laws on guarantees only list suretyships as the archetypal form of third-party guarantees, but this does not mean that non-accessory guarantees are illegal. Virtually all legal systems in the world recognise freedom of contract. Consequently, a demand guarantee (including a URDG guarantee) should be given effect as a legal category in itself, arising from the parties’ freedom to contract, and

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not as an imperfect mutation of a suretyship deprived of its accessory character.

2.5 Using the URDG 758: advantages to all parties

85 Each party to a demand guarantee or counter-guarantee has numerous incentives to incorporate the URDG in that guarantee or counter-guarantee, as discussed below. The combination of these advantages results in a streamlined negotiation and operational framework for both guarantees and counter-guarantees that is much more conducive to the successful building of business relationships on a balanced and transparent basis.

2.5.1 Advantages to the beneficiary of using the URDG

86 The beneficiary of a URDG guarantee and the guarantor/beneficiary of a URDG counter-guarantee derive the following advantages from the incorporation of the URDG in the guarantee and counter-guarantee.

87 A truly independent undertaking. The most important advantage that the beneficiary derives from using the URDG is the independent nature of the demand guarantee and counter-guarantee. A large part of guarantee litigation revolves around the determination of the guarantee’s true nature: independent undertaking or accessory suretyship? Hundreds of court decisions, all resulting from lengthy, costly and highly adversarial proceedings, have attempted to answer this seemingly simple question. At stake is the possibility for the guarantor to raise defences thwarting the beneficiary’s demand. In a nutshell, if the disputed guarantee is found to be an independent guarantee, the beneficiary is entitled to be paid if it presents a demand that complies with the terms of the guarantee, regardless of whether or not any breach has actually occurred in the underlying relationship and regardless of the amount of the resulting loss. By contrast, in a suretyship guarantee, the beneficiary first has to prove the applicant’s breach and, second, can expect its demand to be set off against any counterclaim or defence arising from the underlying relationship. In some countries, the stakes are even higher. Certain statutes or banking regulations could provide that some categories of guarantors are not authorised to undertake one of the two categories of guarantee business. For example, the OHADA Uniform Act on Secured Transactions declares null and void any independent guarantee issued by an individual, while banking regulations in the United States allow national banks to only issue independent undertakings with accessory guarantees being subject to stringent conditions²³.

88 None of the numerous structuring factors or incantatory formulas drafted over the years to express an intention to conclude an independent guarantee proved to be barriers against a possible recharacterisation as an accessory guarantee: payment on demand, irrevocable and unconditional undertaking, payment on first demand, issue of the guarantee by a bank, issue in an international context and so forth. Conversely, the incorporation of the URDG in a guarantee combined with the use of the model guarantee and counter- guarantee forms published in the URDG booklet, is a conclusive indication of

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the parties’ intent to have an independent undertaking and not a suretyship. Indeed, article 5 of the URDG – Independence of guarantee and counter- guarantee, provides:

“a. A guarantee is by its nature independent of the underlying relationship and the application, and the guarantor is in no way concerned with or bound by such relationship. A reference in the guarantee to the underlying relationship for the purpose of identifying it does not change the independent nature of the guarantee. The undertaking of a guarantor to pay under the guarantee is not subject to claims or defences arising from any relationship other than a relationship between the guarantor and the beneficiary.

b. A counter-guarantee is by its nature independent of the guarantee, the underlying relationship, the application and any other counter- guarantee to which it relates, and the counter-guarantor is in no way concerned with or bound by such relationship. A reference in the counter-guarantee to the underlying relationship for the purpose of identifying it does not change the independent nature of the counter-guarantee. The undertaking of a counter-guarantor to pay under the counter-guarantee is not subject to claims or defences arising from any relationship other than a relationship between the counter-guarantor and the guarantor or other counter-guarantor to whom the counter-guarantee is issued”.

89 Irrevocable undertaking. URDG guarantees and counter-guarantees are irrevocable undertakings even if they do not state so (article 4(b)). This protects the beneficiary against the risk of revocation of the guarantee at a time when the applicant’s obligation is still to be completed. In fact, by combining irrevocability with an expiry date or an expiry event, the URDG offer beneficiaries undertakings for an agreed limited duration that cannot be revoked before that duration elapses. This spares beneficiaries a serious risk that they would have encountered in some legal systems – for instance civil law systems – where guarantees issued for an unlimited duration can be revoked, even where agreed otherwise.

90 Effective when issued. A beneficiary can present a demand under a URDG guarantee and counter-guarantee from the time of issue, unless a later time or event is indicated in the undertaking (article 4(c)). This rule is meant to avoid misunderstandings, common in advance payment guarantees, where applicants argue that the effectiveness (i.e. availability for drawdown) of the guarantee depends upon the receipt of the advance payment. Absent a clause to that effect in the guarantee, this understanding may not necessarily be shared by the beneficiary. If the URDG are incorporated in the guarantee, no party can be misled about the principle that all guarantees and counter- guarantees, including advance payment guarantees, are available for the presentation of a demand as from their issue, unless they expressly stipulate a deferred entry into effect.

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91 No variation of amount absent agreement. The amount of a URDG guarantee or counter-guarantee can only be reduced in accordance with the reduction clause stipulated in that guarantee or counter-guarantee or as a result of the payment of a complying partial demand presented by the beneficiary. Such reduction is not connected to progress of performance of the underlying relationship (articles 12 and 13).

92 Time and content of notice of rejection – preclusion. The beneficiary (or the guarantor in the case of a counter-guarantee) is assured of knowing whether its demand is non-complying and the reason for rejection no later than the close of the fifth business day following the day of presentation (article 24). Failure to do so precludes the guarantor (or the counter-guarantor in the case of a counter-guarantee) from claiming that the demand and any related documents are non-complying. Beneficiaries are expected to heartily welcome this time-limit, given the amount of time that guarantors sometimes take to decide whether or not to pay.

93 Statement, not proof, of breach. Unless article 15(a) is excluded or modified in the guarantee, which can only be done expressly, thus without risk of trapping the beneficiary, the beneficiary is only expected to indicate in a statement supporting its demand in what respect the applicant is in breach of its obligation under the underlying relationship. The beneficiary cannot be required to prove the breach or to justify its right to claim payment. The same also applies to counter-guarantees, as article 15(b) only requires the guarantor to state it has received a complying demand under its guarantee, but nothing else. No proof of actual payment of the guarantee is required.

94 Extend or pay means pay unless extension granted. By incorporating the URDG, the parties agree that an extend or pay demand that complies with the terms of the guarantee should be considered, in itself, as a payment demand if no extension is granted (article 23). An essential advantage for beneficiaries is that their right to payment will not be curtailed if they have submitted a complying extend or pay demand within the validity period of the guarantee but were notified of the guarantor’s refusal to extend after the expiry of the guarantee.

95 A remedy for asymmetrical guarantees. As the beneficiary of the counter- guarantee, the guarantor is assured that the counter-guarantee issued in its favour will be subject to the URDG, even if it does not state so, provided that the instructions to issue the guarantee state that the guarantee is subject to URDG (article 2(b)). This rule is expected to put an end to the problem of asymmetrical indirect guarantees.

96 Amendments to be agreed. An amendment made without the beneficiary’s agreement is not binding on the beneficiary, although it irrevocably binds the guarantor from the time of issue. An amendment cannot indicate that it will take effect unless it is rejected within a certain time (article 11).

97 Incomplete presentations possible. A beneficiary can choose to make a presentation (including a demand) in a piecemeal manner, provided it indicates that it will be completed later, in which case it must be completed

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on or before expiry (article 14(b)). Where the beneficiary indicates that its presentation will be completed later, the guarantor need not commence examination until the presentation is complete (article 20(a)). This protects the beneficiary against any rejection risk in the interim.

98 Electronic presentations. If an electronic presentation is required and the guarantee omits to specify the format, the system for data delivery and the electronic address for the presentation, the beneficiary has a choice between making any electronic presentation that can be authenticated or making one in paper form (article 14(c)).

99 Mode of delivery of paper presentations. If a paper presentation is to be made through a particular mode of delivery without excluding the use of another mode, the beneficiary can use another mode of delivery if the presentation is received at the place for presentation before the expiry of the guarantee (article 14(d)).

100 Multiple demands allowed. Unless the guarantee prohibits multiple demands, the beneficiary is allowed to make more than one demand (article 17(b)), provided the aggregate does not exceed the amount available under the guarantee (article 17(a)). This avoids futile debates on whether the presentation by the beneficiary of a demand for less than the full amount available should stop the beneficiary from presenting subsequent complying demands for the remaining amount.

101 Separate demands. Where the guarantee provides that only one demand may be made and the beneficiary makes a demand that is rejected for non-compliance, another demand can be made on or before expiry of the guarantee (article 17(d) and article 18(a)).

102 Functional standard for examination of documents. The URDG adopt a functional standard for the examination of documents. While presented documents have to be consistent with each other and compliant with the guarantee, the data contained therein need not be identical in all documents or to the data in the guarantee terms (article 19(b)). This rule is expected to curb the rate of rejection of demands on grounds of non-conformity.

103 Change of currency. If payment cannot be made in the currency of the guarantee because of an impediment beyond the control of the guarantor, the guarantor is directed to make payment in the currency of the place of payment even if the guarantee indicates that payment can only be made in the currency specified in the guarantee (article 21). Absent this rule, the guarantee could have been frustrated and the guarantor’s obligation terminated on grounds of impossibility to perform.

104 Termination upon release. Outside the occurrence of an expiry event or the advent of an expiry date indicated in the guarantee, a guarantee terminates upon presentation to the guarantor of the beneficiary’s signed release (article 25(b)). This requirement is more protective of the interests of the beneficiary and less open to abuse than, for example, considering that the return of the original guarantee document amounts to a release of the

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guarantor. T42his is all the more so when knowing that many guarantees are returned as a result of a clerical error or a misappropriation by the applicant or someone acting on its behalf.

105 Force majeure. Contrary to the previous situation under the URDG 458 (and the UCP 600), a beneficiary (and a guarantor in the case of a counter- guarantee) that sees the guarantee expiring at a time when presentation, examination or payment is prevented by force majeure is no longer deprived of its rights. The guarantee and the counter-guarantee are extended for a limited duration (unlike in the case of ISP98), and any rights already crystallised by presentation or determination of compliance are suspended pending cessation of force majeure (article 26). A guarantor whose guarantee is extended as a result of force majeure is also protected by the automatic proportionate extension of the counter-guarantee.

106 Charges. Guarantors are directed not to stipulate that the guarantee or amendment is conditional upon the receipt by the guarantor of its charges (article 32(c)). This rule avoids traps for unwary beneficiaries and assures them of the reliability of the guarantor’s commitment.

107 Transfer. Beneficiaries have the possibility to transfer the guarantee. This makes the beneficiary’s right under the guarantee a valuable and mobile personal property susceptible of conveyance, appropriation and collateralisation under certain conditions listed in article 33 and in particular the concomitant transfer of the beneficiary’s rights and obligations in the underlying relationship (see paragraphs 33.14 – 33.15 in Chapter 4).

2.5.2 Advantages to the guarantor and counter-guarantor of using the URDG

108 An unqualified statement of independence. It is not practicable for the guarantor or counter-guarantor (particularly if they are banks) to assess the genuineness, accuracy, honesty or fairness of the beneficiary’s assertion of breach, the amount of the exact loss resulting from that breach or the validity of the defences available to the applicant under the underlying relationship. Neither are they in a position to determine before payment any disputed issues of fact or law arising from the underlying relationship. Accordingly, unless knowingly choosing to issue an accessory suretyship, the guarantor will wish to see its undertaking insulated from the underlying relationship, and subject only to its own terms. Articles 5 and 12 offer the assurance of an independent undertaking subject only to its own terms. Articles 6 and 7 assure the guarantor that it will deal only with documents, not with facts or non-documentary conditions that require factual investigations.

109 Entire agreement. A guarantor or counter-guarantor need not worry about the terms (often highly technical and complex) of the underlying relationship. URDG guarantees and counter-guarantees are only subject to their own terms, whether such terms are stipulated in the undertaking or incorporated by reference. This is indicated in article 12, which provides a true “entire agreement” rule:

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“A guarantor is liable to the beneficiary only in accordance with, first, the terms and conditions of the guarantee and, second, these rules so far as consistent with those terms and conditions, up to the guarantee amount”.

Accordingly, “entire agreement” clauses of the kind often found in underlying contracts are not required in the URDG, as they are rendered unnecessary by article 12.

110 An exclusively documentary role. Guarantors (and counter-guarantors) deal with documents and not with the goods, services or performance to which the documents may relate (article 6). Non-documentary conditions whose fulfilment cannot be determined from the guarantor’s own records or from an index specified in the guarantee are deemed as not stated and will be disregarded (article 7). Those two key rules of the URDG ensure that the guarantor is insulated from fact-finding exercises that risk tainting its independent role by requiring it to determine issues of fact or law arising from the underlying relationship. In fact, the URDG organise the successive stages in the life cycle of a guarantee or counter-guarantee based upon the presentation of a document or the advent of a date. This is particularly the case with regard to the availability of a guarantee for a drawdown (article 4(c)), the variation of the amount (article 13), payment (article 15), termination (article 25(b)) and transfers (article 33(d)(ii)). Guarantors and counter-guarantors are only required to examine the appearance of conformity of documents or to determine from their own records or from an index specified in the guarantee that a condition has been fulfilled. This would be the case, for instance, where the condition consists of an advance payment being made on the applicant’s account maintained with the bank guarantor.

111 Document examination diligence limited to determining appearance of conformity. Article 19 requires guarantors and counter-guarantors to determine, on the basis of a presentation alone, whether it appears on its face to be a complying presentation. They need not go beyond the presented document to determine issues of fact or law in relation to the data contained therein. Their task is limited to examining diligently and with professional care the required presented documents and comparing the data stated therein to other data in other required presented documents and the guarantee’s (or the counter-guarantee’s) terms and conditions.

112 Bank risk-weighting. Ascertaining whether the guarantee at hand is independent or accessory is also relevant to risk-based calculations of banks’ capital adequacy, whether under the Basel I Accord (1988) or the Basel II Accord (2004 and later updates). Under the Basel I Accord (still in force in many countries outside Europe), the proper risk-weighting factor to be applied to a guarantee in order to comply with the Capital Accord standards is based on the risk represented by the guarantee, which depends directly on its independent or accessory character. This, in turn, should determine the fees that the bank will charge the applicant (or the instructing party if different from the applicant) for the consumption of the bank’s economic capital by

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the amount of the issued guarantee. Article 5 of the URDG 758 leaves no doubt that guarantees subject to the rules are independent guarantees.

113 The following example illustrates the importance of properly determining the nature of the guarantee at the outset. Consider the case of a bank that has issued what it believes to be an accessory suretyship. To comply with the Capital Accord standards, the bank is expected to risk-weight the guarantee using a given factor and charge the applicant commitment fees on the basis of that factor. Later, a court rules that the guarantee is an independent guarantee. Depending on the jurisdiction where it is located, the bank may then have the duty to increase the conversion factor originally attributed. In some cases, this factor could be 100% of the amount of the guarantee. Yet, the bank would be precluded from charging the applicant an increased fee, unless such a possibility is expressly reserved in the application. The use of a URDG guarantee would have made it clear from the beginning that the guarantee is independent.

114 The importance of determining the independent or accessory nature of the guarantee with certainty at the outset is just as important under the Basel II Capital Framework, particularly where the bank is a beneficiary of the guarantee. Banks that have chosen the advanced approach are entrusted with determining the proper risk-weighting of their commitments according to their own expert determination. The strong independent commitment that URDG guarantees offer is expected to lead bank regulators to view them more favourably in the calculation of the exposure at default (EAD), the probability of default (PD) (essentially, whether the guarantor is likely to step in and make a payment that avoids the breach by the borrower) or the loss given default (LGD) (essentially, what the beneficiary bank can recover by enforcing the guarantee after default). In each case, a more favourable risk-weighting is expected to be attributed to a transaction involving a URDG guarantee, leading to less consumption of regulatory capital.

115 Exemption from liability if acting in good faith. Guarantors and counter- guarantors are exempted from liability for acts made or omitted – or the consequences thereof – in the course of carrying out the applicants’ instructions and performing their undertaking, unless they fail to act in good faith (articles 27 to 30).

116 Controlled transferability and assignability. No guarantor, especially if it is a bank, should issue a freely transferable guarantee without knowing the identity of the transferee beneficiary. Whatever the strength of the applicant’s collateral, a guarantor should still know the party to which it entrusts its independent undertaking. There are obvious reasons for this note of caution.

They include:

- the risk of termination of insurance coverage if the beneficiary were to change in the course of the life of the insured guarantee;

- the need to assess the beneficiary’s creditworthiness in case an amount unduly paid is to be recovered by the guarantor (if a court holds that the applicant has no obligation to reimburse the guarantor);

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- the guarantor’s compliance with its statutory or regulatory duties to conduct a proper assessment of the identity, activity and legal and beneficial owners of its counterparties before doing business as well as with its legal duties vis-à-vis economic sanction regulations for example; and

- the beneficiary’s track record with regard to unfair demands. Issuing a freely transferable guarantee turns the guarantee into a negotiable instrument that is tradable on an unregulated secondary market and forms an easy target for prime bank instrument scams involving money laundering or terrorist financing²⁴.

117 No URDG guarantee can be transferred unless the guarantor expressly consents to that transfer (article 33(b)), which it would presumably only do after having properly verified the putative transferee. Furthermore, the transfer of a URDG guarantee can only take place if the underlying relationship is also transferred to the same transferee (article 33(d)(ii)). Finally, article 33(g)(ii) protects the guarantor by indicating that the guarantor is not obliged to pay an assignee of proceeds unless it has so agreed.

118 Committed only if agreed. The URDG protect guarantors and counter- guarantors against being committed where they have not expressly agreed to it. This protection is best illustrated by three articles from the URDG, which apply to both guarantees and counter-guarantees:

(i) Article 9, which directs a guarantor receiving instructions for the issue of a guarantee to inform the party that gave the guarantor its instructions if it is not prepared or is unable to do so. Even where the guarantor fails to so inform the applicant without delay, no preclusion can be invoked obliging the guarantor to issue the guarantee.

(ii) Article 23, which indicates that where an extend or pay demand is presented, the guarantor is entitled not to grant the requested extension, even if the party that gave the guarantor its instructions agrees to do so. This unqualified statement cuts short any attempt by the applicant or the beneficiary to contend, as it has sometimes been argued, that the guarantor should not be allowed to refuse to extend the guarantee or, alternatively, that it should be held liable for damages in reparation of the loss caused by its refusal. Reasons invoked by applicants or beneficiaries to establish an alleged duty of the guarantor to extend the guarantee include:

- the guarantor’s awareness when issuing the guarantee that extend or pay demands are commonplace and should be expected during the life cycle of a guarantee or a counter-guarantee;

- so-called fiduciary duties owed by the guarantor to the applicant, often combined with the claim that the guarantor incurs no additional risk if it were to extend the guarantee, because the applicant could extend its own indemnity towards the guarantor for the same extension period; and

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- a situation where the guarantor has suspended payment upon receipt of a complying extend or pay demand but has subsequently refused to extend the guarantee as instructed by the instructing party after an agreement is reached between that party and the beneficiary. Once again, the clear terms of article 23(e) – “The guarantor or counter-guarantor may refuse to grant any extension even if instructed to do so and shall then pay” – ensure that parties are aware upfront that the ultimate payment or extension decision is the guarantor’s alone (or the counter-guarantor’s in the case of a counter-guarantee).

(iii) Article 24. When determining that a demand is non-complying, the guarantor has the option of approaching the party from which it received its instructions for a waiver of discrepancies. Article 24(c) provides: “Obtaining the waiver of the counter-guarantor or of the instructing party does not oblige the guarantor or the counter-guarantor to waive any discrepancy”. Here, too, the URDG ensure that the guarantor remains in control of the extent of its commitment.

119 Instructing party’s indemnity. The URDG direct the instructing party to indemnify the guarantor against all obligations and responsibilities imposed by foreign laws and usages (article 31). A typical example of this occurs when the law in the country of the beneficiary imposes a validity period or an expiry event that overrides a contrary provision in the guarantee. In such cases, the instructing party remains bound towards the guarantor as a result of article 31, even if the application provides for a different expiry period or event. Absent the URDG, the guarantor could lose its reimbursement claim against the instructing party.

120 Law of guarantor to govern – guarantor’s tribunal competent. Unless otherwise provided in the guarantee, the law of the guarantor’s branch or office that issued the guarantee governs the guarantee, and that of the counter-guarantor the counter-guarantee (article 34). Likewise, the competent court of the guarantor’s branch or office that issued the guarantee has jurisdiction over disputes arising from the guarantee, and the competent court of the counter- guarantor’s branch or office that issued the counter-guarantee over disputes arising from the counter-guarantee (article 35). Seasoned bankers and traders know the difficulty of negotiating a governing law and jurisdiction clause in favour of one’s jurisdiction and the likelihood of ending up with so-called neutral third jurisdictions with a legal system they rarely know. The default solution in articles 34 and 35 facilitates reaching an agreement as proposed by ICC, an international organisation that is not suspected of national bias.

2.5.3 Advantages to the applicant of using the URDG

121 It has occasionally been claimed that the URDG have sacrificed the applicant’s interests at the altar of a beneficiary’s interest-driven compromise. This is not the case. If an accessory suretyship or a URCG hybrid guarantee is taken as a benchmark, an applicant is likely to find a URDG demand guarantee more severe because the applicant will not be asked to give its consent before the

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guarantee is paid. However, such a benchmark would be unrealistic in today’s buyer-driven market. Applicants that do not offer cash-like guarantees are automatically excluded from many major projects. A more positive and realistic approach for an applicant would be to identify the advantages offered by a URDG guarantee compared to the cash deposit that the applicant would otherwise have been obliged to place in the hands of the beneficiary. These advantages can be divided into two categories: a streamlined negotiation environment that is conducive to a better relationship with the beneficiary and a series of rights offered to the applicant as a result of the application of the URDG without the need to specifically negotiate for them.

(1) A streamlined negotiation environment

122 Bases for negotiation. The URDG also benefit the applicant by streamlining the negotiation process, thereby saving time, costs and effort. Above all, the URDG allow the negotiation to take place in a more serene environment that is conducive to a better business relationship with the beneficiary, as indicated below.

Offering the URDG as a regulatory framework for the guarantee, whether at the outset or as a means to break a negotiating stalemate, is more likely to obtain the beneficiary’s acceptance than, for instance, the applicant’s suggesting clauses drafted by legal counsel, which is often suspected of being biased. The reason lies in the international representativeness that characterises both the rules themselves and the organisation under whose aegis they were elaborated:

- The text of the URDG is the result of long consultations involving representatives of all parties: exporters (often applicants), banks (often guarantors) and importers (often beneficiaries). Because they do not side with a particular party’s interests, the URDG can be presupposed to offer a neutral and balanced set of terms that meet the reasonable expectations of all parties.

- The URDG also benefit from the internationally recognised standing of ICC, an organisation that has served international business for 90 years, with over 7,000 members in 130 countries, among which the country of the beneficiary is very likely to be represented. This eliminates suspicions of bias and renders the URDG more likely to be accepted by the beneficiary.

123 A shortened text. Agreeing to issue a URDG guarantee spares the parties the effort of drafting extensive clauses to describe the independence of the guarantee, its irrevocability, its conditional transferability, the guarantor’s duties, the treatment of extend or pay demands, compliance standards for presentations, the applicable law and jurisdiction and so forth. In short, a one-page URDG guarantee or counter-guarantee, whether or not it tracks the terms of the proposed model URDG guarantee form, is as efficient and comprehensive as a 30-page document drafted at great cost by specialist consultants, because all 35 articles of the URDG are incorporated into the

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guarantee merely by stating that it is “subject to URDG”. Applicants can thus save considerable negotiating time and costs by benefiting from ready-to-use standard conditions and the accompanying model guarantee form (see Annex 1 to this Guide).

(2) New rights for the applicant

124 The right to be informed. Under the URDG, the guarantor owes the instructing party a comprehensive set of information duties. Counter-guarantors are also entitled to the same information in indirect guarantees. Absent the URDG, the instructing party (or the counter-guarantor) may not be entitled to claim such information, since such a right may not be available to it under the applicable law. The URDG direct the guarantor to provide the following information to the party from which it received its instructions:

- Article 9. If the guarantor is not prepared or is unable to issue the guarantee, it should so inform the applicant without delay. This provision does not, strictly speaking, impose a duty; it is merely precatory. That being said, in certain situations, the fact that the applicant is unaware that the guarantee will not be issued can be critical. This can be the case, for example, where the applicant has to procure the issue of a performance guarantee by a determined date, failing which it will be considered to be in breach of the tender terms and will see its tender guarantee forfeited.

- Article 16. In the event of a demand for payment or an extend or pay demand, the guarantor has the duty under the URDG to inform the instructing party without delay²⁵. However, the URDG do not require the guarantor to do so before making payment.

- Article 23. In the event of a complying extend or pay demand, the guarantor has the duty to inform the instructing party without delay of its decision to suspend payment, extend the guarantee or pay the demand.

- Article 25. Where the guarantee terminates for any reason other than the advent of the expiry date, the guarantor has the duty to so inform the instructing party without delay. The corollary, although not mentioned in the URDG, is that the guarantor has to release the instructing party from its indemnity and must also release any collateral that the instructing party might have put up as a requisite for the issue of the guarantee. Instructing parties can thereby benefit from replenished credit lines and recover their collateral to arrange for other financing.

125 Safe regulatory harbour. Applicants are often concerned about the risk of entering into contracts under foreign laws with which they may be unfamiliar. To a reasonable extent, the URDG offer them a safe regulatory harbour. This is because the majority of national commercial or civil code provisions

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relating to demand guarantees are optional²⁶. As such, they can be superseded by the URDG. The successive operational stages spanning the life cycle of a demand guarantee can therefore be regulated by the URDG as opposed to the provisions of the governing law that would otherwise have applied. This is the case with respect to the guarantor’s comprehensive duty to provide information to the party from which it received its instructions (articles 9, 16, 25 and 26) and to the termination of the guarantee upon expiry whether or not the guarantee document is returned to the guarantor (article 25(b)). However, the parties should still carefully examine the applicable law, at least to ensure that its provisions are optional.

126 Termination. In article 25(b) and (c), the URDG provide multiple termination causes that supplement whatever expiry event or date is stipulated in the guarantee or counter-guarantee. Thus, whether or not the guarantee or counter-guarantee so indicates, its incorporation of the URDG will lead to its termination: (i) on expiry; (ii) when no amount remains payable under it (including as a result of its reduction as provided in article 13); or (iii) on presentation to the guarantor of the beneficiary’s signed release from liability under the guarantee. Moreover, if the guarantee or the counter-guarantee states neither an expiry date nor an expiry event, the guarantee terminates three years from the date of issue (and the counter-guarantee shall terminate 30 calendar days after the guarantee terminates). This last cause of termination is expected to be welcomed by the instructing parties by putting a time limit on open-ended guarantees and counter-guarantees.

127 Force majeure. When an obligation cannot be performed because of an external unforeseeable impediment over which the debtor has no control, the majority of legal systems suspend the performance duty and any time limit associated with it until such time when performance is possible again. This has led to the extension of some obligations for several months because of war or civil strife. If the expiry of a guarantee were to be suspended because of force majeure by effect of law, the applicant would be expected to stay committed and continue to pay commitment fees to the guarantor for the duration of the suspension. In article 26, the URDG offer a balanced solution that avoids this fate. Where the guarantee expires at a time when presentation is prevented by force majeure, the guarantee is extended not for the duration of the force majeure but for a period of 30 days from the date on which the guarantee would otherwise have expired. If at the end of that extension the guarantor has not resumed its business, the guarantee expires. In cases where the force majeure event lasts for more than 30 days, article 26 still offers an advantage to the applicant by avoiding an uncertain outcome before a court of law, but without immediately and unfairly putting an end to the rights of the beneficiary under the guarantee and the guarantor under the counter-guarantee.

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2.6 The scope of the URDG 758: what’s in – what’s out

128 In a nutshell, the URDG cover:

• Demand guarantees and counter-guarantees that are stated to be subject to the URDG (article 1(a));

• Asymmetrical indirect guarantees (article 1(b));

• Transition from URDG 458 to URDG 758 (article 1(d));

• Separateness of branches in different countries (article 3(a));

• Electronic as well as paper guarantees and counter-guarantees and presentations thereunder (article 2 (definition of “authenticated” and “signed”), article 3(c) and article 14);

• Issue and irrevocability of guarantees and counter-guarantees and their availability for presentation of demand (article 4);

• Independence of guarantee and counter-guarantee (articles 5 and 6);

• Non-documentary conditions (article 7);

• Recommended content of applications, guarantees and counter-guarantees (article 8);

• Consequences of applications not taken up (article 9);

• Advising of guarantees and counter-guarantees (article 10);

• Amendment of guarantees and counter-guarantees (article 11);

• Variation of amount (article 13);

• Presentations: place, time, content, form, mode of delivery, linkage of documents to guarantee or counter-guarantee and language of documents (articles 14 and 15);

• Information of instructing party about demand and expiry (articles 16, 23 and 25);

• Standards for complying presentations (articles 2 (definition of “complying presentation”), 17 (partial and multiple demands and amount) and 19);

• Separateness of presentations (article 18);

• Examination of presentations (article 20);

• Impossibility of payment in the currency specified in the guarantee(article 21);

• Extend or pay demands (article 23);

• Rejection process for non-complying demands (article 24);

• Liability (and its limits) of the guarantor and the counter-guarantor(articles 12 and 27-30);

• Termination of guarantee and counter-guarantee, including where no expiry provisions are stated (article 25);

• Force majeure (article 26);

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• The intrinsic value of the document embodying the guarantee or counter-guarantee (article 25);

• Indemnifying the guarantor or counter-guarantor for the obligations imposed by foreign law and usages (article 31);

• Liability for charges (article 32);

• Transfer of guarantees and assignment of proceeds of guarantees and counter-guarantees (article 33);

• Governing law (article 34);

• Competent jurisdiction (article 35).

129 The URDG do not cover:

• The capacity, power and authority of the applicant, the counter-guarantor and the guarantor to enter into their respective undertakings;

• Confirmation of guarantees;

• Syndication of, or participation in, guarantees or counter-guarantees;

• Subrogation whether arising under equity, contract or law;

• Succession by operation of law (merger, trust, liquidation, inheritance,etc.);

• Payment in kind, items of value, acceptance or negotiation of negotiable instruments and other non-monetary means of payment of guarantees or counter-guarantees;

• Guarantees requiring the guarantor to step into the underlying relationship and perform in lieu of the defaulting applicant in accordance with the terms of that relationship;

• Legal effectiveness of, effect of contractual or statutory restrictions on and conflicts of priority in the assignment of proceeds of a guarantee or counter-guarantee;

• The application – especially legal duties upon entering into a business relationship, providing collateral, possible fiduciary duties and so forth– except for the instructing party being deemed to have accepted the rights and obligations ascribed to it in the URDG (article 1(c));

• Type, scope and description of content of documents, other than the content of statements required under articles 15 and 33;

• The underlying relationship: legality, bindingness, rights and obligations of the parties and so forth;

• Fraud and unfair demands;

• Provisional measures enjoining the payment of the guarantee and counter-guarantee;

• The guarantor’s post-payment claim in restitution or for unjust enrichment against the beneficiary or the counter-guarantor’s equivalent claim against the guarantor.

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2.7 Other questions on the scope of the URDG

130 Frequently asked questions on the scope of the URDG cover their application to counter-guarantees, two and multi-party guarantees, domestic guarantees, guarantees issued by non-banks, branches acting in a separate capacity in indirect guarantees, standby letters of credit and electronic guarantees. These questions are discussed below.

2.7.1 Counter-guarantees and the URDG

131 Because several URDG articles only mention guarantees and guarantors, but not counter-guarantees and counter-guarantors, a question may arise as to whether those articles apply equally to counter-guarantees and counter-guarantors. This is the case, for example, in articles 6-14 as well as in other articles.

132 That same question was raised under the URDG 458, which gave the impression that some of their provisions covered only guarantees, in the absence of an explicit reference to counter-guarantees. On 14 June 2000, the ICC Banking Commission adopted Opinion 470/TA.454 rev, in which it indicated that URDG 458 provisions referring to guarantees and guarantors but not counter- guarantees and counter-guarantors should be read, where the context so warrants, as also referring to counter-guarantees and counter-guarantors. The new URDG 758 codify this opinion in a more general rule of interpretation without changing its substance. This is what article 3(b) provides:

“Except where the context otherwise requires, a guarantee includes a counter-guarantee and any amendment to either, a guarantor includes a counter-guarantor, and a beneficiary includes the party in whose favour a counter-guarantee is issued”.

133 The purpose of this rule is to avoid tedious repetitions in the formulation of URDG rules where this is not necessary. The reason for the reservation “except where the context otherwise requires” is that there are rules in the URDG under which counter-guarantees require separate treatment, in particular those embodied in articles 1(b) (application of URDG to asymmetrical guarantees), 5(b) (independence of guarantee from counter- guarantee), 8(e) (identification of counter-guarantee), 15(b) (requirements for demand under counter-guarantee), 20(a) (place for payment), 23 (extend or pay), 25(c) (termination of counter-guarantee), 26(c) (force majeure), 33(a) (transfer of guarantee), 34(b) (governing law) and 35(b) (jurisdiction).

2.7.2 Two-party and multi-party guarantees and the URDG

134 Three and four-party guarantees. The traditional guarantee involves three parties: the applicant which requests the guarantor to issue its guarantee in favour of the beneficiary (see Diagram 1, paragraph 1). Where the beneficiary wishes to benefit from the undertaking of a guarantor located in its country, a four-party structure is set up involving a counter-guarantor which, acting upon the applicant’s instructions, instructs and counter- guarantees the guarantor, which issues its undertaking in favour of the beneficiary (see Diagram 3, paragraph 31).

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135 Two-party guarantees.²⁷Other structures are frequently found in practice. For example, an exporter may ask a bank to guarantee the payment of the price due by the importer. In such cases, the exporter applies for and benefits from the guarantee²⁸. In addition, guarantors may act for their own account. This would be the case, for instance, where a head office of a company issues a guarantee covering the liability of a branch. Because both the head office and the branch are one and the same legal entity, the guarantee is a two-party guarantee where the applicant and the guarantor are one person. Additionally, in certain legal systems of a common law tradition, the issue of a guarantee for the guarantor’s own account will typically give the beneficiary a stronger right than a mere claim under the underlying relationship. The issue of a cheque or other bill of exchange fulfils a similar function and illustrates this point.

136 Like the UCP and the ISP, the URDG 758 specifically cover cases where guarantors and counter-guarantors act for their own account, that is, combine the role of applicant and guarantor or counter-guarantor. Article 2 defines “guarantor” as follows:

“guarantor means the party issuing a guarantee, and includes a party acting for its own account”.

It also defines “counter-guarantor” as follows:

“counter-guarantor means the party issuing a counter-guarantee, whether in favour of a guarantor or another counter-guarantor, and includes a party acting for its own account”.

137 Multi-party guarantees.²⁹Guarantees issued in favour of two or more beneficiaries by two or more syndicated guarantors, or for the account of two or more applicants, are not referred to in the URDG but are nonetheless compatible with their rules. Where such guarantees are issued subject to the URDG, rights and obligations ascribed in the rules to the “beneficiary” are to be considered as being ascribed to all beneficiaries, unless the guarantor is informed that one of the beneficiaries is to act as an agent or trustee for the other beneficiaries. Actions to be performed by the beneficiary towards the “guarantor” where the guarantee is issued by multiple guarantors (which raises obvious difficulties, especially where the presentation of one or more original documents is required), such as presenting a demand, are to be made in a timely fashion to all the guarantors, unless the beneficiary is informed that one of the guarantors is acting as the agent for a syndicate of guarantors. Likewise, duties owed to the instructing party (such as providing information) have to be performed in favour of all instructing parties. Experience shows that unless the rights and obligations arising under each party’s role under a guarantee are vested in one party acting as an agent or trustee for the benefit of the other parties, disputes may arise as to which party owes and which party

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is owed a duty. It is recommended that an agency or trust agreement is drafted among multiple parties of any one class to a guarantee or counter-guarantee before the guarantee is issued. The relationship between the parties to the agency, trust or other agreement falls outside the scope of the URDG.

2.7.3 Domestic guarantees and the URDG

138 Demand guarantees are the product of transnational transactions. Initially, their structure (direct and indirect guarantees), key principles and texts were fashioned in response to the problems and challenges that typically arise in international contracts. Yet, practice shows that many of these problems regularly arise in guarantees issued in the context of domestic transactions as well. Issues that regularly arise in the life cycle of domestic guarantees, whatever the covered obligation, include the independence principle and its consequences, the presumption of irrevocability, the guarantor’s and counter- guarantor’s duties, the variation of amount, extend or pay demands, standards of examination of presentations, incomplete demands and many others. All of these issues can be settled by applying the relevant URDG rule. In short, because the URDG are contractual rules, it is open to the parties to domestic guarantees to incorporate them by reference in exactly the same way as in the case of international guarantees. Obviously, articles 21, 34 and 35 covering, respectively, the currency of payment, governing law and the competent jurisdiction will be of little relevance in purely domestic contracts.

2.7.4 Non-bank guarantees and the URDG

139 Although the percentage of demand guarantees and counter-guarantees issued by banks exceeds that issued by non-banks, it is open to non-banks to issue guarantees and counter-guarantees as well. Guarantees issued by parent companies in favour of creditors of their subsidiaries are commonplace in modern economies.

140 Contrary to the UCP, the URDG acknowledge various types of guarantors and do not restrict the definition of guarantor, counter-guarantor or advising party in article 2 to a bank undertaking that role. The only limitations to the above might result from provisions in the applicable law. Indeed, a number of national laws consider the regular issue of guarantees by non-banks to constitute illicit banking activity. Any such prohibition would obviously supersede the URDG.

2.7.5 Separate capacity of branches

141 Both the UCP (article 3) and the ISP (Rule 2.02) allow branches of a bank in different countries to act under a letter of credit in different capacities. For example, they could confirm and pay a credit issued by their head office or accept or negotiate documents presented under a credit issued by another bank. The URDG 758 follow suit. Article 3(a) provides that branches of a guarantor in different countries are considered to be separate entities. This allows structures where Branch A in one country issues a guarantee against a counter-guarantee from Branch B of the same issuer in another country.

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Likewise, a guarantee could be issued by Branch A in one country and be advised to the beneficiary by Branch B of the same issuer in another country. Internal accounting or regulatory reasons may also lead the head office in one country to issue a guarantee in favour of its branch in another country to avoid the need to deposit funds with that branch to strengthen its capital base. Reasons may include the need to obviate the consequences of the branch’s insufficient working capital and allow it, through the issue of a head office guarantee, to extend new credit lines.

2.7.6 Standby letters of credit and the URDG

142 Standby letters of credit are technically within the scope of URDG, but their issuers may find it more convenient to opt for the ICC Uniform Customs and Practice for Documentary Credits (UCP) or possibly the International Standby Practices (ISP98), since standby letters of credit use mechanisms, including confirmation and payment by acceptance or negotiation of drafts, that are more akin to those utilised for documentary credits.

2.7.7 Electronic guarantees and the URDG

143 The URDG have a wide scope. They apply to guarantees on traditional paper support, i.e. guarantees printed on paper and mailed or handed to the beneficiary, as well as to electronic guarantees issued by tested telex, SWIFT, via the Internet or by other electronic means. Two definitions in article 2 are relevant to electronic guarantees:

“authenticated, when applied to an electronic document, means that the party to whom that document is presented is able to verify the apparent identity of the sender and whether the data received have remained complete and unaltered”;

“signed, when applied to a document, a guarantee or a counter- guarantee, means that an original of the same is signed by or on behalf of its issuer, whether by an electronic signature that can be authenticated by the party to whom that document, guarantee or counter-guarantee is presented or by handwriting, facsimile signature, perforated signature, stamp, symbol or other mechanical method”.

144 Where a guarantee or counter-guarantee is issued electronically, it needs to be both authenticated and signed. This means that the beneficiary, or the guarantor in the case of a counter-guarantee, is able to verify the apparent identity of the sender and whether the data received have remained complete and unaltered. Where a guarantee or counter-guarantee, or a document presented thereunder, is required to be signed it means that an original of the same is to be signed. “Original” is not defined in the URDG, but the rule of interpretation in article 3(c) devised for electronic presentations can be of assistance when providing:

“Any requirement for presentation of one or more originals or copies of an electronic document is satisfied by the presentation of one electronic document”.

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145 Faxes are not originals and accordingly do not meet the requirement of presentation of a “signed” electronic document under the URDG. By contrast, SWIFT messages can be regarded as originals.

146 Similarly, a guarantee or counter-guarantee can require that a presentation be made electronically, including where the guarantee or counter-guarantee itself is in paper form. The rules require some electronic documents to be signed (as defined), such as the demand for payment and a beneficiary’s statement of release of the guarantor. Furthermore, article 14(c) requires that a guarantee requiring an electronic presentation should specify the format, the system for data delivery and the electronic address for that presentation. Failing to do so allows a presenter to make any presentation in any electronic format that allows it to be authenticated (as defined in the URDG) or in paper form.

147 In summary. Because of their contractual nature, the URDG are extremely flexible. They can be adapted to the transaction at hand, whatever its complexity. In fact, the URDG can provide an adequate operational framework for any situation where a demand guarantee is required, whatever the situation or the sector involved. Any demand guarantee or counter-guarantee may be a URDG guarantee or counter-guarantee if the parties so choose.

The URDG 758: a promising debut

148 A year after the adoption of the URDG 758 by the ICC Executive Board, and nine months after their entry into force, their entry on the global guarantee stage looks very promising. URDG 758 guarantees and counter-guarantees were issued on the very first day that the rules entered into force. A great number of ICC national committees, banking and business federations and professional organisations have organised highly attended seminars presenting the new rules to business circles from all sectors and the media. The World Bank and the International Federation of Consulting Engineers are reportedly in the process of updating their guarantee forms that incorporate the URDG 458. ICC has reached out to the United Nations Commission on International Trade Law to endorse the new URDG, as it did for the previous version of the rules. The Organisation for the Harmonization of Business Law in Africa (OHADA), which modelled the chapter on Independent Guarantees in its 1997 Uniform Act on Secured Transaction on the URDG 458, has likewise adopted the URDG 758 as a model for the chapter on Independent Guarantees in its revised 2010 Uniform Act on Secured Transaction (see further in Chapter 5). Finally, a number of bank regulators have expressed interest in the new rules. In the case of the Central Bank of Iran, a circular letter was sent to national banks acknowledging the URDG 758 and recommending their distribution to all branches³⁰. This letter follows the Central Bank of Iran’s endorsement of the URDG 458 in 2004. This promising debut is the result of the efforts and dedication of the ICC Task Force on Guarantees and ICC members around the globe and the belief of issuers and users in the potential of the new rules to achieve a fair and balanced uniform guarantee practice.

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