Books

CHAPTER 3

The URDG 758 In Operation

The main characters in the URDG play

149 Opting for a practical approach, Chapter 3 presents the life cycle of a URDG guarantee and counter-guarantee by tracking each of their seven key stages: drafting, issuing, changing the terms, making a presentation, examining a presentation, making payment and termination, without omitting the relationship between the instructing party and the guarantor, which is covered in the eighth and final part. Each part presents the specific rules of URDG 758 that apply to the selected situation and offers practical advice on how to make the most of them.

150 Before presenting the rules in their operational context, the main characters should take the stage for a presentation of the roles attributed to them in article 2.

Applicant

The applicant is the party indicated in the guarantee as having its obligation under the underlying relationship supported by the guarantee. In URDG 458, the term “principal” was used, but URDG 758 follow modern guarantee practice for demand guarantees, which uses the term “applicant”, in line with documentary credit and standby letter of credit practice.

The applicant may or may not be the party from which the guarantor or counter-guarantor (i) receives instructions for the issue of the guarantee or counter-guarantee and (ii) is entitled to an indemnity for its outlay. Hence, the applicant is defined as the party “indicated in the guarantee…” rather than as the party on whose instructions the guarantee is issued. See “instructing party”.

Instructing party

The instructing party is the party, other than the counter-guarantor³¹, which gives instructions for the issue of a guarantee and is responsible for indemnifying the guarantor or, in the case of a counter-guarantee, the counter-guarantor. The instructing party will generally be the applicant, but this is not always the case. Parent companies regularly instruct banks to issue guarantees with their subsidiaries as applicant, either because the subsidiary’s financial status is not sufficiently creditworthy in the eyes of the guarantor, which will want to look to the parent for indemnity, or because in the internal organisation of a group of companies one entity within the group is responsible for handling supplies and the other for finance. Where the

[Page58:]

instructing party is different from the applicant, the guarantor’s relationship will be with the instructing party, while the beneficiary’s relationship will be with the applicant.

Beneficiary

The beneficiary is the party in whose favour a guarantee is issued. Since “guarantee” includes a counter-guarantee (as indicated in article 3(b)), “beneficiary” includes a guarantor or, in the case of a chain of counter- guarantees (see Diagram 12), a counter-guarantor to which a counter- guarantee is issued, except where the context requires otherwise. Even outside the case of indirect guarantees, a guarantor can itself act as the beneficiary of its own guarantee where it is in fact acting on behalf or for the benefit of another party that is the intended beneficiary of the guarantee. An example is where the guarantor also acts as a trustee for the beneficiary under the guarantee.

Guarantor

The guarantor is the party issuing a guarantee, including a party acting for its own account. “Guarantor” includes a counter-guarantor except where the context requires otherwise (see article 3(b)).

Counter-guarantor

The counter-guarantor is the issuer of a counter-guarantee, whether in favour of a guarantor or another counter-guarantor, and includes a party acting for its own account.

Advising party

The beneficiary or guarantor may receive advice of the issue or amendment of a guarantee either directly from the guarantor or through the agency of another party, referred to in the URDG as the advising party. While possible in theory, counter-guarantees are in practice rarely advised to guarantors through an advising party because they are predicated on the guarantor and counter-guarantor having a pre-existing correspondent relationship which obviates the need for an advising party. The obligation, the nature of the undertaking of an advising party and the limits of such an undertaking are covered in article 10. An advising party may itself use the services of another party to communicate the advice. Such a party is known as the “second advising party” (see article 10(a)).

[Page59:]

3.1 Drafting a URDG guarantee

151 In a nutshell. Experience shows that undertakings drafted in clear and precise language, without undue length or excessive detail, limit the risk of misunderstandings, pre-payment dilatory arguments and litigation. By facilitating the drafting of guarantees and counter-guarantees, the URDG help foster a sound demand guarantee practice. This part of the Guide explains how to make the best of the URDG, including the URDG Forms of Demand Guarantee and Counter-Guarantee, when drafting guarantees and counter-guarantees.

3.1.1 How to draft a URDG guarantee

152 When undertaking for the first time to draft a guarantee or a counter- guarantee that incorporates the URDG, parties will be surprised by the limited number of clauses that are required to create an effective demand guarantee or counter-guarantee. There are two main reasons why the URDG facilitate the drafting task:

- No fewer than 35 key provisions in demand guarantees will not need to be specifically stated in the guarantee or counter-guarantee. The reason for this is that all of those provisions – traditionally the lengthiest and requiring the most legal and technical mastery – are already drafted in the URDG, which themselves become an integral part of the guarantee as a result of their incorporation by stating “subject to URDG”.

- Ready-to-use model guarantee and counter-guarantee forms are attached to the URDG in ICC Pub. No. 758 (and to this Guide) and are expected to meet the parties’ requirements in the vast majority of cases. If an adaptation is required, it is likely to be limited to adding a reference to one or more documents to be presented in support of the demand or modifying one or more articles of the URDG. In both cases, the effort needed for such an adaptation is far less than what is required when undertaking to draft a guarantee from scratch without the URDG.

[Page60:]

The key elements to consider when drafting a URDG guarantee or counter- guarantee are outlined below.

(1) A URDG guarantee or counter-guarantee need NOT state:

153 Because a mere reference to the URDG in the guarantee or counter- guarantee incorporates all 35 URDG articles, there is no need for the parties to stipulate or refer to the key provisions in a URDG guarantee or counter- guarantee relating to any of the following:

• The application of the URDG to the counter-guarantee where the counter-guarantor has requested the guarantor to issue a guarantee subject to the URDG but has omitted to incorporate the URDG in the counter-guarantee (article 1(b)).

• The version of the URDG, i.e. 458 or 758, that applies (article 1(d)).

• The fact that a branch of the guarantor or counter-guarantor abroad can act in a separate capacity under the guarantee or counter-guarantee (article 3(a)).

• The irrevocability of the guarantee or counter-guarantee (article 4(b)).

• The entry into effect of the guarantee or counter-guarantee as of its date of issue (article 4(c)).

• The independence of the guarantee or counter-guarantee. Because the URDG affirm beyond any doubt in article 5 the independence of a URDG guarantee and counter-guarantee, it is not necessary to affirm independence in the undertaking. This contrasts sharply with non- URDG guarantees and counter-guarantees that, absent the benefit of article 5, have to express at great length the exclusion of any accessory aspect and endless lists of defences or counterclaims (article 5).

• The advising party signifying that it has satisfied itself as to the apparent authenticity of the guarantee (article 10).

• The fact that an amendment is binding on the guarantor from the time of issue but binding on the beneficiary only when accepted.

• The liability of the guarantor (or the counter-guarantor) in accordance with the terms specified in the undertaking, and the limitation of that liability up to an amount not exceeding the maximum guarantee (or counter-guarantee) amount (article 12).

• The time when a variation of amount event is deemed to have occurred(article 13).

• The place and time for presentation (article 14(a)).

• The treatment of incomplete demands (article 14(b)).

• Consequences of the non-indication in the guarantee of the format, the system for data delivery and the electronic address for a presentation in an electronic form (article 14(c)).

[Page61:]

• Consequences of the use of a mode of delivery of a paper presentation that is different from the one indicated in the guarantee or counter- guarantee (article 14(d)).

• Consequences for a presentation not identifying the guarantee under which it is made (article 14(f)).

• The language of documents to be presented (article 14(g)).

• The fact that a demand under a guarantee or counter-guarantee has to be supported by statement (article 15).

• The duty of the guarantor to inform the counter-guarantor without delay upon its receipt of a demand for payment or an extend or pay demand (article 16)³².

• The possibility to make a partial demand or multiple demands (article 17).

• The separateness of each demand (articles 17(d) and 18).

• Standards for the examination of a presentation (articles 19 and 20).

• A change of currency in cases where payment in the currency specifiedin the guarantee becomes impossible (article 21).

• The duty of the guarantor to transmit without delay a copy of the beneficiary’s complying demand, and any related documents, to the counter-guarantor (article 22)³³.

• The beneficiary’s entitlement to payment of the guarantee (or the guarantor’s entitlement to payment of the counter-guarantee) if, after presenting a complying extend or pay demand, extension is refused, whether or not the guarantee (or counter-guarantee) has expired in the meantime (article 23).

• The duty of the guarantor (or the counter-guarantor) to give notice to the beneficiary (or guarantor) of the rejection of the demand listing all discrepancies no later than the close of the fifth business day following the day of presentation (article 24).

• The termination of the guarantee (or the counter-guarantee) upon payment (including by reduction) of its full amount or receipt of the beneficiary’s signed release from liability, even if it contains a different expiry provision (article 25(b)).

• If both an expiry date and an expiry event are specified in the guarantee (or the counter-guarantee), the occurrence of the expiry upon the expiry date or the expiry event, whichever happens first (article 2, definition of “expiry”).

• The fact that the beneficiary’s retention of the guarantee document does not preclude its expiry according to its expiry terms when no amount remains payable under it or upon receipt of the beneficiary’s signed release from liability (article 25(b)).

[Page62:]

• The duty of the guarantor to inform the counter-guarantor of the termination of the guarantee as a result of the payment of its full amount (including by reduction), the occurrence of an expiry event or the receipt of the beneficiary’s signed release from liability (article 25(e))³⁴.

• The extension of guarantee and counter-guarantee in case of force majeure (article 26).

• The guarantor’s exemption from liability for acts or omissions in the course of carrying out the counter-guarantor’s instructions or in the course of performing its duties under the guarantee, provided it has acted in good faith (articles 27-30)³⁵.

• Liability for charges (to the extent the parties agree with the allocation of liability under article 32).

• The non-transferability of the guarantee without the guarantor’s consent and the free assignability of the proceeds of the guarantee or the counter-guarantee (article 33).

• A governing law clause (article 34).

(2) A URDG guarantee or counter-guarantee needs to state:

154 Because certain items are specific to each guarantee or counter-guarantee, they cannot be drafted as default rules in the URDG or accompanying model forms. Parties therefore have to expressly specify the following items in their undertaking:

• The identity of the applicant.

• The identity of the beneficiary or, in the case of a counter-guarantee, the identity of the guarantor in whose favour the counter-guarantee is issued.

• The identity of the guarantor issuing the guarantee or, in the case of a counter-guarantee, the identity of the counter-guarantor.

• A reference number or other information identifying the underlying relationship. The purpose is to allow the beneficiary to identify the underlying relationship in any supporting statement presented with the demand in compliance with article 15³⁶.

• A reference number or other information identifying the issued guarantee or, in the case of a counter-guarantee, the issued counter- guarantee. The purpose is to allow the presenter to identify the guarantee under which a presentation is made in compliance with article 14(f). Failing such identification in the presentation, examination for conformity will start only on the date of identification without resulting in an extension of the guarantee validity period.

• The maximum amount payable and the currency in which it is payable.

[Page63:]

155 Parties should note that, if they fail to include any of the above six items, the URDG cannot make up for their failure, with the risk that the guarantee is either ineffective or non-operative or that serious doubt is cast on its independent character. Specifically:

- A URDG guarantee issued without specifying the maximum amount payable results in turning the guarantee either into an uncapped payment undertaking or, more plausibly, into an accessory suretyship payable only in proportion to the established loss caused by the applicant’s breach. This also applies to counter-guarantees.

- A URDG guarantee issued without specifying the underlying relationship that it covers results:

(a) either in the impossibility for the beneficiary to present a demand for payment that would comply with article 15(a) because no statement of breach of the applicant’s obligations “under the underlying relationship” can be presented absent the identification of such a relationship;

(b) or, if the beneficiary nonetheless presents such a statement, in the guarantee being paid irrespective of the applicant’s contention that the breach stated by the beneficiary in the supporting statement in fact relates to a contract different from the one which the guarantee is intended to cover. Absent an identification of the underlying relationship in the guarantee, the guarantor is not required to construe the intent of the applicant and the beneficiary concerning the specific relationship covered by the guarantee. Article 27(b) exempts the guarantor from any liability in such cases.

Should a demand guarantee or counter-guarantee refer to the underlying relationship?

156 This question has been heatedly debated before courts in many countries. Opponents of a reference to the underlying relationship in the guarantee have argued that such a reference would create a connection between the two agreements that would turn the guarantee into an accessory suretyship. A guarantee can only be independent, they argue, if it is isolated from anyother relationship. Those opposed to this view, who accordingly support a systematic reference to the underlying relationship, argue on the basis of thereality of business needs, namely:

(i) It is necessary to refer to the underlying relationship for identification purposes. Experience gained from four decades of demand guarantee practice shows the importance of referring to the underlying relationship in the guarantee. Only this reference makes it possible to link the guarantee to the obligation it secures. This is best illustrated by the following example. Suppose an exporter is simultaneously a party to two sales contracts with the same importer: contract A and contract B. Suppose also that a demand guarantee is issued by the

[Page64:]

exporter’s bank in favour of the importer covering the performance of the exporter’s obligations under contract A, while no guarantee is issued under contract B. If the exporter defaults under contract B (for which no guarantee exists), the importer might be tempted to present a demand for payment under the guarantee covering contract A. In such cases, the guarantor would have no means of ascertaining whether the importer’s demand is proper, because it is not a party to contract A or contract B. The above confusion could easily be avoided if the guarantee covering contract A were to specifically refer to contract A and to require the importer to state in the demand for payment – in line with article 15(a) of the URDG – that a breach has occurred under contract A. Experience shows that beneficiaries are less likely to make false statements when they have to specify the contract to which the alleged breach is stated to relate.

(ii) Referring to the underlying relationship for identification purposes does not turn the guarantee into a suretyship. The independence of a URDG guarantee, expressed in article 5 of the URDG, is in no peril if the reference to the underlying relationship is only made for identification purposes. However, this would not be the case if such a reference were made with a view to linking the guarantor’s undertaking to that of the applicant, for instance by using such phrases as “the guarantor undertakes to pay what the applicant owes under the underlying contract”. In such cases, the subject matter of the guarantee becomes that of the underlying relationship, and it can no longer be claimed that the guarantee is independent. Interestingly, documentary credits have systematically been issued with a reference to the underlying sale. This reference is of the essence of the documentary credit, and it has never been alleged that such a reference alters the independence of the documentary credit. To summarize, not only does a reference to the underlying relationship in a demand guarantee have no impact on the characterisation of the guarantee, but it is also highly advisable to meet the practical needs of business.

(3) A URDG guarantee or counter-guarantee might state:

157 In addition to the six items mentioned in paragraph 154 above, it is open to the parties, if they wish, to include the following clauses in their guarantee or counter-guarantee:

• A clause for the increase or for the reduction (other than by partial payments) of the guarantee or the counter-guarantee amount. In this respect, a model variation of amount clause is provided in the model forms attached to the URDG in ICC Pub. No. 758. If no such clause is provided, the amount of the guarantee or counter-guarantee will be reduced only by partial payment pursuant to complying demands, but not in accordance with dates or events reflecting the performance of the underlying relationship.

[Page65:]

• A clause allowing deferment of the time from which a demand may be presented (in application of article 4(c)). In this respect, a model clause is provided in the model forms attached to the URDG in ICC Pub. No. 758. If no such clause is provided, a demand may be presented from the time of issue.

• A clause stating whether a presentation shall be made in paper and/or electronic form. If no such clause is provided, article 14(e) states that any presentation shall be made in paper form.

• A clause determining the language of any document specified in the guarantee. If no such clause is provided, article 14(g) states that documents issued by or on behalf of the applicant or the beneficiary, including any demand or supporting statement, shall be in the language of the guarantee. Documents issued by any other person may be in any language.

• A clause determining the party liable for the payment of charges if different from the rule in article 32. If no such clause is provided, article 32(a) states that a party instructing another party to perform services under these rules is liable to pay that party’s charges for carrying out its instructions.

• A clause determining the expiry date or the expiry event of the guarantee. If no expiry provision is included in the guarantee, article 25(c) indicates that the guarantee shall terminate after the lapse of three years from the date of issue and the counter-guarantee shall terminate 30 calendar days after the guarantee terminates. This effectively provides the functional equivalent to an expiry date in the guarantee and counter-guarantee.

• A clause determining the terms for demanding payment. Strictly speaking, the parties only have to indicate the conditions the beneficiary is required to fulfil to obtain payment of the guarantee if article 15 is modified or excluded. If the parties are satisfied with the statement requirement, they need not specify the conditions for demanding payment.

• An arbitration clause or a jurisdiction clause that modifies article 35 that provides that the court of the location of the guarantor’s branch or office that issued the guarantee shall settle disputes under the guarantee or, in the case of a counter-guarantee, the court of the location of the counter-guarantor’s branch or office.

• A clause submitting any dispute to a binding or non-binding decision of a DOCDEX panel. DOCDEX is a dispute resolution service administered by the ICC International Centre for Expertise and specifically tailored to disputes arising under demand guarantees and counter-guarantees subject to the URDG, documentary credits subject to the UCP, and collections subject to the URC (more on DOCDEX in paragraphs 35.2 et seq. in Chapter 4).

[Page66:]

158 Parties should note that if they fail to specifically include any of the above 9 items in the guarantee or the counter-guarantee, the default rules provided in the URDG will apply without this omission affecting the effectiveness of the guarantee or the counter-guarantee.

(4) Article 8 and the model guarantee and counter-guarantee forms

159 Article 8 of the URDG recommends that all instructions for the issue of guarantees, as well as the guarantees themselves, should be clear and precise and avoid excessive detail. It recommends that all guarantees specify:

(1) the applicant;

(2) the beneficiary;

(3) the guarantor;

(4) a reference number or other information identifying the underlying relationship;

(5) a reference number or other information identifying the issued guarantee or, in the case of a counter-guarantee, the issued counter- guarantee;

(6) the amount or maximum amount payable and the currency in which it is payable;

(7) the expiry of the guarantee;

(8) any terms for demanding payment;

(9) whether a demand or other document shall be presented in paper and/ or electronic form;

(10) the language of any document specified in the guarantee; and

(11) the party liable for the payment of any charges.

160 As indicated in the preceding paragraphs, items (7) through (11) of the list of recommended clauses in article 8 are optional. Their absence from a guarantee or counter-guarantee triggers the application of the default rules provided in the URDG.

161 Even article 8’s list of recommended indications can be dispensed with where the parties use – as is recommended – the model guarantee or counter-guarantee forms featuring at the end of ICC Pub. No. 758 (and as an appendix to this Guide). They are destined to evolve into an indispensable companion to the new URDG 758 and their users. It is expected that a comprehensive ready-to-use package that combines both the rules and model forms will be more attractive to users than the previously separate ICC Pub. Nos. 458 and 503. It should also be conducive to establishing a more harmonised practice. The URDG model forms are simple to use and fit all purposes. Each form only requires the parties to fill in about 13 blanks per guarantee, relating to dates, identity of parties, reference numbers and figures.

[Page67:]

162 In drafting the new URDG 758 Model Form, a unitary approach was preferred to one that would have consisted of multiple forms linked to the purpose of each guarantee. Tender, performance, advance payment, retention money, warranty and other types of demand guarantees share the same nature and have similar features. This was evidenced by the nearly identical five basic model guarantee forms in ICC Pub. No. 503 that accompanied URDG 458. Of course, URDG 758 users have the option of enriching the unitary model form with one or more of the optional clauses proposed at the end of URDG 758, such as the reduction of amount model clause for advance payment guarantees, or even drafting any other clause outright. That being said, it is expected that the novel approach of having a unitary model demand guarantee form for all guarantee purposes will foster the harmonisation of international guarantee practice.

(5) The three golden rules of drafting a URDG guarantee and counter-guarantee

163 Clear drafting is the linchpin of a successful international demand guarantee practice. Using the URDG model guarantee and counter-guarantee forms levels the playing field and avoids protracted negotiations and many misunderstandings. As such, it will hopefully significantly curb the worrying tendency that a few courts have shown in recent years to recharacterise demand guarantees as accessory suretyships and vice versa. While sometimes warranted by the ambiguous terms used by the parties, such interference has substantially destabilised the international guarantee market by adding a particularly prejudicial element of uncertainty. It has also caused the parties to exaggerate detailed drafting in an attempt to dispel ambiguity and cater to every foreseeable situation. Not surprisingly, while often failing to make the parties’ intent clearer, this trend has actually widened the gap between guarantee users according to their sophistication and the skills of their advisers.

164 Such a regrettable situation can be remedied by a consistent use of URDG 758 and their accompanying model forms. There is no question that URDG 758 only apply to independent guarantees and not to accessory suretyships. As such, a reference in the guarantee to URDG 758 is a strong indication of its independent nature. Yet parties should be cautioned against mixing the clear URDG language with arcane drafting that could raise doubt in the mind of a court as to their true intent. The new URDG 758 can only achieve the objective of fostering a sound uniform international demand guarantee practice if all their users remain consistent with the rules’ characteristic features. Of course, the rules leave the parties considerable freedom to add to the guarantee whatever documentary terms and conditions that may be necessary in a particular case.

[Page68:]

165 It is recommended that URDG users observe the following three rules when drafting a URDG guarantee or counter-guarantee:

1. Make your choice

166 Before starting the drafting process, the parties should choose whether they wish to have a demand guarantee or an accessory suretyship. The two are mutually exclusive. Any attempt to create a cross-breed between an independent undertaking under which no defence derived from the underlying relationship can be asserted, on the one hand, and an obligation to establish the applicant’s breach before payment and determine the consequential loss, on the other hand, is bound to be deficient.

2. Be consistent with your choice when drafting the guarantee

167 Once the parties have opted for a demand guarantee, they should avoid drafting conditions whose occurrence can only be determined through a forensic examination of the underlying relationship. Likewise, conditions stipulated in the guarantee or counter-guarantee should be determinable, either by the presentation of a specified document or from the guarantor’s own record. Otherwise, the condition will be deemed “not stated” (article 7).

3. Prefer clarity

168 Guarantors and instructing parties should avoid:

- using ambiguous terms in the guarantee, even if they are advised that an ambiguity can be interpreted in their favour as debtors of the payment obligation. Sound practice can only be built upon transparency and good faith.

- excessive detail in describing any condition or document required under the guarantee, as recommended in article 8 of the URDG. It is in no one’s interest that the guarantee terms can only be understood through lengthy and costly litigation. Clear wording requires no judicial interpretation.

- expressing any condition that cannot be determined by the presentation of a specified document or from a date, an index specified in the guarantee or the guarantor’s own records (a defined term, see paragraph 2.44 in Chapter 4). Article 7 directs guarantors and counter- guarantors to disregard any non-documentary conditions and consider them as not stated. This is further examined in paragraphs 338 et seq.

[Page69:]

3.2 Issuing a URDG guarantee

169 In a nutshell. The issue of a guarantee or counter-guarantee triggers a number of consequences. The guarantor or counter-guarantor is irrevocably committed from the time of issue, and, unless a deferred time is expressly indicated, the beneficiary can present a demand from that time too. It is therefore important to determine with certainty when a guarantee is issued. This is done in article 4. Article 9 covers the situation where a guarantor or counter-guarantor is unwilling or unable to carry out the instructions for issue. Article 10 covers the use of one or more advising parties to notify the beneficiary of the guarantee or amendment. Disclaimers as to the guarantor’s liability for acts or omissions during this stage of the life cycle of the guarantee (and throughout that life cycle) are covered in articles 28 and 29. Finally, the responsibility for the payment of fees is a matter that needs to be decided from the beginning, at the issue stage, as outlined in article 32.

3.2.1 Guarantee and counter-guarantee issued

(1) When is a guarantee issued?

170 The time of issue is key in the life cycle of a guarantee, since it marks:

- the time at which the guarantee becomes irrevocable; and

- the earliest time at which a demand can be made unless a different time or event is specified for that purpose (see article 4(c)).

171 Under the URDG, a guarantee is issued when it leaves the control of the guarantor, irrespective of whether or when the beneficiary receives it. While other possible tests were examined during the revision, including the delivery of the guarantee to the beneficiary, the guarantor’s control test was considered to be the better standard given the established practice. This is shown in the following example. Take the case of a guarantee sent by a guarantor in Frankfurt on Wednesday by courier to the beneficiary in Abu Dhabi but only delivered to that beneficiary on Saturday. It is generally accepted that the guarantor charges the instructing party for the guarantee fees and commissions and, in the case of a bank guarantor, that it reflects the

[Page70:]

guarantee amount in its capital adequacy ratios as of Wednesday even if the beneficiary can only present a demand as of Saturday at the earliest, although in theory the beneficiary may be able to submit a demand from Wednesday if it were to receive a copy of the guarantee by telecommunications.

(2) The control test deconstructed

172 A paper-based guarantee leaves the control of the guarantor when it is dispatched by the guarantor or its agent to the beneficiary or its agent, including when the guarantor or its agent remits it to an independent carrier (e.g. a postal or courier service) with no power for the guarantor to recall it. However, a guarantee remains under the control of the guarantor while en route to or held by the guarantor’s own agent, even if that guarantee has completed the guarantor’s approval process for issue and was signed by all authorised officers as required by the guarantor’s internal policy. Likewise, if the guarantee is transmitted to a party acting as an escrow agent with the guarantor’s instructions to remit that guarantee to the beneficiary when certain conditions are met, the guarantee is not issued until the escrow agent actually remits it to the beneficiary. In essence, it is the legal test of control that is chosen by the URDG, not a material test of “letting the guarantee out of the guarantor’s hands”.

173 Where a guarantee is sent to an advising party for transmission to the beneficiary, the advising party is the agent of the guarantor, not of the beneficiary. This means that the guarantee remains under the control of the guarantor, which is able to withdraw it, until the advising party transmits it to the beneficiary or incurs a commitment to the beneficiary to transmit it.

(3) Contractual variations

174 It is recommended that the parties abstain from agreeing that a guarantee be deemed issued before the date when it leaves the control of the issuer. Conversely, if a guarantee has left the control of the issuer with an indication on its face that it is not “available”, “operative”, “effective” or the like, the guarantee has nevertheless been “issued” under article 4(a) and is irrevocable and binding on the guarantor. That being said, it is worth noting that, where the condition of article 4(c) is met, the beneficiary will be precluded from presenting a demand under the guarantee until the conditions laid down in the guarantee regarding its differing availability for presentations are met.

(4) When is an electronic guarantee issued?

175 The guarantor’s control test applies equally to electronic guarantees that are deemed to have been issued when they are transmitted to the beneficiary or its agent but not when they are transmitted to the guarantor’s own agent, including an advising party. If a clerical error or IT failure results in a guarantee being lost in the guarantor’s electronic data system after it has been signed but before it has left the control of the guarantor, the guarantee is not issued even if the guarantor cannot change or retrieve it.

[Page71:]

(5) Conflict of dates – the SWIFT case

176 In the case of a conflict between the issue date printed on the guarantee and the date on which the guarantee has actually left the control of the issuer, the latter prevails unless the guarantee specifies otherwise. This solution mirrors the rule that generally applies to deeds under English law, according to which the date of the deed is the date on which it is tendered as a deed, regardless of the actual date printed on the document. The issue normally does not arise in guarantees issued through the SWIFT network, where the date of issue in MT760 is inserted electronically by the issuer’s electronic system in field 30 of the message when the guarantee is issued. However, if the guarantor’s electronic system allows for a date to be inserted manually in field 30 and the bank clerk completing the guarantee inserts the date on day one, but the guarantee is sent through SWIFT only on day three after the completion of the internal approvals, then day three is the date of issue according to article 4(a) of the URDG because it is on that date that the guarantee leaves the control of the guarantor, regardless of whether or not the SWIFT usage rules indicate a different solution. Although unlikely, should the applicable law decide otherwise by means of a mandatory rule, it would obviously supersede the URDG control test.

(6) Counter-guarantees issued

177 All of the above considerations apply equally to a counter-guarantee that is issued when it leaves the control of the counter-guarantor, as well as to an amendment to a counter-guarantee, since under article 3(b) a guarantee includes a counter-guarantee and any amendment to either.

(7) Irrevocability

178 Irrevocability is of the essence in demand guarantees and counter-guarantees, which are irrevocable on issue even if they do not state so. Though highly unusual, it is open to the parties to frame the guarantee or counter-guarantee as revocable, but if they do not do so it cannot be revoked once issued. The same rule applies to an amendment as to a guarantee unless and until it is rejected by the beneficiary (article 11(b)). A revocable guarantee means that the guarantor is entitled to cancel its undertaking or change its terms at any time without first having to seek the beneficiary’s consent. This creates an unacceptable risk that goes against international standard demand guarantee practice, which promotes a fair balance of the interests of the parties based on transparency and certainty.

(8) No need for beneficiary to accept or reject guarantee

179 Under the URDG, the beneficiary need not accept or reject a guarantee or an amendment thereto. The guarantor is irrevocably bound by the guarantee – and the counter-guarantor by the counter-guarantee – upon issue. Of course, a beneficiary could reject an issued guarantee because it considers that its terms do not conform to what was agreed in the underlying contract and so inform the guarantor. Alternatively the beneficiary can ask for different terms. In both cases, the effect of the rejection or the request for change of terms is that the guarantor ceases to be bound by the guarantee that it issued.

[Page72:]

(9) When demand may be presented

180 Demand guarantees and counter-guarantees can be issued irrevocably, yet may have a deferred availability for the presentation of demands until a date or event stated in the guarantee or counter-guarantee happens as indicated in article 4(c). The case is best exemplified in the situation of an advance payment guarantee. The question inevitably arises as to whether the beneficiary should make the advance payment first or wait for the applicant to procure the issue of an advance payment guarantee. The solution lies in separating (a) the date of issue when the guarantor’s undertaking becomes irrevocable and (b) the date when the issued guarantee becomes available for payment. For example, the guarantee can state that a demand can be presented as of the presentation to the guarantor of a bank certificate stating that the advance payment has been credited to the applicant’s account. The beneficiary is thus reassured that it is fully covered by an irrevocable guarantee that can be relied upon if and when the beneficiary pays the advance payment to the applicant.

181 It is possible for the beneficiary to make a demand under the guarantee from the moment that it has been issued (“from” here means “at”), unless the guarantee specifies a later time or event. However, it is necessary to bear in mind that under article 15 a demand must be supported by a statement of breach. While the guarantor is not concerned with the truth or accuracy of the statement as indicated in the disclaimer in article 27, a demand made immediately upon issue of the guarantee or only shortly thereafter could give rise to legitimate questions as to the conditions in which it is made. Indeed, even the guarantor may be able to conclude that such a demand is unfair.

3.2.2 Application not taken up

182 As further indicated in paragraph 550 below, a guarantor that, at the time of receiving the application for the issue of the guarantee, is unwilling or unable to do so should without delay so inform the party from which it received its instructions.

183 Article 9 is essentially a recommendation. It reflects a standard of good practice and cannot be made a binding rule, given that there may be no relationship between the guarantor and the party from which it received its instructions and, therefore, no obligation of any kind on the prospective guarantor. Therefore, article 9 essentially encourages prospective guarantors to communicate their decision and to do so without delay.

3.2.3 Advising of guarantee

184 Guarantees are not always directly issued by the guarantor to the beneficiary. A guarantor may instead instruct an advising party to advise the guarantee to the beneficiary where (a) that guarantor is unknown to the beneficiary or (b) the beneficiary, while accepting the guarantee without requiring a more costly reissue of the guarantee through a local guarantor, nonetheless insists on getting from an advising party acceptable to it – generally, a bank with which it has a standing commercial banking relationship – a warranty of the authenticity of the guarantee. In the case of non-bank guarantors, seeking a

[Page73:]

bank to advise the guarantee to the beneficiary adds a “banking label” to the guarantee at a reasonable cost, by allowing it to be processed through the banking system, including by using SWIFT, which could substantially augment the attractiveness of that guarantee to the beneficiary.

185 A guarantee can be advised to the beneficiary by more than one advising party. The use of a second advising party results from the beneficiary’s wish for a particular advising bank to signify the guarantee. If that bank is not one with which the guarantor has a correspondent banking relationship, the guarantor will need to route the guarantee through an intermediary bank that has such a relationship with both the guarantor and the bank chosen by the beneficiary, which then becomes a second advising bank.

186 While routing the guarantee through one or more advising parties is generally indicated in the applicant’s instructions, an advising party acts as agent of the guarantor and has no relationship with the applicant. Pursuant to article 4(a), the principal-agent characterisation of the guarantor-advising party relationship results in the guarantee being issued not when the guarantor transmits it to the advising party but when that advising party notifies it to the beneficiary, for it is only then that the guarantee has left the control of the guarantor (see article 4(a)).

(1) Responsibility of the advising party to the beneficiary

187 By advising a guarantee, whether directly or by utilising the services of another party (“second advising party”), the advising party represents to the beneficiary and, where applicable, the second advising party, the following two warranties:

- first, that it has satisfied itself as to the apparent authenticity of the guarantee; and

- secondly, that the advice accurately reflects the terms and conditions of the guarantee as received by the advising party.

(a) APPARENT AUTHENTICITY OF THE GUARANTEE

188 As to the first representation, the URDG have opted not to follow the often misunderstood standard in UCP 500 article 7 requiring the advising party to exercise reasonable care in establishing the apparent authenticity of the documentary credit. Instead, it aligns itself with the new concept introduced by UCP 600 article 9, which requires the advising party to satisfy itself as to the apparent authenticity of the guarantee. This concept is more in line with international standard demand guarantee practice of banks³⁷and what they are expected to do to authenticate the guarantees they advise. The term “authenticity” in this article tracks the definition of the same term provided in article 2 under “authenticated” and applies even where a paper document is used.

189 Additionally, an advising party does not warrant that the guarantee is authentic, only that it appears to be authentic. This is a reaffirmation of the general principle that guarantors and related parties are concerned only with the apparent good order of documents (see article 19(a)).

[Page74:]

(b) (B) ADVICE ACCURATELY REFLECTS THE GUARANTEE AS RECEIVED

190 As to the second representation pursuant to which the advising party warrants that the advice accurately reflects the terms and conditions of the guarantee, it is the responsibility of the advising party to ensure that what it has received is advised to the beneficiary or the second advising party. However, this duty relates only to the terms and conditions as received by the advising party. If the terms were not accurately transmitted by the guarantor to the advising party, or were distorted in the course of the transmission, the advising party is not liable. Also, the rule should not be understood as requiring the advising party to include in its advice any guarantee information that it may have received from the guarantor that is not part of the guarantee. An example of this is the reimbursement instructions that the guarantor may also give to the advising party pursuant to a separate mandate to act as a place for payment according to article 20(c) and pay as agent of the guarantor. This information covers the bank-to-bank relationship, need not be advised to the beneficiary and can be deleted from the advised guarantee.

191 A breach of either of the two warranties laid down in article 10(a) that causes a loss to the beneficiary is actionable by the beneficiary. Except for these two warranties, the advising party does not owe a duty of care to the beneficiary.

(2) Responsibility of the second advising party

192 The second advising party, by advising the guarantee, signifies to the beneficiary that it has satisfied itself as to the apparent authenticity of the advice it has received and that the advice accurately reflects the terms and conditions of the guarantee as received by the second advising party. The second advising party gives no warranty as to the authenticity of the guarantee. It only warrants the authenticity of the advice that it has received from the advising party and that its advice accurately reflects the terms and conditions of the guarantee as received by the second advising party.

(3) No further representation or undertaking

193 The warranty given by the advising party or second advising party is limited to those matters set out above. The advice is given without any additional representation or undertaking whatsoever to the beneficiary³⁸. An advising party or second advising party thus gives no representation that a guarantee document that appears to be authentic is genuine or has not been altered en route to the advising party, nor does it give any undertaking that a complying demand under the guarantee will be paid, whether by itself or anyone else. Again, the advising party is not required to do more in the way of advice than notify the beneficiary of the issue of the guarantee.

(4) Party unable or unwilling to advise

194 Under article 10(d), if a party requested to advise a guarantee is unable or unwilling to do so, it should without delay inform the party from which it

[Page75:]

received the guarantee. Like article 9, and for the same reason, article 10(d) is not mandatory, since there may be no existing relationship with the party issuing the guarantee. Article 10(d) is therefore simply a recommendation of good practice.

(5) Party unable to satisfy itself as to apparent authenticity

195 Under article 10(e), if a party requested to advise a guarantee and agreeing to do so finds that it is unable to satisfy itself as to the apparent authenticity of that guarantee or the advice, it need not carry out the advice instructions it has received and must:

(a) without delay so inform the party from which the instructions appear to have been received; and

(b) if it nonetheless decides to carry out the instructions to advise, inform the beneficiary or the second advising party that it has not been able to satisfy itself as to such authenticity.

(6) Same party to advise amendments

196 In anticipation of more substantial development in the section relating to amendments (paragraph 226), it is worth noting at this stage that a guarantor using the services of an advising party, as well as an advising party using the services of a second advising party, to advise a guarantee, should wherever possible use the same party to advise any amendment to that guarantee (article 10(f)).

3.2.4 Exemption from liability – loss, delay or error in transmission

197 Article 28(a) exempts the guarantor from liability where delay, loss, mutilation or errors occur in the transmission of documents due to events that are outside of the guarantor’s control, in particular:

- non-delivery or late delivery of a document by a delivery service company or, in the case of an electronic document, disruption in the transmission not due to the guarantor’s own systems;

- mutilation of a document, whether because of a technical defect or because of deliberate distortion of the document in transit; and

- errors in the transmission of a document, such as when the delivery service company mistakenly delivers the document to the wrong addressee.

198 This exemption is available only where the following two conditions are met:

(1) the delay, loss in transit, mutilation or other error in the transmission of documents is not a result of an act or a process over which the guarantor has control. For example, if the guarantee was delivered to the wrong addressee because the guarantor wrote an erroneous address on the envelope, or if the guarantee was issued to the beneficiary with the wrong data because the guarantor mistakenly entered those data in the electronic system for guarantee issuance, the disclaimer in article 28 does not apply; and

[Page76:]

(2) the document or message is transmitted or sent according to the requirements stated in the guarantee. Conversely, if the guarantor has deliberately or negligently strayed from those requirements, even if it did so with the intention of offering what it considers to be a better, faster or cheaper service to the instructing party, it cannot benefit from the disclaimer in article 28. The exception to this rule is where, in the absence of instructions by the instructing party, the guarantor has itself chosen the delivery service that resulted in the delay, loss in transit, mutilation or other error in the transmission, whereupon the guarantor can avail itself of the benefit of article 28.

3.2.5 Exemption from liability – errors in translation and transmission without translation

199 Absent a specific undertaking to that effect, the guarantor is not obliged, before issue, to translate into a language acceptable to the beneficiary the terms of the guarantee transmitted to it in another language by the instructing party. If it does so, the guarantor is not liable for errors in translation or in the interpretation of technical terms. Likewise, the guarantor is not liable for such errors in the translation or interpretation by the beneficiary or a third party that issued a document.

200 The guarantor may transmit all or any part of the guarantee without translation. Although article 28(b) does not explicitly say so, the guarantor may also transmit any document presented to it by the beneficiary or the applicant without translating it. However, this tolerance is predicated on article 14(g), which states that, except where the guarantee otherwise provides, documents issued by or on behalf of the applicant or the beneficiary, such as a document concerning the reduction of the guarantee amount or any demand, must be in the language of the guarantee. Accordingly, a presentation of a document in an unauthorised language must be treated as discrepant and rejected, but not transmitted under article 28(b).

3.2.6 Exemption from liability for acts of another party

201 A guarantor is entitled to use the services of another party to carry out its instructions. Where the application does not require the use of a third party but does not prohibit that use, the guarantor is free to use any party to ensure that the instructions are given effect and, in doing so, benefits from the exemption of liability provided in article 29. This is typically the case where the guarantor is instructed to issue a guarantee in favour of a beneficiary with which it has no commercial banking relationship and whose guarantee it is thus unlikely to accept. Such a situation typically prompts the guarantor to use another party to act either as a guarantor, if the beneficiary so requires, or as an advising party whose warranty of the authenticity of the guarantee is acceptable to the beneficiary.

202 The effect of the exemption of liability in article 29 is twofold:

- First, if the guarantor utilises the services of another party to give effect to the instructions of an instructing party or counter-guarantor, it incurs

[Page77:]

no responsibility if that party fails to carry out its instructions, deviates from its instructions or carries them out in a fraudulent or negligent manner. Thus, if an advising party is instructed by the guarantor to advise the beneficiary of the issue or amendment of a guarantee, the guarantor is not responsible if the advising party fails to do so. When expressing this rule, the URDG express the parties’ agreement by default. As with all other rules of the URDG, the disclaimer in article 29 can be overridden by an express term to the contrary in the guarantee or the application or by effect of mandatory law.

- Secondly, unless otherwise agreed, any charges incurred by the guarantor in utilising such services (see article 32) are for the account of the party from which it received its instructions and may be recouped by that party from the guarantor.

Exceptions

203 There are three cases in which the guarantor is not entitled to invoke article 29:

- The first case is where the guarantor strays from strictly carrying out the instructions that it has received. Thus, if the details of the guarantee transmitted by the guarantor to the advising party for advice to the beneficiary are not in accordance with the instructions that it received, the guarantor cannot rely on article 29 to exempt itself from liability.

- The second case is where a domestic mandatory rule of the applicable law or an international mandatory rule of the forum overrides the exemption conferred by article 29.

- The third case is where the guarantor fails to act in good faith (article 30), as where it knows that the charges levied by the third party for the services it performs are grossly excessive. However, where the guarantor is merely negligent, as where it fails to exercise reasonable care to select a party that is competent and functioning, article 29 protects it from liability. However, see also paragraph 30.1 in Chapter 4.

3.2.7 Exemption from liability conditional upon acting in good faith

204 The exemptions granted by articles 27-29 are lost if the guarantor fails to act in good faith.

3.2.8 Charges

(1) Liability for the charges of a party instructed to perform services

205 Article 32(a) is also relevant for the issue of guarantees and counter- guarantees, because it imposes on a party that instructs another party to perform any service under the URDG, including issue, advice or amendment, a duty to pay for those services.

[Page78:]

(2) Liability where charges cannot be collected

206 As further developed in paragraph 563, where the guarantee states that charges are for the account of the beneficiary, the party instructed to perform the services must collect the charges from the beneficiary.

207 Similarly, if a counter-guarantee states that charges relating to the guarantee are for the account of the beneficiary and those charges cannot be collected, the counter-guarantor remains liable for those charges. Of course, it can claim reimbursement from the instructing party.

(3) Issue of guarantee not to be conditional on payment of charges

208 As further explained in paragraph 565, if it is the guarantor’s intention to condition the payment of its guarantee on the payment of its charges, the issue of the guarantee is better delayed until the charges are paid or, at a minimum, agreed with the party to bear those charges. Any other course of events would conflict with article 32(c) and turn into a trap to the beneficiary. Indeed, a beneficiary or, in the case of a counter-guarantee, a guarantor is entitled to assume that a guarantee, amendment or advice issued is binding on the issuer and subject only to explicit conditions that comply with article 7 and are supposed to reflect, through the presentation of documents, the occurrence of events relating to the underlying relationship.

3.3 Changing the terms of a URDG guarantee

209 In a nutshell. Like in any other agreement, the terms of guarantees and counter-guarantees may need to be changed to reflect the changing circumstances of the guarantee and counter-guarantee, including as to their operational environment, the parties to them and the state of the obligation they secure.

210 Because guarantees and counter-guarantees are irrevocable upon issue, their terms cannot be changed without the agreement of the parties. This agreement takes the form of an amendment. The issue of amendments is covered in article 11. The effectiveness or binding nature of an amendment depends on whether the party in question is the beneficiary or the guarantor and whether the amendment is pre-agreed in the guarantee, counter- guarantee or the rules. An example of the last of these concerns the impossibility of making a payment in the currency specified in the guarantee, whereupon a pre-agreed amendment laid down in article 21 allows the

[Page79:]

currency to be changed, thus preventing the frustration of the guarantee. However, because it is inherent in the payment stage, the issue of changing the currency of payment is examined in part 6 below (paragraphs 437 et seq.). Finally, a pre-agreement in the guarantee to change the beneficiary is not sufficient to transfer the guarantee; to take effect, a transfer request must comply with the other conditions set out in article 33.

3.3.1 Amendments generally

(1) Amendment binds guarantor from time of issue

211 A guarantor is under no obligation to accept instructions to issue an amendment unless it has previously agreed to do so. When it issues an amendment, as when it issues a guarantee, the guarantor is bound unless and until that amendment is rejected by the beneficiary (article 11(b)). An amendment is issued when it leaves the control of the guarantor (article4(a)). As a consequence, if a guarantor issues an amendment changing the validity period of the guarantee and its amount, the guarantor should reflect in its books the longer duration and the higher amount, whether they correspond to the original terms of the guarantee or the amended ones.

(2) Amendment of no effect if guarantee has expired

212 A guarantee comes to an end on its expiry, and an amendment issued after that date is of no effect. Where, after the expiry of a guarantee, the guarantor and the beneficiary agree to bring it back to life by means of an amendment postponing the expiry date, they are in fact issuing a new guarantee according to the same terms as the expired one but with a new expiry date.

(3) Beneficiary not bound by amendment made without its agreement

213 An amendment made without the beneficiary’s agreement is not binding on the beneficiary (article 11(b)). The beneficiary’s prior agreement to the amendment will usually be concluded with the applicant rather than the guarantor, but this does not constitute acceptance of the amendment as between beneficiary and guarantor, unless that prior agreement is recorded in the guarantee, since the guarantee is the only relationship covered by article 11(b). It follows that a beneficiary that rejects an amendment previously agreed with the applicant does not breach any duty to the guarantor but only a duty to the applicant to accept a previously agreed amendment.

214 In summary, an amendment binds the guarantor to the beneficiary on issue, and binds the beneficiary to the applicant where agreed before issue or accepted (or deemed to be accepted) subsequently. Accordingly, the effect of the beneficiary’s becoming “bound by an amendment” upon acceptance is simply that the beneficiary is subsequently no longer allowed to make a presentation based on the original terms of the guarantee in so far as they are inconsistent with the amendment.

[Page80:]

(4) No obligation on the beneficiary to expressly accept or reject amendment

215 The fact that an amendment can be binding on the guarantor upon issue but not on the beneficiary if it has not agreed to it is the logical consequence of the beneficiary’s entitlement to assert its rights according to the original guarantee terms. These rights cannot be affected by the unilateral decision of the guarantor or the applicant to change the terms of the guarantee. The beneficiary therefore has a choice: to accept the amendment, to hold the guarantor to the terms of the guarantee as issued or to defer a decision. At no time does the beneficiary need to expressly reject an amendment notified to it. Thus, if the amendment extends the period of the guarantee, a presentation made by the beneficiary after the original expiry date but on or before the amended expiry date is a valid presentation (if also compliant in other respects) even if the beneficiary did not explicitly notify the guarantor that it has accepted the amendment.

(5) No exception for amendments benefiting the beneficiary

216 The rule in article 11(b) does not change where the amendment favours the beneficiary, for example by increasing the amount of the guarantee or extending its validity period. The reason for this is to avoid debates as to what constitutes “more favourable terms” for the beneficiary. The following examples illustrate the point:

- An amendment allowing partial shipments may appear to be favourable to the beneficiary. However, if the charges for the amendment are for the beneficiary’s account (and depending on the cost involved), the beneficiary may consider that a single shipment is more appropriate after all.

- An extension of the guarantee’s validity period might not be welcome to the beneficiary if it is the party paying the guarantor’s charges, which are invoiced periodically throughout the duration of the guarantee. This applies regardless of whether those charges are invoiced directly to the beneficiary or indirectly through the applicant.

- An increase in the guarantee amount could likewise turn out to be an obstacle to the presentation of a complying demand. This would be the case, for example, where a payment guarantee requires the presentation by the beneficiary (the seller) of shipping documents for a specified amount that is calculated to reflect the value of the shipped goods. If the guarantee is amended to increase its amount in proportion to the increased value of the goods to be shipped, and the seller ships goods for a value that corresponds to the original contract value but is unable to ship goods for up to the increased value, it will not be able to present a demand with documents that comply with the amendment. In that case, the beneficiary is no longer covered for the risk of non-payment of any shipped goods.

[Page81:]

(6) Guarantor to be informed of rejection

217 The beneficiary’s rejection of the issued amendment frees the guarantor from its commitment under the amendment only where notified to the guarantor by the beneficiary. If the applicant informs the guarantor that the beneficiary has rejected the amendment, the guarantor is still bound by the amendment until the beneficiary confirms the rejection. Again, the URDG do not require the beneficiary to reject – or accept – an amendment and consider that provisions purporting to impose such a requirement are of no effect (article 11(f)).

(7) Effect of beneficiary’s rejection

218 Where the beneficiary rejects the amendment without having lost the right to do so (see next paragraph), the guarantor ceases to be bound by the amendment and the beneficiary ceases to be entitled to avail itself of the amendment. As a consequence, the guarantor and the beneficiary remain bound by the unamended terms of the guarantee.

(8) Loss of right to reject amendment

219 Although it is under no obligation to reject an amendment whether at the time of receipt or later, the beneficiary may do so at any time until it has performed one of the two acts of acceptance listed in article 11(c):

- either by notifying its acceptance of the amendment to the guarantor;

or

- by making a presentation that complies only with the guarantee as amended.

This is further explained below.

(9) Accepting the amendment by making a presentation that complies only with the amendment

220 Under article 11(c), the beneficiary is prevented from rejecting an amendment where it makes a presentation that complies only with the guarantee as amended, although it may not have notified the guarantor of its acceptance of the amendment. The word “only” is emphasised because a presentation that conforms to the requirements of the original guarantee does not in itself signify acceptance of the amendment even if that presentation also complies with the amendment. What is required for this alternative mode of acceptance is that the presentation is one that would not be a complying presentation but for the amendment. Only such a presentation shows that the guarantor is availing itself of the amendment. It follows that if the beneficiary, not having accepted the amendment, makes a presentation that conforms to the original guarantee but not to the amended guarantee, the guarantor is obliged to treat the presentation as a complying presentation under the original guarantee and to pay accordingly. By contrast, if the beneficiary, without having previously accepted the amendment, presents documents that conform only to the amended version of the guarantee, it thereby accepts the amendment and the guarantor must pay according to the amended terms. This is illustrated in the following two examples.

[Page82:]

(a) AMENDMENT VARYING THE GUARANTEE AMOUNT

221 Where the amendment increases the amount of the guarantee and the demand is for a sum falling within the original terms of the guarantee, the guarantor must honour the presentation but the beneficiary is free to make a further presentation which is inconsistent with the original guarantee but consistent with the amendment, in which event the beneficiary is deemed to have accepted the amendment. If, however, the further presentation is consistent with the original guarantee but not with the amended guarantee, this amounts to a rejection of the amendment.

(b) AMENDMENT EXTENDING THE VALIDITY PERIOD 222

Where the effect of the amendment is to extend the period of the guarantee, the beneficiary is entitled to present a demand on or before the expiry of the extended period, even if it had not previously indicated its acceptance of the amendment. This is because the beneficiary, though not bound by the amendment until acceptance or deemed acceptance, is entitled to invoke the amendment that binds the guarantor from the time of issue unless and until the amendment is rejected by the beneficiary (article 11(b)). Accordingly, the effect of issuing the amendment is to extend the period of the guarantee automatically without the need for any action on the beneficiary’s part.

Finally, if the presentation complies both with the original guarantee and with the amendment, it does not signify either an acceptance or a rejection of the amendment, and unless the guarantee precludes the making of more than one demand the beneficiary is free to make a further presentation which, if consistent only with the amendment, constitutes acceptance of the amendment.

(10) Article 11(c) v. article 19(b)

223 An interesting question arises where a presentation includes a document not required by the original guarantee but added by the amendment. Article 19(d) of the URDG directs the guarantor to disregard any presented document that is not required by the guarantee. However, when the beneficiary makes its presentation with the additional document specified in the amendment, that presentation trumps the rule in article 19(d) and should be considered as an indication of the beneficiary’s acceptance of the amendment. The guarantor should examine this presentation against the terms of the amended guarantee.

(11) Successive amendments

224 If there are two successive amendments of the guarantee and the beneficiary accepts the first amendment, it is not obliged to accept the second amendment unless it has agreed to do so or has lost the right to reject it.

(12) Rejection of non-conforming demand not cured by subsequent amendment

225 Where a demand is properly rejected as not being a complying demand, it ceases to exist and is not revived merely by a subsequent amendment of the

[Page83:]

guarantee that would cure the non-conformity. The demand must be presented all over again.

(13) Advising party’s duty to notify an amendment

226 The amendment must be advised to the beneficiary even though it is irrevocable from the time of issue. Article 10(f) directs a guarantor that has advised the guarantee through an advising party to use, whenever possible, the same party to advise an amendment to that guarantee (see paragraph 196 above). Where the guarantor does this, the advising party must notify the guarantor of any acceptance or rejection of the advised amendment by the beneficiary (article 11(d)). This, of course, assumes that the beneficiary has conveyed its decision one way or another to the advising party. If the beneficiary remains silent, then it will not be known until the time it makes a presentation whether it has accepted or rejected the amendment.

Article 10(f) uses the terms “wherever possible” as opposed to a more mandatory phraseology because the party advising the guarantee may no longer be in business or have a banking relationship with the party from which it received its instructions to advise the guarantee. However, where it is possible for the guarantor to use the same party to advise an amendment, it is good practice that it does so, even if no liability arises under the URDG for failure to do so.

(14) No partial acceptance

227 Partial acceptance of an amendment is not permitted (article 11(e)). A beneficiary that accepts part of an amendment but not the rest is considered to have rejected the entire amendment. This rule has two facets. First, a beneficiary is not entitled to accept part of an amendment and reject the rest. Secondly, acceptance cannot take place in stages. A beneficiary cannot accept part of an amendment and say it is thinking about the rest and will give its decision later. Thus, even if no part is rejected, the fact that the acceptance is only partial means that the entire amendment must be treated as rejected.

(15) No acceptance by silence

228 A provision in an amendment to the effect that the amendment shall take effect unless rejected within a certain time is to be disregarded (article 11(f)). In other words, the guarantor cannot impose on the beneficiary a duty to reject the amendment on receiving it or within a specified time thereafter. Acceptance does not occur until it is notified or on the presentation of documents complying only with the guarantee as amended.

(16) No rejection by silence

229 Although article 11(f) does not explicitly say so, the guarantor cannot impose on the beneficiary a duty to accept the amendment on receiving it or within a specified time thereafter, or stipulate that on the beneficiary’s failure to do so the guarantee will be considered rejected or revoked. This would go against article 4(b) which, when read in combination with article 3(b), leads

[Page84:]

to an amendment being irrevocable on issue even if it does not state so. Even absent such an explicit rule, conditioning acceptance or rejection of an amendment on the beneficiary’s act or abstention does not reflect international standard demand guarantee practice and should be avoided.

(17) Amendment may not be used to effect transfer

230 The parties to a guarantee cannot by amendment substitute a new beneficiary. There are two reasons for this. First of all, substitution of a new beneficiary first requires its consent. What this involves is not an amendment at all but the termination of the existing guarantee and the issue of a new guarantee. Secondly, the substitution of a new beneficiary is governed by the provisions on transfers in article 33, which impose conditions designed to preclude the transfer dealings of demand guarantees in isolation from the transfer of the initial beneficiary’s rights and obligations under the underlying relationship.

3.3.2 Specific amendments: varying the amount

231 Variation of amount mechanisms are important features in demand guarantees that are keenly fought for by experienced applicants. Because a demand guarantee is independent (article 5), its amount cannot automatically adjust to reflect the state of the performance by the applicant of its obligation under the underlying relationship. For example, a guarantee issued for an amount of €1,000,000 covering the seller’s delivery obligations under a sale of goods contract that involves ten monthly deliveries of €100,000 each cannot have its amount decrease by 10% upon each delivery, even if there is no contestation as to the performance of that delivery. That guarantee would remain available for the full amount of €1,000,000 until its expiry according to the relevant expiry terms or the rules. The applicant would also be expected to pay the guarantor’s fees for the full guarantee amount and see its credit lines burdened by the full guarantee amount throughout the duration of the guarantee.

(1) Reduction clause

232 The reduction of the amount of a guarantee can only result from a mechanism that is embedded in the guarantee itself, not in the counter-guarantee, the underlying relationship or the application (even if it refers to the guarantee). A reduction mechanism will take the form of a clause that will notionally tie the amount of the guarantee to the performance of the underlying relationship. To avoid conflicting with the general rules on independence in article 5 and non-documentary conditions in article 7, a reduction clause must be drafted so as to trigger the variation of amount in one of two ways:

- by specifying the date or dates when the variation of amount is to take place; or

- by specifying the event whose occurrence will trigger that variation. However, in the latter case, in conformity with the general principle that guarantors are concerned only with documents and not external facts, the event is deemed to have occurred only:

[Page85:]

(a) when a document specified in the guarantee as indicating the occurrence of the event is presented to the guarantor, such as the certificate of an architect, engineer or surveyor. Only a document specified in the guarantee will be examined by the guarantor to determine the occurrence of the reduction of amount event. As indicated in article 19(d), no other document will be examined even if it shows the occurrence of the specified event; or

(b) if no such document is specified, when the occurrence of the event becomes determinable either:

- from the guarantor’s own records, as defined in article 2, for example:

(i) where the beneficiary has made a previous drawing under the guarantee the proceeds of which were credited to its account maintained with the bank guarantor; or,

(ii) in the case of a guarantee covering the reimbursement of a loan, where the applicant has reimbursed a corresponding instalment of the loan on the beneficiary’s account maintained with the guarantor and the guarantor can identify the guarantee covering that loan; or

- from an index specified in the guarantee, for example, a commodity price index or a published bank interest rate. The identification of the index should not raise any concern because only an index “specified in the guarantee” can be taken into consideration when determining the occurrence of the reduction event. It is reasonable to expect that no index would be specified in the application and subsequently in the guarantee unless the applicant, the guarantor and the beneficiary are confident as to their ability to identify that index and determine the occurrence of the event against it.

233 A model reduction clause is provided among the optional clauses to be inserted in the Form of Demand Guarantee attached to the URDG (ICC Pub758) and featuring in Appendix 1 to this Guide. It is not necessary to add a reduction clause to the guarantee to ensure that the guarantee amount provides for a reduction through a payment under the guarantee, since this is covered in the rules themselves under article 25(a)(i).

(2) Increase of amount clause

234 Increase of amount clauses serve as important a function as reduction of amount clauses. An example is where an advance payment guarantee provides for an increase in its amount to cover new advance payments made by the owner under the construction contract before the contractor has

[Page86:]

delivered the corresponding portions of the works. Turnkey contracts involving additional works to be performed at the option of the buyer are another example. In all those examples, there is little economic purpose for the applicant to instruct the guarantor to issue, at the initial stage, a guarantee for an amount corresponding to the full value of the contract, including the additional advance payments or the additional works, if those payments are not made or that option is never exercised. Indeed, the applicant would burden its credit lines and pay the guarantor the issuance fees calculated on the full amount of the issued guarantee, in addition to the risk that a demand

– admittedly an unfair one – could be presented for the full amount of the guarantee. The applicant is much better off instructing the guarantor to issue a guarantee for the amount of the confirmed portion of the works, while ensuring that the guarantee includes an increase of amount clause that can vary the amount to match the increased value of the contract should this option be exercised.

235 If an agreement on an increase of amount clause with the beneficiary proves to be arduous, the applicant can consider resorting instead to the option offered by article 4(c). Applied to the examples presented in the preceding paragraph, that option would result in the guarantee being issued for the full amount of the contract, including the additional advance payments still to be made or the optional works. However, the part of the amount corresponding to those payments or works would only be available for drawdown upon the occurrence of a specified event, such as crediting the advance payments to the applicant’s account maintained with the guarantor or presenting to the guarantor a copy of the signed option extending the contract to the additional works.

236 Both the reduction and the increase of amount clauses obey the same drafting principles. Article 13 applies to both, and the description of the reduction mechanism in paragraph 232 above applies equally to the increase of amount clause. A model increase of amount clause is provided among the optional clauses to be inserted in the Form of Demand Guarantee attached to the URDG (ICC Pub 758) and featuring in Appendix 1 to this Guide.

3.3.3 Specific amendments: changing the identity of the beneficiary

237 Guarantees transferred in conjunction with the transfer of the underlying transaction perform a valuable service in secured financing. This is the case, for instance, in financial or operating leases for aircraft, ships or equipment (particularly hi-tech equipment) or the leasing of real property, where lessors sometimes sell the leased property to a purchaser who legitimately expects to continue benefiting from a demand guarantee covering the lessee’s obligation to pay the rentals. In such cases, the transfer of the rental payment guarantee in combination with the transfer of the underlying lease agreement provides the obvious solution. Equally widely used are guarantees transferred in conjunction with the trading of loan notes on the secondary market. Transferring the guarantee to the transferee of the loan enables it to benefit from the guarantor’s assurance of the borrower’s reimbursement obligation. Conversely, because transfers do not involve a change in the guarantor, there is no reason

[Page87:]

to include the transfer of counter-guarantees in the URDG. Counter-guarantees transferred by operation of law, for example as a result of a merger between the counter-guarantor and another person, are not covered in the URDG.

(1) Nature of transferable guarantee

238 Article 33(c) defines a transferable guarantee as a guarantee that may be made available by the guarantor to a new beneficiary (“transferee”) at the request of the existing beneficiary (“transferor”). The transfer is effected not by assignment but by novation, that is to say, the existing guarantee is terminated and a new guarantee issued in favour of the transferee, which thus replaces the transferor as the beneficiary. One consequence of the termination of the initial guarantee and the issue of a new guarantee is that the rights of the transferee are not subject to defences and rights of set-off that could previously have been available to the guarantor against the transfer or under the terminated guarantee.

(2) Risks where transfer uncontrolled

239 Article 33 takes into account the risks that may accompany an uncontrolled transfer of guarantee. Guarantors could find themselves committed vis-à-vis new beneficiaries unknown to them and perhaps not meeting the guarantor’s legal, regulatory or creditworthiness criteria for entering into a business relationship. Instructing parties equally could have valid reasons not to entrust guarantees issued upon their instructions into the hands of new beneficiaries, including where such reasons involve existing disputes between the instructing party and the transferee or doubts as to the creditworthiness of this transferee in the case of a claim for the refund of a guarantee unfairly called.

240 Article 33 addresses those legitimate concerns by ensuring that no guarantee is transferred unless the following three cumulative conditions are satisfied:

(A) the guarantee must specifically state that it is transferable (article 33(a)) and the transferor must request a transfer to a new beneficiary (article 33(c));

(B) the guarantor must expressly assent to that request, so that even if the guarantee is stated to be transferable, the guarantor is not bound to accede to a request for transfer made after its issue except to the extent and in the manner agreed by the guarantor (article 33(b)); and

(C) the transferor must have provided a signed statement as to the transferee’s acquisition of its rights and obligations in the underlying relationship (article 33(d)(ii)).

Each of those three conditions is explained below.

(a) GUARANTEE MUST STATE THAT IT IS “TRANSFERABLE”

241 Transposing the rule in UCP 600, the word “transferable” must be used in the guarantee in order for that guarantee to be transferable. Words such as “assignable”, “divisible” or words to similar effect do not suffice. But even a

[Page88:]

guarantee that states that it is transferable does not commit the guarantor to issue a new guarantee in favour of the transferee unless, as required under article 33(b), the guarantor agrees to do so in response to a request made after the issue of the guarantee.

(b) GUARANTOR’S SEPARATE ASSENT TO TRANSFER

242 The fact that the guarantee states that it is transferable does not by itself mean that the guarantor is committed to accepting the transfer. The guarantor is only bound to give effect to a transfer request made by the beneficiary after its issue to the extent and in the manner expressly agreed by the guarantor.

243 “After its issue” refers to the guarantee, not the assent. Strictly speaking, it is redundant, because a guarantee cannot be transferred before it has been issued, nor can a transfer request made before its issue have any effect, since a transfer can be requested only after the transfer of the beneficiary’s rights in the underlying relationship, at which point a guarantee issued to the original beneficiary would not be underpinned by any relationship, so that there would be no basis on which a demand could be made by the original beneficiary. The practical effect of article 33(b) is that the issue of a guarantee that states that it is a transferable guarantee does not commit the guarantor to honouring a transfer request except to the extent and in the manner expressly consented to by the guarantor after the guarantee has been issued and the transfer request has been made.

(i) Why the requirement for a separate assent to transfer?

244 There are good reasons why the guarantor’s separate consent after the issue of the guarantee is required. The guarantor has a legitimate interest in knowing with whom it is dealing and in being satisfied of the bona fides of the new beneficiary. Also, the transferee may hold a nationality that is subject to a ban on business relationships in the country of the guarantor, which could make it an offence for the guarantor to be a party to such a relationship. Moreover, if the guarantor is a bank, it may have a “know your customer” duty under the regulations governing it, with the aim of fostering transparency in financial dealings to combat terrorist financing, money laundering and corruption. Furthermore, the instructing party, which has given instructions for the issue of the guarantee in favour of the transferor, may decline to reimburse the guarantor if it makes payment to a different party, as this would involve an unauthorised variation of the instructions. The instructing party is entitled to insist that the requisite statement of breach is made by the party to the underlying contract, not by a transferee that is simply an assignee of the transferor’s rights under the contract. Finally, the instructing party may happen to have a right of set-off against the transferee under some separate transaction. Allowing the transferee to claim under the separate and independent guarantor’s undertaking thwarts the instructing party’s reciprocal debt claim against that transferee.

(ii) Who should agree to transfer?

245 Only the guarantor can agree to the request and issue the new guarantee. This cannot be done by an advising party, although it can advise the new guarantee issued by the guarantor to the transferee.

[Page89:]

(iii) When should the transfer be agreed?

246 As long as the guarantor has expressly consented to transfer, it does not matter whether that consent is expressed after the submission of a request by the transferor or in anticipation thereof. An illustration of the latter is the case where the guarantee is labelled as “transferable” and provides that the guarantor agrees to its transfer to new beneficiary whose identity is determined in the guarantee. All that is then required is for the beneficiary to request a transfer and refer to the guarantor’s consent recorded in the guarantee. Requiring the express consent of the guarantor to transfer is meant to protect the guarantor and the instructing party against the contingency of having to deal with an unwanted beneficiary as a result of an uncontrolled transfer. Where the name of the transferee is indicated in the guarantee terms pursuant to instructions to that effect and the guarantor has recorded in the guarantee its consent to the transfer, both the guarantor and the instructing party are deemed to have explicitly consented to the transfer taking place.

(c) GUARANTEE TO BE TRANSFERRED ONLY WHEN UNDERLYING RELATIONSHIP TRANSFERRED

247 The guarantor is not allowed under the URDG to transfer the guarantee by issuing a new guarantee to the transferee unless the transferor has provided it with a signed statement stating that the transferee has acquired all the transferor’s rights and obligations in the underlying relationship. The effect of this requirement is that the underlying relationship itself must have been transferred by novation to the prospective transferee of the guarantee. It is not sufficient that the transferor has assigned its rights to the transferee: it is also necessary that the transferee shall have acquired the transferor’s obligations.

248 The reason for the above rule is that a guarantee has no independent commercial value; it is not a bearer bond. The beneficiary is entitled to make a demand only if the applicant has committed a breach of the underlying relationship, although no proof of breach is required for payment. Thus, the guarantee is only of value in the hands of a transferee that has become a party to the underlying relationship under which the risk of breach covered by the guarantee arises. Fraudulent “sales” of guarantees are regularly reported to ICC (the so-called prime bank instruments frauds). In each case, the guarantee had been transferred separately from the underlying contract. One purpose of the rule in article 33(d) is to ensure that a person who “buys” a guarantee without having acquired rights in the underlying relationship is not entitled to present a demand under the guarantee.

(3) Transferor to pay all charges

249 The payment of transfer charges needs to be agreed before the guarantor actually transfers the guarantee. Article 33(e) provides as a default rule (unless otherwise agreed) that all charges incurred in the making of the transfer are to be borne by the transferor. This reflects a widespread practice of expecting the incumbent beneficiary that requests the transfer to pay the related charges and better protects the guarantor that, pending transfer, has no direct relationship other than with the transferor.

[Page90:]

(4) Amendments and transfers

250 A transferred guarantee must include all amendments to which the transferor and guarantor have agreed up to the date of transfer. Thus, if the guarantor issues a new guarantee in favour of the transferee that does not include all amendments, the transferee may reject it as not being in conformity with the guarantor’s obligations under the rules. Conversely:

- there is no requirement for the transferred guarantee to include an amendment that has been issued and has therefore become irrevocably binding on the guarantor under article 11(b) but has not yet been agreed by the beneficiary;

- the transferee is not entitled to require that the transferred guarantee omit any amendment issued and agreed by the transferor before the transfer.

(5) Demand and supporting statement

251 Under a transferred guarantee, a demand and any supporting statement are to be signed by the transferee. This rule applies whether the breach referred to in the statement occurred before or after the transfer. While it could be argued that the breach should be asserted only by the creditor of the breached obligation, that is to say, the beneficiary at the time of the breach, a transfer results in the transferee replacing the transferor and becoming the sole beneficiary for all purposes relating to the guarantee, including signing the demand and the supporting statement. Requiring a different signatory according to the time when the breach occurred leads to uncertainty and places the onus of having to assess an issue (the time of breach) relating to the underlying transaction on the guarantor, which goes against its independent role. Moreover, it puts the transferee in a situation where it is dependent on the transferor for the signing of the supporting statement. No such prospect can be accepted or be conducive to sound uniform practice. Clearly, if a demand is presented under a transferred guarantee for a breach committed prior to transfer, the transferee may have to ask the transferor for information about the general nature of this breach and may even be expected to require such information to be given before novation of the underlying contract.

(6) Other documents

252 Unless otherwise agreed, the name and signature of the transferee may be used in place of the name and signature of the transferor in any document other than the demand and the supporting statement. Thus, if the original guarantee required presentation of a certificate signed by the transferor as the original beneficiary, the transferee may present a certificate carrying its own name and signature without this being considered a discrepancy.

(7) Partial transfers and multiple transfers

253 Where the three conditions (A to C above, paragraphs 241 et seq.) laid down in article 33 are fulfilled, the guarantee may be transferred more than once for the full amount available at the time of transfer. Article 33(a) does not

[Page91:]

authorise partial transfers because potentially facing separate claims by multiple beneficiaries could create serious logistical problems for the guarantor. Moreover, partial transfers are rarely witnessed in demand guarantee practice, if at all. Thus, a guarantee may be transferred only for the full amount remaining available at the time of transfer. In stating that the guarantee may be transferred more than once, article 33(a) is not permitting partial transfers but authorising onward transfer (retransfer) by the transferee to another transferee. Each transfer must be for the full amount available at the time of that transfer. Where a specific situation requires partial transfers, the parties are free to opt out of article 33(a).

(8) Assignment of proceeds as distinguished from transfer

254 An assignment of the proceeds of a guarantee is different from its transfer. When the guarantee is transferred, the transferee replaces the transferor as beneficiary and, as such, is entitled to present any demand. By contrast, an assignee of the proceeds of a guarantee does not become a party to that guarantee and cannot claim any rights in relation therewith, whether in terms of making a demand, agreeing to an amendment or otherwise. It is only where a complying demand is made by the assignor – who remains for all purposes the beneficiary of the guarantee – that the assignee gets the proceeds. The sole effect of the assignment is that the proceeds, instead of being paid to the assignor, have to be paid to the assignee. The conditions governing assignments of proceeds under the URDG are explained in paragraphs 429 et seq.

3.4 Making presentation

255 In a nutshell. This stage in the life cycle of guarantees and counter-guarantees covers all the requirements pertaining to making a presentation, including a demand, and the obligations that follow. It is a key stage, since it forms the linchpin of the presenter’s right to payment, termination and variation of amount, as well as being the trigger for any other consequences stipulated in the guarantee or counter-guarantee. The articles discussed in this part provide the presenter with a roadmap for making a successful presentation

[Page92:]

in terms of place, time, form, mode of delivery, language and linkage to guarantees. While all the rules that apply to presentations also apply to demands (e.g. article 14), the URDG lay down a series of rights and obligations that apply only to demands (e.g. articles 15 through 18). The two terms should therefore not be considered interchangeable.

3.4.1 Making a presentation

(1) Presentation – presenter

256 “Presentation” is defined as the delivery of a document under a guarantee to the guarantor or the document so delivered (article 2). Article 14 covers all forms of presentation, whether presentation of a demand for payment, a document for reduction or increase of amount, a document indicating the occurrence of an expiry event or otherwise. It covers a presentation made either by the beneficiary or applicant itself or by their bank or an agent or proxy acting on their behalf, including, for this purpose, a third party furnishing on behalf of the beneficiary or applicant a document required by the guarantee, such as an insurer presenting directly to the guarantor an insurance certificate specified in the guarantee. If a presentation is made by anyone else, it is not a complying presentation (see the definition of “presenter” in article 2).

(2) Applicant as presenter

257 The reference in article 14(g) to the applicant reflects the fact that the parties to the underlying relationship could well agree that certain presentations other than demands, such as a presentation for the purpose of decreasing the guarantee amount, could well be made by the applicant or on its behalf. It is recommended that guarantees identify the party that is to make the presentation or on whose behalf it is to be made. If the beneficiary is concerned about the risk of the applicant manipulating data or representations in a document required under the guarantee and issued by a third party, such as a customs office or a surveyor, the beneficiary could instead consider requiring the third party to submit the document directly to the guarantor, regardless of whether, in so doing, the presenter is deemed to be acting on behalf of the applicant or the beneficiary.

(3) No interchangeability of applicant and beneficiary as presenter

258 It would be wrong to read the definition of “presenter” in article 2 as suggesting or condoning in any way a free interchangeability between the beneficiary and the applicant. A guarantor issuing a guarantee that requires a document to be presented by the beneficiary can only examine the presentation to determine its compliance if it is presented by the beneficiary or on its behalf, not by the applicant or its agent. For example, if a performance guarantee specifies that it will expire upon presentation by the beneficiary of a surveyor’s certificate indicating a conforming delivery of the goods, the applicant cannot pre-empt the beneficiary’s act by obtaining from the surveyor the required certificate and presenting it itself, including where the presented certificate indicates a conforming delivery of the goods. Any suggestion to the contrary would not only risk corrupting the process by depriving a party from a prerogative

[Page93:]

attributed to it in the guarantee, but would also go against the requirement that a presentation comply with the terms of the guarantee (articles 2 and 19(a)). It would also put the guarantor in an unbearable position of having to guess the purpose behind the parties’ agreement for a document to be presented by a particular person, as well as having to decide whether that purpose is met where presentation is made by another person.

(4) Presentation to guarantor only

259 A presentation made to the advising party, the second advising party or a branch of the guarantor other than the branch specified in the guarantee as the place for presentation or, absent a specification the branch of issue, is not a presentation under article 14 or, indeed, the URDG. It becomes so only if and when the party to which presentation is made acts as a presenter by transmitting that presentation to the guarantor on behalf of the beneficiary or the applicant in accordance with article 14. This also holds true in cases where the counter-guarantor makes a presentation, for example in order to decrease the amount of the guarantee, to the guarantor on behalf of the instructing party, itself acting on behalf of the applicant. It is only when the presentation is made to the guarantor under the guarantee that the requirement laid down in article 14 is met.

(5) Presenter other than beneficiary or applicant

260 The guarantee need not indicate the name of a presenter other than the beneficiary or the applicant. Where it is made by another person, the presenter needs to act on behalf of the beneficiary or the applicant as required in the definition of “presenter” in article 2. The validity, authority and conditions of representing the beneficiary or the applicant for the purpose of making a presentation on behalf of either of them is a matter outside the guarantee and is governed by the law applicable to that representation relationship.

(6) Place of presentation

261 A presentation must be made to the guarantor at the place specified in the guarantee or, if no place is specified, at the place of issue of the guarantee. Thus, if the guarantee is issued by branch A of the guarantor in London and does not specify a place of presentation, the documents must be presented to branch A and not to any other branch of the guarantor, whether in London or elsewhere.

(7) Time of presentation

262 A presentation must be made “on or before expiry”. This means that the documents must be delivered to the guarantor on or before the expiry date or before the expiry event; the mere dispatch of the presentation by the presenter to the guarantor does not suffice unless the guarantee provides otherwise. Presenters need to take the following remarks into consideration.

(a) EXPIRY DATE

263 Where the guarantee states that expiry is to occur on a specific date, the documents may be presented at any time up to and including that date.

[Page94:]

However, where that date is not a business day at the place of presentation, the expiry date is extended to the first following business day at that place (article 25(d)). The rules say nothing about a presentation made on the expiry date outside business hours. If the guarantee makes no reference to business hours, it is reasonable to expect the beneficiary to have until the end of the day (2359.59 hours) constituting the expiry date to make its presentation, subject to any agreement or law providing otherwise.

(b) EXPIRY EVENT

264 Where the guarantee states that expiry is to result from a specified event, the beneficiary must present its demand:

- if the occurrence of the expiry event is to be determined by the presentation of a specified document, then before this document is presented; or

- if no such document is specified, then before the time of determination of the occurrence of the event from the guarantor’s own records. If the event cannot be determined from the guarantor’s own records, then before the lapse of three years from the date of issue of the guarantee (article 25(c)).

(c) TIME OF PRESENTATION OR DETERMINATION, NOT TIME OF EVENT; DEFERRED EXPIRY

265 In both cases, the time of the expiry event itself is irrelevant³⁹. This is one of the features that distinguish an expiry event from an expiry date. Another difference is that the presentation must be made before the expiry event, whereas it can be made on or before an expiry date. Of course, the guarantee itself may provide for expiry to be deferred, for example for a period of two months after the expiry event, in which case the guarantee is to be treated as expiring two months after presentation of a document specified in the guarantee as indicating the occurrence of the event or, if no such document is specified, two months after the time the occurrence of the event becomes determinable from the guarantor’s own records. The parties can agree otherwise, for example by drafting an expiry provision pursuant to which expiry occurs “five days after the date of conforming delivery of the goods as stated in the surveyor’s report”, in which case the five days would be calculated from the date following the date of delivery indicated in the document, not the date when the document is presented to the guarantor.

3.4.2 Incomplete presentation

266 URDG 458 provided no scope for an incomplete presentation. Likewise, URDG 758 state that a presentation is not a complying presentation unless and until it is complete. However, contrary to URDG 458, article 14(b) of the new URDG goes some way towards answering the questions that many guarantors and counter-guarantors have asked themselves when receiving an incomplete presentation. What should be done with it? Should it be rejected? Should it be retained until subsequent completion? Is there any liability risk in acting either way? Under article 14(b), a presenter is now allowed to make an incomplete presentation if that presentation indicates that it is to be completed later (which must be before the expiry of the guarantee). In such cases, the

[Page95:]

guarantor cannot reject the presentation. If the presentation is a demand, there are two fundamental consequences of this tolerance:

- the time allowed for examination pursuant to article 20(a) does not begin to run until the presentation is completed; and

- the beneficiary cannot raise the preclusion sanction of article 24(f) for the guarantor’s failure to reject that demand on the grounds of incompleteness.

3.4.3 Incomplete demand

267 An incomplete presentation that does not indicate that it is to be completed later may be rejected as a non-complying presentation (article 14(b))⁴⁰. This applies to a demand presented without a supporting statement or other specified document as well as to other incomplete presentations that are not a demand. True, article 15(a) and (b) contemplates the possibility of presenting a supporting statement separately from the demand itself, including at a later stage. However, this does not limit the requirement, under articles 14(b) and 20(a), for any incomplete presentation, including a demand, that does not indicate that it is to be completed later to be immediately examined upon presentation and to be susceptible to rejection for non-compliance.

(1) No notice of completion required

268 A presenter that indicates that its presentation is incomplete is not required to indicate in subsequent supplements that the presentation is now complete. It could be argued that a notice of completion enhances certainty. Nonetheless, any such requirement would burden the examination process with an extra formality that makes the process more burdensome. Both the guarantor and the presenter are expected to know which documents need to be presented. If the presenter makes a presentation that is incomplete without so indicating, it should expect this presentation to be rejected as non-complying. If there are successive presentations, all of which are incomplete, each must state that it is to be completed later.

(2) Guarantee requiring electronic presentation

269 Under article 14(c), a guarantee that indicates that a presentation is to be made in electronic form should specify the format, the system for electronic delivery and the electronic address for the presentation.

(a) FORMAT

270 “Format” is not defined in the rules, but guidance can be obtained from eUCP article e3(b)(iii), which defines “format” as “the data organisation in which the electronic record is expressed or to which it refers” (“electronic record” is elaborately defined in eUCP article e3(b)(i) but for the purposes of URDG 758 can be described as a document in electronic form, as defined in article 2). The electronic format dictates the way in which the data are organised and read, that is to say, the system language in which the electronic record is encoded. If the format is not one recognised by the addressee’s

[Page96:]

computer, the data transmitted will be unreadable. That is why it is important for the guarantee to specify the format (see the required field in the Form of Demand Guarantee under URDG 758 in Appendix 1 to this Guide). When using SWIFT, specifying a particular message type, e.g. MT799, satisfies the requirement of specifying the format.

(i) Format not specified

271 The URDG do not say anything about the manner in which the format may be specified and leave it to the parties’ agreement. However, article 14(c) does ascribe a consequence if the guarantee does not specify the precise electronic format in which a presentation is to be made. Indeed, in such cases, the presenter has the option of:

- either presenting an electronic document in any electronic format, provided that format allows the document to be authenticated (a defined term) by the party to which the document is presented; or

- presenting the specified document in paper form, even if the guarantee indicates that all presentations are to be made electronically.

(ii) Any electronic format or paper form

272 Electronic presentations in guarantee practice are still less frequent than paper presentations, and many a party that wishes to use electronic forms of presentation may lack the expertise properly to formulate in the guarantee its expectations in terms of acceptable formats or systems. The default rule in article 14(c), allowing a presentation to be made in any electronic format or in paper form, seeks to avoid the paralysis that would arise where a guarantee requires an electronic presentation but fails to specify the format in which it is to be made. However, there is a limit to this pragmatic approach: a presentation can be made in any electronic format only to the extent that the guarantor is able to verify the apparent identity of the sender and whether the data received have remained complete and unaltered (article 2). Any inferior standard may well fall short of the security standards in electronic data interchange. If authentication cannot be assured, the presenter is better off making the presentation in paper form if possible.

(iii) Authenticate does not mean read

273 A problem might arise where the guarantor is able to authenticate the presentation but is unable to lay out on the screen or in print the content of that presentation. This could be the result of the guarantor being unable to open the electronic files that contain the presented documents due to a conflict between the guarantor’s proprietary information technology system and the format used in the presentation. However regrettable the ensuing complications may be, there is no place in article 14(c)’s default rule for an additional requirement that the guarantor is able to also “read” a presentation whose electronic format the guarantor did not specify in the first place.

[Page97:]

(iv) Format and form

274 “Format” is to be distinguished from “form”, which expresses the medium for presentation of the document, that is to say, whether it is to be a paper or electronic presentation. Failure to specify the form means that the presentation must be in paper form (article 14(e)).

(b) SYSTEM FOR DATA DELIVERY AND ELECTRONIC ADDRESS

275 The other two requirements for a presentation in electronic form, namely the system for data delivery and the electronic address for the presentation, are satisfied by reference to presentation by means of a SWIFT message, a hyperlink to a website where the documents will be posted or simply an e-mail and by indicating the SWIFT or e-mail address of the guarantor. Of course, the parties are free to agree to other electronic delivery systems, such as tested telex.

(3) Paper presentation where mode of delivery is specified

276 Article 14(d) deals with cases where the guarantee indicates the mode of delivery of documents in paper form. “Mode of delivery” refers not to the form of the documents (i.e. paper or electronic) but to the means used to convey those documents to the guarantor. The guarantee may prescribe a particular mode of delivery for a paper presentation, for example by indicating that it is to be sent by courier or hand-delivered at the address of the issuing branch of the guarantor. Sometimes, in addition to specifying the mode of delivery, a guarantee can elaborate by also excluding other modes, for example by indicating that no presentation should be sent by post or that only the specified mode of delivery is to be used for making a presentation. If the mode of delivery is specified in this way, a presentation made through the post may be rejected as a non-complying presentation even if it arrives before the expiry of the guarantee. However if, in prescribing a particular mode of delivery, the guarantee does not expressly exclude other modes, a presentation delivered by another mode will be a complying presentation if it is received at the requisite place (see paragraph 261) on or before expiry. It is true that documents sent by post may take longer to arrive than documents sent by courier, but the actual time of delivery is irrelevant so long as the documents arrive before the expiry of the guarantee, since a presentation can be made anytime up to the expiry of the guarantee.

277 In effect, article 14(d) looks to the purpose of the rule, which is to avoid evidential problems as to the time of delivery. It takes the position that unless expressly excluded by the terms of the guarantee, a mode of delivery other than the one specified in the guarantee may be utilised. However, the possibility offered to the presenter to disregard the mode of delivery specified in the guarantee is predicated upon an important condition: a presentation delivered by a mode other than the one specified in the guarantee must be received on or before expiry; it is not sufficient that it has been dispatched within that time. This, indeed, is true of any presentation unless the guarantee provides otherwise, since by definition “presentation” means delivery (see paragraph 2.49 in Chapter 4).

[Page98:]

(4) Form of presentation not specified

278 Where the guarantee or counter-guarantee does not indicate whether a presentation is to be made in electronic or paper form, any presentation must be made in paper form. This is a default rule that seeks to banish uncertainty and reflects the relatively lower frequency of electronic presentations compared to paper ones. If the parties wish to have a presentation made in electronic form, the guarantee or counter-guarantee must so indicate and article 14(c) will apply. The rule in article 14(e) prevailed over an earlier draft that proposed, absent an indication of a particular form, that a presentation could be made in either electronic or paper form, or partly in both. This was because a majority of comments during the revision expressed concerns as to the consequences of opening up the possibility of making electronic presentations where the guarantee or counter-guarantee does not specify the electronic format and system requirements to ensure that presentation can be processed and examined for conformity.

(5) Linkage

279 Under article 14(f), each presentation must identify (i.e. be linked to) the guarantee under which it is made, whether by stating the guarantor’s reference number for the guarantee or otherwise. Any method of identification that enables the guarantee to be distinguished from any other guarantee issued by the guarantor to the same beneficiary suffices. A reference to the date of issue of the guarantee is enough if no other guarantee was issued to the beneficiary by the guarantor on that date.

280 If a presentation does not identify the guarantee under which it is made, examination does not commence until identification. However, if, before such an identification is made, the guarantee expires after the presentation of an otherwise complying presentation but for the identification requirement, the guarantee cannot be extended on the account of some freeze in its validity period or the presenter’s right pending identification. Any other solution would be unfair to the applicant, which is entitled to rely on the expiry specified in its instructions for issue unless it agrees to an extension or amendment⁴¹.

(6) Whose duty is it to identify the guarantee?

281 Article 14(f) indicates only that the time for examination shall start on the date of identification but does not indicate whether the burden of identification falls on the guarantor or the presenter. Two courses of action could be envisaged when a presentation does not identify the guarantee under which it is made:

- either the guarantor contacts the presenter with a request to provide the necessary data that allow identification to be made; or

- the guarantor makes this identification itself.

Neither case can result in an extension of the guarantee. Any claim for

[Page99:]

damages that the presenter may have against the guarantor for an alleged lack of diligence in identifying the relevant guarantee falls outside the scope of the URDG and should be adjudicated under the applicable law.

(7) Language of presented documents

282 Except where the guarantee provides otherwise, documents issued by or on behalf of the applicant or the beneficiary, including any demand or supporting statement, must be in the language of the guarantee (article 14(g)). However, documents issued by any other person – for example an engineer, surveyor or customs authority – may be in any language. This is because the applicant and the beneficiary may have no control over documents issued by third parties if those parties are not acting on their behalf. If it is required that documents issued by a third party be in a particular language, this should be specified in the guarantee. See the required field for this purpose in the Form of Demand Guarantee under URDG 758 in Appendix 1 to this Guide.

(8) Article 14 also applicable to counter-guarantees

283 Article 14 also applies in its entirety to counter-guarantees, as indicated in the general rule of interpretation in article 3(b).

3.4.4 Requirements for demand

284 A demand for payment must not only comply with the requirement for complying presentations laid down in article 14; it must also comply with the specific requirements for demands laid down in article 15, including the requirement of a supporting statement, which arguably form the hallmark of the URDG. These requirements are detailed below.

(1) “Demand”

285 “Demand” means a signed document by the beneficiary demanding payment under a guarantee or counter-guarantee (article 2, which also defines “signed”). Strictly speaking, it is not necessary for the guarantee itself to require that the demand be signed; this is simply a requirement built into the definition in article 2. Thus, the time-honoured phrase “upon first written demand” can continue to be used even though the rules no longer refer to “writing”. In fact, under the new URDG 758, the word “written” could equally cover a signed or unsigned document. Indeed, it is not even necessary for the guarantee to state explicitly that the demand must be embodied in a document. Such a requirement is necessarily part of the guarantee as a result of its incorporation of the URDG, which signifies that the parties intend for the definition of demand to apply unless expressly excluded or modified.

(2) Guarantees requiring no demand

286 A guarantee that provides for payment without presentation of a demand does not fall within the definition of a “demand guarantee” and, accordingly, falls outside the scope of the URDG. This was the case with regard to certain public procurement guarantees seen in Syria in the 1960s and Saudi Arabia in the 1970s, where the guarantor undertook the commitment to pay the guarantee amount automatically upon the advent of the expiry date unless formally

[Page100:]

released by the beneficiary. In a way, direct-pay standby letters of credit are conceptually close to this type of guarantee. Unlike other standby letters of credit and demand guarantees, the beneficiary of a direct-pay standby letter of credit need not assert any breach to obtain payment from the issuer. A direct-pay standby letter of credit is the primary and expected means of payment by a third party, the issuer, of the applicant’s debt without the need to wait for that applicant to default. Direct-pay standby letters of credit are frequently used in the United States as credit enhancement devices where the low credit rating of a bond issuer does not allow it to obtain favourable rates from the market. In such cases, the bond issuer needs to add the better rating of a third party that will commit to pay the bond holders at maturity regardless of whether the bond issuer can redeem those bonds itself. Direct-pay standby letters of credit can be made subject to ISP98 but are not suited to URDG 758.

(3) Hold for value

287 Sometimes, the beneficiary presents a “hold for value” notice to the guarantor which, while fully complying with the guarantee, does not require the actual payment of the guarantee amount. Through this attempted halfway house, the beneficiary seeks to ensure that its presentation is made before expiry but does not want to be paid until a future date. This could reflect the beneficiary’s attempt to leverage its position in negotiations with the applicant concerning the underlying relationship while trying to avoid the strain that could result from a firm demand for payment. For that reason alone, a hold for value demand is not an unfair demand. The URDG do not deal with demands of this nature, and it is for the courts to decide whether such a “demand” is indeed a demand at all.

(4) Supporting documents

288 The demand must be supported by such other documents as may be specified in the guarantee, for example an engineer’s certificate of failure to pass tests on completion or failure to remedy defects or a court decision or arbitral award finally adjudicating a dispute between the beneficiary and the applicant in relation to the underlying relationship. The requirement for such a decision or award does not limit the independence of the guarantee, as the guarantor will treat such a decision or award just like any other document and, as directed in article 19(a), determine whether the decision or award appears on its face to comply with the terms of the guarantee. For instance, if the guarantee does not indicate that the decision or award should be final, the guarantor need not concern itself with a pending appeal and will give effect to the decision or award as presented to it.

(5) Statement of breach (“supporting statement”)

289 Whether or not explicitly stated in the guarantee, any demand must be supported by a statement by the beneficiary indicating in what respect the applicant is in breach of its obligations under the underlying relationship. This is the hallmark of the URDG. It was first drafted into article 20 of URDG 458 in 1991 and gradually gained consensus in the market, to the point of prompting

[Page101:]

a shift leading to the vast majority of demands being presented along with an indication of the beneficiary’s breach whether or not the guarantee was governed by the URDG. During the revision, there was a large consensus on this requirement as representing the cornerstone of the fair balance between the interests of the beneficiary and the applicant on which the URDG are built.

290 The balance that the URDG propose is predicated on an acknowledgement by all parties that the beneficiary needs to be able, in the event of default by the applicant, to have rapid recourse to payment under the guarantee based only on the presentation of documents but not proof of facts, while the applicant needs a reasonable safeguard against unfair demands. True, the statement of breach is to be furnished by the beneficiary itself and not by a third party, which may prompt the argument that the protection conferred by this article is limited. In fact, any stronger threshold of evidence as to the substance of the applicant’s default risks turning the independent guarantee into an accessory suretyship and may lead to the rejection of the rules by the beneficiary, as happened in 1978 in relation to the Uniform Rules for Contract Guarantees (ICC Pub. No. 325). Nevertheless, when examined in practical terms, article 15 does provide a brake on unfair calling in that a beneficiary that might be prepared to make a demand for payment under the guarantee even if it knew there was no justification for doing so might hesitate to commit itself to signing an intentionally false statement of breach. It is up to the parties to reinforce the safeguard offered by the statement requirement by requiring the beneficiary to present additional documents to corroborate the stated breach without actually requiring proof of breach.

(a) STATEMENT REQUIRED IN ANY EVENT, UNLESS EXCLUDED

291 Requiring the demand to be supported by a statement of breach is the one exception to the rule contained in article 12 that, in determining the guarantor’s liability, the rules are to be applied only in so far as consistent with the guarantee. The effect of article 15(a) is to impose a documentary requirement for a demand that may not appear on the face of the guarantee. In other words, a guarantee that is subject to the URDG and states that it is payable “on simple demand” or “on first demand” should be read as requiring that demand to be supported by the statement of breach outlined in article 15(a), because, as part of the URDG, this article is a core term of the guarantee and is as binding as the other explicitly stated terms in the guarantee. This is the reason for the inclusion of the words “and in any event” in article 15(a), meaning whether or not explicitly specified in the guarantee.

292 If the parties are concerned that the beneficiary may be taken by surprise, they can explicitly incorporate the requirement for a statement of breach into the guarantee. This is what the Form of Demand Guarantee under URDG 758 provides (see Appendix 1 to this Guide). In fact, the Model Forms for Issuing Demand Guarantees under URDG 458 (ICC Pub. No. 503), all bank templates for URDG guarantees that the drafting group reviewed during the revision and the model guarantee forms of international and multilateral organisations that have adopted the URDG (e.g. FIDIC and the

[Page102:]

World Bank) indeed spell out in their terms the requirement of a statement and the content of that statement. Without in any way limiting the effectiveness of the statement requirement in article 15(a) and (b), including the requirement for a statement in the guarantee can be acknowledged as a best practice standard. This is reflected in the URDG, where article 8 recommends that guarantees should state all the operational terms, including, in paragraph (h), any terms for demanding payment, which also includes the statement requirement. Nonetheless, there should be no doubt that a guarantee subject to the URDG that does not explicitly require the presentation of a supporting statement should not be considered as having waived this requirement. If the statement requirement is to be excluded, the procedure outlined in article 15(c) should be followed.

(b) “THE RESPECT IN WHICH”

293 The use of the phrase “the respect in which”, rather than “the respects in which”, shows that the article envisages only the most general description of the breach. The following examples are valid supporting statements under article 15(a):

- performance was not completed by the due date;

- there was a shortfall in the quantity of goods shipped under the contract;

- the contract works were defective;

- in the case of a tender guarantee, the applicant failed to sign the awarded contract or failed to procure the issue of the performance guarantee that was to be given in exchange for the tender guarantee.

More examples of supporting statements are given in the optional clauses to be inserted in the Form of Demand Guarantee in Appendix 1 to this Guide.

(c) A STREAMLINED DRAFTING OF THE STATEMENT OF BREACH COMPARED TO URDG 458

294 Article 15(a) both clarifies the statement requirement in URDG 458 and introduces a functional approach to describing the breach that brings a greater flexibility. Indeed, the URDG 758 make clear that, if the supporting statement indicates the respect in which there has been a breach, it is not necessary also to state that there has been a breach, since this obviously follows from the statement of the nature of the breach. A statement indicating “the works were not completed by the due date” need not indicate “the applicant is in breach” to satisfy the statement of breach requirement.

295 The new functional formulation of the statement requirement answers a concern raised by some URDG users faced with the expectation of guarantors under URDG 458 that any demand should not only indicate the respect in which the applicant is in breach but also explicitly state “the principal is in breach” in strict compliance with URDG 458 article 20(a)(i). While the two-tier statement of breach required in URDG 458 indicating (i) that the applicant is in breach and (ii) the respect in which it is in breach could be helpful for the applicant in a case where the drafting of the indication of breach does not convey that a breach has actually happened (e.g. “the goods

[Page103:]

were delivered on 3 January 2010”), it was felt that in the great majority of cases the requirement for the statement to indicate “the principal is in breach” was becoming too formalistic. It also turned into a trap for beneficiaries that would indicate in their demand the respect in which there has been a breach (e.g. “the works were not completed by the due date”) but still saw their right to payment denied for failing to also state that “the applicant is in breach”. During the revision, a large amount of support was expressed for this functional approach, which achieves the purpose of getting the beneficiary to specify the precise breach that led it to present the demand.

(d) STATEMENT CAN BE PRESENTED SEPARATELY FROM AND LATER THAN DEMAND

296 Article 15 now clearly indicates that the statement need not either appear in the demand itself or accompany the demand. It is open to the beneficiary, at its own discretion, to state the breach in a signed document separate from the demand, whether accompanying the demand or presented at a later time before expiry, though in this case the separate statement needs to identify the demand.

297 By derogation from article 14(f), if a supporting statement is presented separately from the demand and refers not to the demand but to the guarantee, the statement is to be considered as not having been presented until the guarantor is able to link it to the demand. This rule is particularly important in the case of multiple partial demands where separate statements showing amounts different from those in the related demands need to be linked to the demand in question (see article 17(e)(ii)).

(e) INCOMPLETE DEMAND AND SUBSEQUENT STATEMENT

298 Under article 14(b) on incomplete presentations, in cases where only the demand is presented but not the supporting statement, the presentation is regarded as incomplete and, as such, may be rejected unless the presentation indicates that it is to be completed later. In the case of a demand, the beneficiary cannot argue that the indication that it will be completed later is necessarily implied by reason of the fact that article 15(a) – as well as article 15(b) – explicitly opens up the possibility for the presentation of a separate statement. The requirement in article 14(b) will apply to any presentation, including a demand. If the guarantor fails to reject within five business days an incomplete demand that does not indicate that it is to be completed later, the guarantor will be precluded by article 24(f) from rejecting it for incompleteness even if the supporting statement is never presented. However, following such a rejection, there is nothing to preclude a new and complying demand from being presented afresh if this can be done on or before expiry. Any statement that is subsequently presented must identify the demand to which it relates, thereby providing the necessary linkage between the two documents. In either case, the statement must be signed.

(f) GOING BEYOND THE STATEMENT CONTENT REQUIRED IN ARTICLE 15(A)

299 As indicated above, article 15(a) provides that the demand shall be supported in any event by a statement by the beneficiary indicating in what respect the

[Page104:]

applicant is in breach is a minimum requirement. It is open to the parties to agree in the guarantee that the statement should also indicate other assertions or details whereupon it becomes binding on the beneficiary. A question that may arise concerns what happens if the parties do not require the statement to indicate anything other than the terms required in article 15(a) but the beneficiary nevertheless provides additional unsolicited details. Do the additional details corrupt the whole statement? The URDG do not provide an explicit answer on this issue, but it is easy to infer the solution from article 19(d), which directs the guarantor to disregard any document that is not required by the guarantee or the rules⁴². In this case, the additional details are mere surplusage and should be ignored when examining the conformity of the demand with the terms of the guarantee and the rules as well as when examining the consistency of documents, including the statement, presented in support of the demand. The beneficiary’s provision of data not required by the guarantee does not in any way affect the validity of the guarantee.

(g) DEMAND UNDER COUNTER-GUARANTEE

300 A demand under the counter-guarantee must in any event (i.e. whether or not this is explicitly specified in the counter-guarantee) be supported by a statement by the party to whom the counter-guarantee was issued indicating that it has received a complying demand under the guarantee or counter- guarantee issued by it. The references to “the party to whom the counter- guarantee was issued” rather than “the guarantor” and to a complying demand under “the counter-guarantee” issued by the counter-guarantor cover cases involving counter-guarantee chains where a counter-guarantee is issued not to the guarantor but to another counter-guarantor that will issue its own counter-guarantee to the guarantor (see Diagram 12). For the sake of brevity, the rest of the paragraphs in this section refer to the beneficiary of a counter-guarantee as the “guarantor”.

301 In contrast to the beneficiary of a guarantee, the guarantor is not required to furnish a statement of breach by the applicant of its obligations under the underlying relationship, as there is no underlying relationship between the applicant and the guarantor. Instead, the statement must indicate that the guarantor has received a complying demand under the guarantee it has issued. Unless the counter-guarantee provides for “reimbursement” of the guarantor, or words to that effect, it is not necessary that the complying demand received by the guarantor shall have been paid: the guarantor is entitled to payment under the counter-guarantee as soon as it (a) has received a complying demand under its own guarantee and (b) indicates this in its demand under the counter-guarantee. Moreover, the counter-guarantor is not entitled to defer payment of a complying demand presented by the guarantor under the counter-guarantee until the counter-guarantor has first verified that the demand made by the beneficiary under the guarantee was in fact a complying demand⁴³.

[Page105:]

302 As is the case for guarantees, the supporting statement under a counter- guarantee may be stated in the demand or in a separate signed statement accompanying the demand or may be presented subsequently, although in the latter case it needs to identify the demand (see paragraph 296).

303 In contrast to paragraph (a) of article 15, paragraph (b) does not expressly refer to other documents that may be specified by the counter-guarantee, because it is rare for a counter-guarantee to require the guarantor to present supporting documents other than those tendered by the beneficiary, which are dealt with in article 22 on the transmission of copies of the complying demand. Nevertheless, if supporting documents are specified in the counter- guarantee, for example a copy of the wire transfer order effecting the payment of the guarantee amount to the beneficiary, these too must be presented by the guarantor in support of its demand under the counter-guarantee.

(h) EXCLUSION OR MODIFICATION OF REQUIREMENT FOR A SUPPORTING STATEMENT

304 The guarantee or counter-guarantee may expressly exclude the requirement for a supporting statement, but, as indicated above, the mere fact that there is no reference to the requirement for such a statement in the guarantee or counter-guarantee is not in itself a sufficient exclusion. The exclusion must be explicit (article 15(c)). If the mere omission in the guarantee or counter- guarantee terms of a requirement for a supporting statement were sufficient to constitute an implied exclusion, article 15(a) and (b) would never be effective at all as regards the supporting statement. Article 15(c) gives as an example of an effective exclusion term: “The supporting statement under article 15[(a)] [(b)] is excluded”.

305 Clauses in guarantees and counter-guarantees attempting to stress the stringency of the guarantor’s payment undertaking and the absence of requirement for the beneficiary to evidence or prove the applicant’s default in any way whatsoever are insufficient to exclude the statement requirement. The sample exclusion terms in article 15(c) compel the parties to explicitly address the exclusion of the statement requirement and to express their agreement to this effect in the unambiguous terms proposed in article 15(c) or similar.

(i) Modifying the wording of the supporting statement

306 If the parties wish to have a differently worded statement presented by the beneficiary in support of its demand, they do not need to exclude article 15(a) or (b) in its entirety. Although not explicitly indicated in article 15, it is open to the parties to indicate in the guarantee or counter-guarantee the precise terms they would like to see in the supporting statement. Examples could include:

- in the guarantee, a provision requiring the supporting statement to state “that the applicant is in breach without the need to indicate the nature of that breach”;

- in the counter-guarantee, a provision requiring the supporting statement to state “that the guarantor has received a complying demand from the beneficiary and has paid the amount indicated in that demand”.

[Page106:]

307 In both of these examples, the specific wording in the quotation modifies the default wording of the supporting statement provided in article 15(a) and (b) without the need for the guarantee or counter-guarantee to indicate that article 15(a) or (b) is excluded or modified. In case of doubt as to the real intention of the parties resulting from an ambiguously worded statement requirement, the default wording of the supporting statement specified in article 15(a) and (b) should prevail as indicated in article 15(a) and (b).

(ii) Exclusion of supporting statement is not exclusion of demand or documents

308 If the exclusion, instead of being limited to the supporting statement, excludes article 15(a) in its entirety, this does not relieve the beneficiary of the need to present the demand and any other documents specified in the guarantee to obtain payment of the guarantee amount. The reference in article 15(a) “to such documents as the guarantee specifies” is simply a reminder to the parties that the requirement for a supporting statement does not displace the need to present any other documents required in the guarantee.

(6) Dating of demand

309 Article 15(d) promotes integrity and best practice in demand guarantees and counter-guarantees by banning the pre-dating or post-dating of presentations. Thus, a demand or supporting statement may not be dated before the date when the beneficiary is entitled to present a demand, which in the absence of a contrary provision in the guarantee is the date of its issue (article 4(c)). Indeed, seeing a presentation that consists of a demand and a statement of breach that were prepared and dated before the guarantee was even issued is expected to prompt legitimate questions. This may even hide a conspiracy between the applicant and the beneficiary, which might be seeking to disguise a questionable payment relating to the underlying relationship as a payment under the guarantee. The rule in article 15(d) does not limit the presentation of a demand and a supporting statement indicating a breach that happened before the date when the beneficiary is entitled to present a demand, as long as the demand and statement are dated after that date.

310 Because documents other than the demand and the supporting statement (e.g. shipping documents) are either issued by a party other than the beneficiary or, if issued by the beneficiary itself (e.g. an invoice), considered less important than the demand and the statement, the dating rule does not apply to them.

311 The second limb of article 15(d) that bans the post-dating of a demand, supporting statement and any other document seeks to spare the guarantor the untenable position of being in possession of a document bearing a date that the guarantor knows to be different from the true date. The post-dating of a demand sometimes conceals an attempt to circumvent contractually agreed cooling-off periods where the parties to the underlying relationship agree that no demand should be made under the guarantee before the expiry of, say, five weeks from the notice of breach under the underlying relationship. The beneficiary might be tempted to make a presentation

[Page107:]

immediately after the breach but dated five weeks later in order to avoid breaching the terms of the underlying relationship. Of course, an agreement between the applicant and the beneficiary outside the guarantee is of no concern to the guarantor, but absent the rule in article 15(d) the guarantor could well become an unwitting accomplice to the beneficiary’s scheme.

312 Whether or not the applicable law attributes any legal liability to post-dating, it is not a sound international demand guarantee practice that the URDG condone or wish to promote. Unless article 15(d) is excluded in the guarantee or counter- guarantee, a presentation that includes either a demand and a statement that pre-date the date when the beneficiary is entitled to present a demand or any documents that post-date this date is not a complying presentation.

3.4.5 Information about demand

(1) Duty of information about demand

313 The rule in article 16 is consistent with the substance of URDG 458 article 17. The guarantor must without delay inform the instructing party or, where applicable, the counter-guarantor, of a demand received under the guarantee and of any request, as an alternative, to extend the expiry of the guarantee.

314 The same duty applies to counter-guarantors as regards demands received under their counter-guarantees. Neither UCP 600 nor ISP98 provide a similar information duty.

315 The duty of information about demand:

- arises only in relation to a demand, including an extend or pay demand, but not a presentation that is not a demand (although a presentation for the purpose of expiry gives rise to a separate information duty under article 25(e));

- is not confined to complying demands but covers all demands and arises separately of the guarantor’s duty to examine a demand to determine if it is a complying demand; and

- is not confined to complete presentations (assuming the presentation is a demand) but also arises where a presentation indicates that it is to be completed later (article 14(b), see paragraph 266), whether or not that presentation is subsequently actually completed. Obviously, no separate information duty arises when the presentation is eventually completed.

(2) An acknowledged practice

316 Article 16 codifies a widespread practice pursuant to which guarantors inform the party from which they received their instructions for issuing the guarantee of any demand received under that guarantee. This is almost always done voluntarily by the guarantor as a matter of commercial courtesy to its customer or correspondent. In some situations, the guarantor is required to do so as a result of an undertaking it has agreed to with the

[Page108:]

instructing party or a mandatory requirement under the applicable law44. Where the URDG apply, the guarantor is bound by this information duty regardless of what its agreement with the instructing party or the applicable law may indicate in this respect. Article 16 can of course be excluded or modified in the guarantee or counter-guarantee.

(3) Who must be informed?

317 Article 16 directs the guarantor and counter-guarantor to inform the instructing party of any demand. If the instructing party is different from the applicant (see paragraph 150), the duty is owed to the instructing party, not the applicant. Thus, for example, if the instructing party is the parent of the applicant that signed the underlying contract under which a breach is stated in the demand, the information must be given to the parent not to the company that signed the underlying contract. While an argument could be made to the effect that the applicant, being the party to the underlying relationship with the beneficiary, is in a better position, if informed in due time, to negotiate with the beneficiary the withdrawal of the demand, the argument in favour of providing the information to the instructing party that has given the guarantor or counter-guarantor its issuing instructions and is liable to indemnify them was considered to be more compelling. This drafting choice is unlikely to have any dramatic consequences, as the instructing party is often closely linked to the applicant either by virtue of their being entities of the same group of companies or as trading partners in a chain of contracts forming the underlying relationship (e.g. an upstream seller and an intermediary seller of the same cargo). Accordingly, the instructing party is likely to transmit the information it has received from the guarantor to the applicant without delay. Of course, this issue does not arise where the applicant and the instructing party are the same person.

(4) No duty of information about demand before payment

318 Article 16 does not change the rule that has been in effect for 18 years under URDG 458 article 17, namely that the guarantor is required to inform the instructing party of any demand it receives, including an extend or pay demand. However, the URDG do not require the guarantor to inform the instructing party of such a demand before making payment (if the demand is a complying demand) or rejecting the demand (if it is not a complying demand). Of course, guarantors are entitled under URDG 758 – and were also entitled under the 458 version – to inform the instructing party before payment or rejection if they so choose. Where guarantors are compelled by agreement or by law to inform the instructing party of the demand before payment or rejection, they do so under that agreement or law, not the URDG.

319 A mandatory duty to inform the instructing party of a demand before making payment or rejection could divert the rule from its intended function, which

[Page109:]

simply consists of informing the instructing party that its account will be debited by the guarantor when the guarantee is paid. Conversely, if the demand is rejected as a non-complying demand, informing the instructing party still serves the useful purpose of alerting an otherwise unaware instructing party that the beneficiary considers its performance to be deficient and prompting it to enter into negotiations with the beneficiary that could avert subsequent demands. It would be wrong to require an information duty with a view to transforming it into a means for the instructing party to seek a court injunction against the guarantor’s payment of the guarantee. This would be so obviously detrimental to the interests of the beneficiary that it could gravely affect the balanced approach that the URDG promote and possibly result in the same doomed fate as the unbalanced Uniform Rules for Contract Guarantees (ICC Pub. No. 325, see paragraphs 45 et seq.). Furthermore, it could lead to dissatisfaction with demand guarantees and a shift towards other payment instruments that offer a stronger assurance of payment, such as letters of credit, where no information is required.

320 The information duty should not conflict with the guarantor’s paramount duty to accept or reject a demand within five business days (article 20(a)). A guarantor that lends a listening ear to the instructing party’s stated intention of seeking an injunction and does not reject a discrepant demand within this five-day period is precluded under the URDG from later claiming that the demand is not a complying demand, regardless of whether an injunction is actually sought, let alone granted or confirmed at trial.

(5) Interaction of information and payment/rejection of demand – without delay

321 Article 16 requires the information about the demand to be provided without delay. What precisely does “without delay” mean? The answer to this oft-asked question should be assessed pragmatically and, more importantly, according to the circumstances of the particular case. Where a demand consists of the presentation of a sole document demanding payment and stating the breach, the whole examination process from the time when it reaches a competent examination staffer, including any required internal approvals, is unlikely to take more than a few hours. In that case, the guarantee should be paid, with no requirement under the rules to wait for the expiry of the five-business- day examination period laid down in article 20(a). If that payment is made on the day of the receipt of the demand or the next business day, and the information is sent to the beneficiary on the day of payment or the next business day, the guarantor has acted without delay and incurs no liability. Conversely, complex demands involving multiple technical documents whose examination takes several days require the guarantor to inform the instructing party before it decides to pay or reject the demand. This is not because article 16 directs the guarantor to do so but because the guarantor would otherwise be in breach of the “without delay” time standard imposed by article 16. “Without delay” is a standard that needs to be determined in each particular case. In general, informing the instructing party of the demand within three business days of its receipt is not acting “without delay”.

[Page110:]

(6) Information duty and waiver process

322 Article 24(a) indicates that, where the guarantor determines that a demand is not a complying demand, it may approach the instructing party for a waiver of the discrepancy. Article 24(c) states that approaching the instructing party for a waiver does not dispense with the information duty under article 16. This requirement should be understood pragmatically. As indicated in paragraph 315 above, the information duty under article 16 is not predicated upon the demand first being examined for conformity: it has to be reported without delay. However, if the guarantor happens to have examined the demand, identified one or more discrepancies and decided to approach the instructing party for a waiver of those discrepancies, all within the “without delay” standard, it would be unjustifiably formalistic and burdensome to require the guarantor to send two separate messages to the instructing party within minutes or hours of each other, the first informing the instructing party of the demand in compliance with article 16, and the second availing itself of the waiver option. A waiver sought from the instructing party without delay after the demand is received should be deemed as fulfilling, and effectively dispensing with, the need to inform the instructing party about the demand.

(7) Information about demand under articles 16 and 23

323 Where the demand is an extend or pay demand and the guarantor is able to complete the examination in time promptly to provide information that meets both the obligation under article 16 to inform without delay and the requirements of article 23, the provision of information under article 23 also satisfies the requirements of article 16, so that it is not necessary to give information about the demand twice.

(8) Sanction for absence of information

324 The rules do not impose any sanction on the guarantor for not fulfilling its duty under article 16 to inform the instructing party of any demand received under the guarantee without delay. Specifically, the URDG do not prevent the guarantor from claiming reimbursement from the instructing party under the application, although the instructing party may have a claim against the guarantor under the applicable law for breach of contract or, where that instructing party can establish that it suffered a loss as a result of the absence of information about the demand, damages. However, any such claim falls outside the scope of the URDG.

3.4.6 Partial demand and multiple demands

(1) Partial demand

325 A demand may be made for less than the full amount available, and multiple demands may be made unless prohibited by the terms of the guarantee. Guarantees typically specify a maximum amount rather than a fixed amount, in order to accommodate partial or multiple demands, reflecting the fact that where there is a series of breaches by the applicant, each supported by a statement specific to the particular breach, it may be necessary for the beneficiary to make successive demands under the guarantee. Partial and multiple demands are expressly authorised by article 17(a) and (b).

[Page111:]

(2) Multiple demands

326 Unless the guarantee prohibits multiple demands, in which case only one demand may be made, more than one demand may be made (article 17(b)). Where multiple demands are prohibited, the beneficiary should seek to ensure that it knows of all breaches of the underlying relationship before making its demand, because once the demand has been made the beneficiary cannot make an additional demand when further breaches occur or are discovered, unless the demand is rejected (see paragraph 327) or withdrawn or deemed to have been withdrawn (see paragraph 478). The applicant and the beneficiary should not agree to exclude multiple demands where performance is to be made by instalments, because this would be likely to induce the beneficiary to make a demand for the full amount available even if the breach relates only to one instalment, since it is only allowed one complying demand.

(3) Rejection of demand

327 When a demand is rejected as non-complying, it ceases to exist and the situation is as if no demand was made at all. Accordingly, article 17(d) provides that where the guarantee permits only one demand to be made and that demand is rejected, another demand can be made on or before expiry. This rule, which is reinforced by article 18(a) on the separateness of each demand, also applies where the beneficiary withdraws or is deemed to have withdrawn its demand under articles 18(a) and 23(d) (see comment under those articles). The effect of the rule is to dispel any misconception as to the interaction of article 17(c) and (d): where multiple demands are prohibited in the guarantee, a guarantor is precluded from honouring more than one complying demand, but where a demand has been rejected it does not count. Since a demand that has been rejected is treated as if it had never been made, a post-rejection amendment of the guarantee to remove the discrepancy for which it was rejected does not revive the demand and a fresh presentation is necessary.

3.4.7 Separateness of each demand

(1) Presentation of non-complying demand; withdrawal of demand

328 Each demand is to be treated as separate from any other demand, whether that other demand is complying or not. The presentation of a non-complying demand or the withdrawal of a demand therefore does not waive or otherwise prejudice the right to make another timely demand, whether or not the guarantee prohibits multiple demands. This rule, which also applies to a deemed withdrawal under article 23(d), reinforces the point made under article 17(d) that a demand that is rejected or withdrawn is nullified. Under this scenario, it is as if the demand was never presented, and any subsequent demand is to be treated as the only demand. As regards the effect of the rejection of a demand on the presentation of a new demand, article 18(a) in substance reiterates what is said in article 17(d).

[Page112:]

(2) Payment of non-complying demand

329 Payment of a non-complying demand does not waive the requirement for other demands to be complying demands (article 18(b)). This is so even if the discrepancy in the later demand is of the same nature as that in the first demand. Of course, the guarantor cannot properly pay a non-complying demand without authorisation from the instructing party and would put in jeopardy its right for indemnification if it did so. This, however, is a matter for the instructing party-guarantor relationship and falls outside the scope of the URDG. Yet, not infrequently, discrepancies are waived by the instructing party, and this is specifically covered by article 24(a). However, the fact that an instructing party has agreed to waive a discrepancy in one demand does not mean that it is prepared to waive discrepancies in future demands. Each demand must be treated separately. Thus, if, having paid a discrepant demand following the instructing party’s waiving of the discrepancies, the guarantor receives a subsequent demand that is also discrepant (either in the same way as identified in the first demand or otherwise), it must not pay the demand unless the instructing party waives the discrepancy. Moreover, even if such a waiver is given, the guarantor is not obliged to pay the demand (see article 24(c)).

330 Article 18 applies not only to the payment of a discrepant demand following a waiver but also to the erroneous payment of such a demand. Thus, if a guarantor has failed to identify a discrepancy in a demand and paid, the beneficiary cannot assert waiver or preclusion and require payment of subsequent demands containing the same discrepancy. Each demand is separate and has to comply with the terms of the guarantee, the rules and international standard demand guarantee practice.

3.5 Examining a presentation

331 In a nutshell. Making a presentation does not by itself trigger any consequences in terms of payment, termination, variation of amount or otherwise. It is only when the guarantor or, in the case of a counter-guarantee, the counter-

[Page113:]

guarantor examines the presentation and determines that it is a complying presentation that it triggers its intended consequences in terms of payment, variation of amount, expiry or otherwise. The examination stage is a critical stage for the guarantor and counter-guarantor, as they can be held liable for the consequences of their negligence in examining a presentation and, as a result, lose their right to indemnity. The URDG offer a comprehensive step-by-step description of the rules governing the examination stage. Most of the steps appear in article 19. However, the definition of “complying presentation” in article 2 is the linchpin of the examination and should be examined first. Articles 7, 17(e) and 20(a) also provide compliance standards for the examination stage.

3.5.1 Definition of “complying presentation”

332 How does a guarantor or counter-guarantor determine whether a presentation made to it under a guarantee or counter-guarantee is a complying presentation? The first step in the definition of “complying presentation” in article 2 is to look to the terms of the guarantee. In particular, the presentation must be made on or before expiry at the place for presentation and any demand must be accompanied by all required documents presented in the form and mode of delivery specified in the guarantee and the rules. Where the guarantee is silent as to a relevant aspect of a presentation, resort must be had to the rules. If there is no relevant provision in the guarantee or the rules, the presentation must conform to international standard demand guarantee practice. The hierarchical order of these three standards (1) the terms of the guarantee, (2) the rules, and (3) international standard demand guarantee practice, must be strictly followed when examining a presentation to determine its conformity.

(1) A strict hierarchy of the standards of examination

333 Simply put, a presentation that does not conform to the guarantee or the rules is not a complying presentation even if it conforms to international standard demand guarantee practice. Conversely, a presentation that does conform to the guarantee and the rules is a complying presentation even if it is not in accord with international standard demand guarantee practice.

334 There are two exceptions to this strict hierarchical approach. First, a demand that is not supported by the statement of breach required by article 15 is not a complying demand even if the guarantee does not explicitly require the presentation of a supporting statement. In this particular case, it is therefore necessary to move to the second hierarchical tier to test conformity – the rules – even though the first-tier test – the guarantee itself – has been satisfied. Secondly, article 7 directs the guarantor and counter-guarantor to consider a non-documentary condition as not stated and to disregard it. Here, too, the rules supersede the express terms of the guarantee or counter- guarantee.

(2) International standard demand guarantee practice

335 A new concept featuring in the URDG 758, international standard demand guarantee practice, should be seen as a gap-filler rather than a substitute for

[Page114:]

either explicit guarantee terms or the rules of the URDG. If the issue at hand is covered by a term in the guarantee or a provision in the rules, including cases where the particular rule in URDG 758 reflects existing international standard demand guarantee practice, there is no gap and there is no need to look any further. However, because no guarantee or rules can ever be exhaustive, there will inevitably be situations falling outside the scope of the rules or the explicit guarantee terms that will need to be resolved. And this is where “international standard demand guarantee practice” comes into play. It aims to offer the parties, and ultimately the courts, a tool to assess the conformity of a presentation where the disputed issue is not covered specifically in the terms of the guarantee or in the URDG. As such, it is hoped that, like in the case of the international standard banking practice under the UCP (International Standard Banking Practice for the Examination of Documents under Documentary Credits, 2007 Revision for UCP 600 (ICC Pub. No. 681))⁴⁵, the new standard will decrease the rejection of demands, render demand guarantee practice less litigious and promote international harmonisation of international guarantee practice by avoiding solutions based only on local practices. Indeed, absent such a standard, the courts would have to fill the gap in the guarantee terms or the rules by resorting to usages and practices that they would identify as being relevant for that purpose. Some of those practices could be local, with the result that solutions based on such practices would counter certainty and predictability in international guarantee practice. As such, they would defeat the very purpose of the URDG, which seek to level the playing field between parties of different countries and backgrounds by offering a body of standard guarantee practice that transcends and rises above local practices. The dangerous drift that would result from solutions based on local practices can be contained when the parties incorporate the URDG into their guarantee, including the reference to international standard demand guarantee practice in article 2. This reference amounts to a clear guidance to the courts to take the international character of a practice into account when construing the guarantee. International standard demand guarantee practice may be relevant in determining various issues, including:

- the level of security to be used to authenticate a document where the parties have not covered this in the guarantee itself (see paragraph 188);

- the standard of care to be exercised in the examination of documents (see paragraph 358);

- the degree of diligence required of a guarantor when performing its information duty under article 26(b)(i) (see paragraph 524); or

- the degree of diligence required of a party instructed to collect charges from the beneficiary (see paragraph 206).

The following example further illustrates the importance of supporting the rules with a standard like the international standard demand guarantee practice. Take the case where a demand guarantee subject to URDG 758

[Page115:]

requires the presentation of a statement by the beneficiary stating that the applicant has failed to deliver the goods, such statement to “bear the confirmation of the beneficiary’s bank that signatories thereon are authorised to sign.” Assume that a demand accompanied by the required statement is presented to the guarantor by the beneficiary’s bank under a covering schedule stating: “We hereby confirm that [X] has the authority to sign the statement for and on behalf of the beneficiary”. In addition to this presentation being forwarded, the presenting bank also sent the same day a separate SWIFT message (not required in the guarantee) to the guarantor stating: “Re: your guarantee No. /.../ for €500,000- applicant: Company Z. Please be informed we have today forwarded to you a demand for the amount of €500,000 via DHL courier. We hereby confirm that signatories of the accompanying statement are authorised to sign”. Is the guarantor entitled to reject the statement as non-complying because the requirement for the presenting bank’s confirmation of the signatories’ authority should take the form of a counter-signature by the bank on the statement itself as opposed to an indication to that effect on the covering schedule or a separate SWIFT message? The URDG do not provide a specific rule that would cover this case. However, the same facts arising under a standby letter of credit governed by UCP 600 were considered by the ICC Banking Commission during its meeting in Zurich on 22-23 March 2011. The Commission agreed that where the guarantee or the letter of credit requires a document to bear the confirmation of the beneficiary’s bank that signatories thereon are authorised to sign, the required confirmation must appear on that document itself; it is not sufficient that it is in the covering letter of the presenting bank or in a separate SWIFT message from that bank. Citing the international standard banking practice under UCP 600 applicable to the case at hand, the Commission ruled in the ensuing opinion (470/TA.738rev) that “countersigned” and “confirmation” should be seen, in the context of the wording in the instrument, to be interchangeable. The rationale of the opinion and its conclusion equally apply under URDG 758 where a reference to the international standard demand guarantee practice would lead to an identical finding.

336 So where can international standard demand guarantee practice be found? Well, it is all around us, including in the daily practice of many readers of this Guide. It is what professional bankers, guarantee practitioners and document examiners, acting diligently and honestly and exercising their expert judgement, do when confronted with an issue in relation to their international guarantee practice. Every day, courts requested to construe guarantees and counter-guarantees in dispute identify the relevant usage or practice to fill the gap in their terms or in the rules, including by resorting to the assistance of experts and to affidavits from professional federations.

337 As in the case of the UCP, it will take time for demand guarantee practice to develop international standards in relation to matters not covered by the URDG, but the importance of international practice is amply attested by the fact that in relation to the UCP, previously uncodified banking practice

[Page116:]

developed to the point where the International Chamber of Commerce felt able to produce a booklet on it as a guide to document checkers⁴⁶. As in the case of the UCP, opinions rendered by the ICC Banking Commission and DOCDEX decisions (on DOCDEX, see paragraphs 35.2 et seq. in Chapter 4) are the natural reservoir for international standard demand guarantee practice. These opinions and DOCDEX decisions are regularly compiled and published by ICC. However, it is important to note that, even when such practices are eventually compiled, codified and released, they ought not to be considered as an exhaustive body of practices. Rather, international standard demand guarantee practice – and for this purpose the International Standard Banking Practice for the Examination of Documents under Documentary Credits – should be viewed as a method to identify the relevant practices by reference to their international character, their generalised use and their compatibility with the rules. Any attempt to see them as an exhaustive body of practices could well turn into self-defeating rigidity.

3.5.2 Non-documentary conditions

338 In one of the most important innovations brought by URDG 758, article 7 provides that a guarantee should not contain a condition – other than a date or lapse of a period – whose fulfilment cannot be determined from the guarantor’s own records or from an index specified in the guarantee without specifying a document to indicate compliance with that condition. The rationale for the new rule is obvious: non-documentary conditions require guarantors to check not the conformity of documents but external facts, a task for which their operational set-up is rarely adequately equipped. As such, non-documentary conditions eventually lead to modelling the guarantee’s operational stages on facts relating to the performance of the underlying relationship. This would be the case for a guarantee payable upon non-conforming delivery of services, reducible upon each instalment of supplied goods being delivered to the importer or ending upon satisfactory performance of the contractor’s obligations under the construction contract. In all these cases, there could be a legitimate argument that a guarantee specifying such conditions is no longer an independent guarantee but ought to be characterised as an accessory guarantee – a suretyship – for which the URDG are not appropriate at all.

(1) What is a non-documentary condition?

339 For the purpose of the rules, a non-documentary condition is a condition – other than a date or lapse of a period – the fulfilment of which cannot be determined from:

(1) the presentation to the guarantor of a document specified in the guarantee;

(2) the guarantor’s own records; or

(3) an index specified in the guarantee.

[Page117:]

(2) Presentation “to the guarantor”

340 Although article 7 does not explicitly require that the document specified in the condition be presented to the guarantor, this is clearly implied in the terms of article 7. Indeed, any condition specifying presentation of a document under the guarantee to any party other than the guarantor (for instance, the applicant) necessarily implies that the guarantor has to ascertain an external fact rather than examine a document. As such, it is a non- documentary condition.

(3) Presentation of specified document

341 The guarantor is not authorised under the rules to examine a document that is presented voluntarily but that is not specified in the guarantee (article 19(d)). Accordingly, a condition that does not specify the document that has to be presented to determine its fulfilment is a non-documentary condition, even if a non-required document voluntarily presented by the applicant, the beneficiary or someone acting on their behalf permits the guarantor to determine the fulfilment of the condition.

(4) Guarantor’s own records

342 The phrase “guarantor’s own records” is quite narrowly defined in article 2. It does not cover all the records of the guarantor but only those showing amounts credited to or debited from accounts held with the guarantor and enabling the guarantor to identify the guarantee to which it relates (see paragraph 2.44 in Chapter 4).

(5) Index specified in the guarantee

343 The third method of showing that a condition is not a non-documentary condition although it does not call for the presentation of a document is when its fulfilment can be determined from an index specified in the guarantee. Examples include cases where the guarantee contains a variation of amount clause providing for increase or decrease according to an index, such as a retail price index or a commodity index. Although requests were made during the revision to define “index” in the rules, there was a consensus that no such definition was necessary given that only an index specified in the guarantee is admissible for this purpose. For an index to be specified in the guarantee, the instructing party is expected to have specified it in its instructions, the guarantor to have agreed to it by carrying out those instructions, by issuing the guarantee specifying that index, and the beneficiary to have accepted it by not rejecting the guarantee or by making a presentation thereunder. Any discussion about the index should therefore avoid abstract definitional approaches but instead take into account the intention of the parties to the guarantee in the specific context thereof.

(6) Disregard of non-documentary condition

344 The general rule spelled out in article 7 is that the guarantor will treat a non-documentary condition as not stated and will disregard it. This is essentially drafted for the benefit of the beneficiary of the guarantee, as the

[Page118:]

guarantor cannot require a presentation to comply with any non- documentary condition in the guarantee.

345 There is one exception to the rule concerning the disregard of non-documentary conditions that cannot be determined from the guarantor’s own records or from a specified index. This exception can be found in the last sentence of article 7: “…except for the purpose of determining whether data that may appear in a document specified in and presented under the guarantee do not conflict with data in the guarantee” (emphasis added). These words echo article 19(b), which states in its last sentence: “Data need not be identical to, but shall not conflict with, data in [any document required and presented under the guarantee] or the guarantee” (emphasis added). This exception reflects ICC Banking Commission Opinion 644 (2008)⁴⁷. In essence, the Opinion states that depriving non-documentary conditions of effect is a rule that benefits the beneficiary, with the result that a beneficiary need not provide any evidence of compliance with a non-documentary condition. The Opinion goes on to state that if the beneficiary were to voluntarily make a presentation that addresses a requirement in a non-documentary condition, that presentation has to comply with the non-documentary condition. The reason is that no guarantor can be expected to process and approve, as a complying presentation, a presentation that conflicts with an explicit condition in the guarantee that the guarantor itself has issued. For instance, if a payment guarantee indicates that it covers the exporter’s obligations to deliver red shirts and requires any demand to be accompanied by a surveyor’s report indicating non-conforming delivery, the reference to red shirts is a non-documentary condition and the guarantor cannot require the beneficiary to reflect in its demand that it relates to red shirts. However, if the beneficiary presents a surveyor’s report referring to green shirts, the demand is not a complying demand and should be rejected. Hence the unqualified reference to “the guarantee” at the end of both article 7 and article 19(b).

(7) Only documents specified in the guarantee need to be examined

346 As indicated in article 7, only documents specified in the guarantee need to be consistent with the guarantee and with each other. A document not specified in the guarantee is disregarded whether or not it conflicts with a documentary or non-documentary condition. Taking the above example, if the beneficiary were to present with its demand an invoice indicating the sale of green shirts, while the surveyor’s report does not refer to the colour of the shirts, the guarantor cannot assert a discrepancy, since the invoice – a non-required document – has to be disregarded outright (article 19(d)).

347 During the revision, it was debated whether to allow for the presentation of any document, even if it is not specified in the guarantee, if it helps to determine the fulfilment of the condition. However, when the result was tested on the ground, another concern emerged, namely that the rule would become an encouragement of self-serving documentary proofs by a beneficiary or an

[Page119:]

applicant. This can be illustrated by the following example. Take the case of a guarantee providing for expiry upon delivery of the works. The expiry event in this example is unquestionably drafted as a non-documentary condition. If the rule in article 7 allowed the presentation of any document to determine the fulfilment of the expiry event, the contractor acting as applicant would be able to tender a statement to the guarantor stating that the works have been delivered. The same applies to a reduction of amount mechanism, which, if predicated upon the successive instalments being shipped, could be triggered by the presentation by the shipper of mere statements indicating that instalments were shipped. This could well call into question the integrity of the documentary process. Accordingly, the revised URDG have restricted the effect of conditions to those requiring the presentation of a document specified in the guarantee or, where no document is specified, to those whose fulfilment can be determined from the guarantor’s own records or from an index specified in the guarantee.

(8) Guarantor advising instructing party of article 7

348 Where a guarantor is instructed to issue a guarantee with non-documentary conditions, it is recommended – but not a requirement under the rules – that the guarantor either draw to the attention of the instructing party the consequences of article 7 before issuing that guarantee or decline to issue the guarantee unless the relevant conditions are reformulated in documentary terms. An obvious example is where the advance payment is to be paid by the beneficiary on the applicant’s account held with a bank other than the guarantor. Conditioning the coming into force of the relating advance payment guarantee on the payment of the advance would amount to a non-documentary condition and, as such, be disregarded, thus dramatically affecting the position of the instructing party.

It is outside the scope of the URDG to deal with the consequences of the guarantor issuing the text of the guarantee transmitted to it by the instructing party, including any embedded non-documentary conditions, without advising that instructing party of the consequences of article 7. Indeed, the URDG do not cover the relationship between the instructing party and the issuer other than in specific matters linked to the operation of the guarantee, such as in the articles listed in paragraph 1.30 in Chapter 4.

(9) No contradiction between the first and the second sentence of article 7

349 At first sight, the first sentence of article 7, recommending that a guarantee should not contain a non-documentary condition, and the second sentence, requiring guarantors to disregard any such condition, may seem contradictory. In fact, they are not. The word “should” in the first sentence indicates that this part of article 7 is not mandatory. In line with article 8, it only makes a recommendation – a statement of best practice – for the good drafting of a guarantee. The URDG, as rules of a contractual nature, cannot dictate what a guarantee shall or shall not contain; they can only state the effect of an omission (e.g. article 25(c) supplementing a non-existent expiry provision) or of the inclusion of a banned condition (e.g. article 7 providing that a non-documentary condition is to be ignored).

[Page120:]

3.5.3 Complying demands and excessive demands

350 A demand is a non-complying demand if it is for more than the amount available under the guarantee or if it exceeds what is indicated in total by any supporting statement or other documents required by the guarantee (surveyor’s report, arbitral award, etc.) (article 17(e)). This is so regardless of whether the excess in the amount of demand compared to the amount available under the guarantee is minimal. The amount available is not necessarily the amount specified in the guarantee, since there may have been payments under previous complying demands that have reduced the amount available (article 25(a)(i)).

351 An excessive demand is non-compliant in its entirety, not merely as to the excess, which means that the beneficiary is not entitled to payment of that demand even for the amount that still remains available. It is necessary to present a fresh complying demand that does not exceed the available amount.

352 Conversely, the fact that a demand is for less than the amount indicated in the supporting statement or other documents does not make the demand a non-complying demand, as the guarantor is claiming payment for less than what appears to be due.

353 A demand will usually specify the amount demanded. However, it suffices that the amount is ascertainable by the guarantor. So a demand for “the full amount remaining available” under the guarantee is a valid demand.

354 In specifying what constitutes a non-complying demand, article 17(e) is concerned solely with the amount of the demand. A demand may, of course, be non-compliant on other grounds, for example because the guarantee has expired or because the presentation of the demand does not conform to the requirements of article 14.

3.5.4 Examination

(1) Examination of presentation for apparent compliance

355 The guarantor shall determine, on the basis of a presentation alone, whether it appears on its face to be a complying presentation (article 19(a)). This cardinal principle of demand guarantees, which they share with documentary credits, affirms that a guarantor is only concerned with the apparent good order of documents presented to it and their conformity with the guarantee terms. In fact, a guarantor should not consider the actual facts to which those documents relate. This is also stated in plain terms in article 6 (guarantors deal only with documents), itself being a corollary of article 5 (independence of guarantee). It should be read in conjunction with articles 7 (non-documentary conditions) and 27 (no responsibility for form, sufficiency, accuracy, genuineness, falsification or legal effect of any signature or document presented to the guarantor).

[Page121:]

356 Article 19(a) has three elements:

- First, the examination is to be made by the guarantor itself, not by an intermediary. It is usual for a presentation to be made by a bank or other intermediary on behalf of the beneficiary rather than by the beneficiary itself. The guarantee itself may have been advised through an advising party, but it is the guarantor, not the advising party, that will examine the documents for compliance.

- Secondly, the guarantor must make its examination “on the basis of a presentation alone”.

The guarantor is therefore not concerned with: (i) whether a statement of breach is genuine;

(ii) whether a non-documentary condition could be redeemed by means of a determination from outside the guarantor’s own records; or

(iii) more generally, any examination that goes beyond the documents specified in the guarantee and presented to the guarantor.

- Thirdly, the guarantor must determine whether the presentation “appears on its face” to be a complying presentation. “On its face” is not meant to distinguish the front page of a document from the back page; it emphasises that the presentation must be such that, on an examination of the documents, its compliance with the guarantee terms, the rules and international standard demand guarantee practice can be asserted⁴⁸. The guarantor is not responsible if an examination conforming to the expected professional standards does not allow the detection of a discrepancy or inconsistency or if it transpires later that a document was forged or issued without authority, a point made specifically in article 27(a).

(2) Exceptions to the “presentation only” rule

357 There are two exceptions to the rule that the guarantor is concerned only with the documents presented to it:

- The first exception is when the expiry event is not indicated as happening upon the presentation of a specified document. In that case the event is deemed to happen when its occurrence becomes determinable from the guarantor’s own records (see paragraphs 2.39 and 2.44 in Chapter 4).

- The second exception can be found in article 7, where fulfilment of a non-documentary condition (including the event after which the beneficiary can present a demand or the event leading to the variation of the amount of the guarantee) cannot be determined from a document

[Page122:]

specified in the guarantee. In this case, too, it may be determined from the guarantor’s own records or from an index specified in the guarantee (see paragraph 339 above).

(3) Standard of care of examination

358 URDG 458 and UCP 500 required that documents be examined by the issuer “with reasonable care”. This phrase does not appear in UCP 600, and URDG 758 follow UCP 600 in this respect. Accordingly, the new rules do not expressly state any standard for examination. The phrase “with reasonable care” was dropped not because of any intention to exculpate issuers from exercising care in the examination of documents but because it was felt that words such as “reasonable” generated uncertainty, because they depend upon the circumstances of the particular case⁴⁹. However, it remains the case that guarantors must examine a presentation diligently and professionally to see if it is a complying presentation. Since most presentations under a demand guarantee, in contrast to those under a documentary credit, involve few documents – often no more than the demand itself and a supporting statement – it is usually relatively easy to see whether a presentation does or does not conform to the requirements of the guarantee and the rules. Whether an examination has been conducted with the requisite care is to be determined by reference to international standard demand guarantee practice.

(4) The principle of strict compliance

359 As under the UCP, the principle of strict compliance of documents with the terms of the guarantee, though not expressly stated in the URDG, nevertheless applies to presentations under the URDG. If the documents do not strictly conform to the guarantee, their presentation is non-complying, even if this non-compliance is of no practical significance and what is tendered is equally effective. Thus, if the guarantee calls for the presentation of a document showing shipment by a stated date, the presentation of a document showing shipment on the next day of the same month is a non-complying presentation even though the cargo is delivered on time and the delay in the shipment ultimately found to be of no commercial consequence.

360 Strict compliance does not mean literal adherence to every detail. In this respect, the International Standard Banking Practice for the Examination of Documents under Documentary Credits, 2007 Revision for UCP 600 (ICC Pub. No. 681) – and its imminent update – provides good guidance. For instance, it indicates that the use of generally accepted abbreviations, such as “Ltd” for “Limited” and “Co.” for “Company” does not make a document non-compliant. Similarly, a spelling or typing error that does not affect the meaning of a word does not constitute a discrepancy.

(5) Examination of data in context

361 Article 19(b) provides that data in a document required by the guarantee are to be examined in context with that document, the guarantee and the rules.

[Page123:]

Like in UCP 600 article 14(d), “in context” means that the document containing the data and all the specified documents must be read as a whole, taking into consideration the purpose of the guarantee, the document itself and international standard demand guarantee practice. This may affect the interpretation of data. An obvious example is where the document defines terms used in it, or in another document, in a way that gives them a meaning different from their ordinary meaning. In such a case, the data must be interpreted in the light of their definition in the document when testing for consistency. Another example is where, in the matter of inventory financing, the collateral management agreement names the secured lender as the party entitled to claim delivery of the inventory, while the storage agreement between the depositor and the warehouse indicates that the inventory is deposited with the warehouse in the name of the owner of the inventory who is entitled to claim the inventory back. Clearly, each document serves a different purpose, with the collateral management agreement serving as a security for the lender, by preventing the owner of the stored inventory from claiming it back without the lender’s agreement. Where both a collateral management agreement and a storage agreement relating to the same stored goods are specified in and presented under a guarantee, no conflict exists if different names appear in the field corresponding to the depositary.

(6) Data not to conflict with other data in the presented document, other required documents or the guarantee

362 Article 19(b) also provides that data need not be identical to, but shall not conflict with, data in the document, any other required document or the guarantee. This largely follows article 14(d) of UCP 600 relating to documentary credits. Accordingly, if the data in the two documents are the same, except that one document contains more details than the other, there is no inconsistency. Like the drafters of UCP 600, the drafters of URDG 758 considered that the phrase specifying that data “must not conflict with” is much narrower and less prone to misuse than the phrase “documents which appear on their face to be inconsistent with”. Under UCP 500, this phrase prompted many banks to mistakenly require a mirror image of data. The new standard is expected to reduce the rejection of demands for discrepancies.

363 ISP98 promote a different standard. Rule 4.03 states that documents shall be examined for inconsistency with each other only to the extent provided in the standby letter of credit. The rationale of the rule as indicated in the official comment to ISP98 is that there is not necessarily one underlying obligation from which the examiner can determine what constitutes consistency and that documents may be related to different obligations under the same or different transactions⁵⁰. Because the examination of interdocumentary consistency requires extra effort on the part of the issuer or the nominated person, standby letter of credit practice seems to require a specific request in the instructions for this purpose and that those requesting this service should be charged for it. The URDG follow the UCP in taking an opposite stand, leaving it to the parties to choose to relieve the guarantor of the task of examining documents for inconsistency with each

[Page124:]

other. This can be achieved by modifying article 19(b), for example by deleting the words “any other required document”.

364 In testing for inconsistency, the guarantor can ignore any document presented by the beneficiary that is not required by the guarantee (article 19(d)).

(7) Consistency of data with non-documentary conditions

365 Although, in general, non-documentary conditions are to be ignored, they remain relevant to the question of consistency. Specifically, where data in a document specified in and presented under the guarantee are inconsistent with a non-documentary condition stated in the guarantee, the presentation is not a complying presentation. This is the case, for instance, where the non-documentary condition refers to a specific quality standard of the goods to be delivered and the inspection company’s quality certificate shows a different standard. This situation is expressly provided for in article 7, in order to avoid the kind of ambiguity that arose under UCP 600 and that was resolved by an Opinion of the Banking Commission (Opinion TA644rev) to the above effect (for more on this see the comments on article 7 in Chapter 4). However, the fact that a non-documentary condition is inconsistent with data in a document presented under but not required by the guarantee cannot lead to the rejection of the presentation, because article 19(d) directs the guarantor to disregard any non-required document.

(8) Guarantee not containing stipulations as to signature or data content

366 If the guarantee requires the presentation of a document without stipulating whether it needs to be signed, by whom it is to be issued or signed or its data content, article 19(c) provides that:

(a) the guarantor will accept the document as presented if its content appears to fulfil the function of the document required by the guarantee and otherwise complies with article 19(b); and

(b) if the document is signed, any signature will be accepted and no indication of name or position of the signatory is necessary.

367 Inspired in part by UCP 600 article 14(f), URDG article 19(c) directs the guarantor to accept a document whose precise data content is not specified in the guarantee to the extent that the guarantor can determine that the presented document appears to fulfil the intended function of such a document. Of course, the guarantor is not expected to divine the specific intention of the applicant and the beneficiary when stipulating the particular document; rather, it is expected to be able to recognise the intended purpose of the document required in the guarantee. Take as example the case where a guarantee requires a demand to be supported by an arbitral award without also requiring that the award should rule that the applicant has breached its obligations under the underlying relationship or that it is entitled to claim under the guarantee. The guarantor is expected to examine that award on its face to determine that it appears to be an arbitral award and, if the rest of the

[Page125:]

demand is a complying demand, to pay under that demand without having to review how the arbitrators apportioned the liabilities or to elucidate the rationale behind their ruling.

368 Similarly:

- if the guarantee or the rules do not state that a specified document has to be signed, an unsigned document will be accepted, provided of course that its content appears to fulfil the function of that document;

- if it does not state who may sign it, any signature will be accepted;

- if it does not require the designation of the signatory (e.g. “a director”), no designation is necessary; and

- if it does not specify the data content, the document will be sufficient if its content appears to fulfil the function of a document of that kind.

369 Other examples given by the drafters of UCP 600 are also worthy of note in this respect: a weight list that does not offer any information as to weight should be rejected because it obviously does not appear to fulfil the function of a weight list; likewise, a document that purports to be a certificate of analysis but does not contain any data regarding analysis or reference to the goods being analysed is not a document that appears to fulfil the function of a certificate of analysis⁵¹.

(9) Disregarding documents not specified in the guarantee

370 If a document not required by the guarantee or referred to in the rules is presented, the guarantor is directed by article 19(d) to disregard it whatever its content or its effect as to consistency among documents or compliance with the guarantee terms. There is simply no duty on the guarantor to examine any such document. The guarantor can either return it to the presenter or hold it at the presenter’s disposal. Obviously, this does not apply to the supporting statement, which, although it may not be explicitly required in the guarantee or counter-guarantee, is required under article 15.

(10) Guarantor not required to recalculate beneficiary’s calculations

371 Article 19(e) indicates that the guarantor need not recalculate a beneficiary’s calculations under a formula stated or referenced in the guarantee (for example, a Platts price reference formula). Thus, if the amount of a demand is based on the beneficiary’s erroneous calculation, the guarantor is entitled to pay the demand without checking and correcting the calculation, provided that the amount available under the guarantee is not exceeded (article 17(e) (i)). As stated in article 19(e), it is open to the guarantor, if it so chooses, to recalculate the beneficiary’s calculations and, if the beneficiary’s calculations are wrong, to reject the presentation. The option is the guarantor’s alone and is limited only by the requirement that the formula for the beneficiary’s calculations be stated or referenced in the guarantee. The beneficiary cannot blame the guarantor for having taken the initiative of recalculating its calculations and, as a result of finding an error, rejecting the presentation. Similarly, the party that gave the guarantor its instructions (whether the

[Page126:]

instructing party or a counter-guarantor) cannot blame the guarantor for not having recalculated the beneficiary’s calculations and, as a result, considering a presentation to be compliant at a time when it contained a calculation error that the instructing party or counter-guarantor identified when receiving a copy of the presentation. Any suggestion to the contrary turns the option allowed to the guarantor in article 19(e) into an obligation which is certainly not part of the intent or the terms of the article.

(11) Requirement for a document to be legalised, etc.

372 A guarantee may require a specified document to be legalised, visaed, certified or similar. Article 19(f) allows the guarantor to consider such a requirement to have been satisfied by any signature, mark, stamp or label on the document that appears to satisfy that requirement, without the need to check the authenticity of the legalisation, the authority of the signatory or the status of the person affixing the mark, stamp or label.

(12) Stamp in foreign language

373 The rule in article 19(f) also relieves the guarantor of responsibility in cases where the stamp contains words in a foreign language that the guarantor is unable to read. Neither the beneficiary nor the applicant is required to present a document in the language of the guarantee where the document is issued by a person other than the beneficiary or the applicant or a person acting on behalf of any of them (article 14(g)). However, where the whole stamp is in a foreign language that the guarantor is unable to read, thus leaving the guarantor unable to determine whether the stamp appears to satisfy the guarantee requirement, the URDG – like UCP 600 article 3 – do not provide a precise direction. They leave it to the guarantor to decide whether the circumstances of the case warrant having the stamp translated and then examining it for compliance or whether to reject the document outright for failure to present the appearance of satisfying the guarantee requirement. In either case, the guarantor should not incur liability.

3.5.5 Time for examination of a demand

(1) Time for examination

374 Article 10(a) of URDG 458 prescribed “a reasonable time” for examining documents presented under a demand guarantee. It mirrored article 16(c) of UCP 400, which was then in force. It was felt that this generated too much uncertainty, essentially because of the lack of a globally standard application of the concept of “reasonable time”. Even the hybrid approach promoted by UCP 500 article 13(b) “reasonable time not to exceed seven banking days following the day of receipt of the documents” proved to be inadequate and a frequent source of contention, as what seemed reasonable to one bank was strongly challenged by another bank even where the time of examination was well within the period of seven banking days. For the same reason, the drafting group of the new URDG discarded the approach in ISP98 Rule 5.01 purporting to offer a half-way house: “Notice of dishonour must be given within a time after presentation of documents which is not unreasonable.

[Page127:]

Notice given within three business days is deemed to be not unreasonable and beyond seven business days is deemed to be unreasonable”. At the end of an extensive consultation, the new URDG emerged with the choice that best promotes certainty. Indeed, article 20 lays down a fixed period of five business days following the day of presentation to examine the demand and determine whether it is a complying demand. The end of the period for examination also represents the last day on which the guarantor can give notice rejecting a non-complying presentation (see article 24(e)).

(2) Business day at place for presentation

375 It is the “business day” (as defined in article 2) at the place for presentation that is relevant for the calculation of the five-business-day period. In the majority of cases, presentation is expected to be made to the guarantor at the place of issue, but there is nothing that stops the parties from agreeing in the guarantee that presentation be made elsewhere, for example at a branch of the guarantor in the beneficiary’s country. In that case, it is the business day in the place for presentation that should be taken into account for the calculation of the five-business-day period of article 20(a), not the potentially different one at the place of issue.

376 When calculating the five business days, the day of presentation is to be excluded. Thus, in a place where Saturdays and Sundays are not business days, the compliance of a demand presented on a Monday must be determined by the end of the following Monday.

(3) No extension of validity period

377 The five-business-day period is not shortened or otherwise affected by the expiry of the guarantee on or after presentation. This is because expiry merely fixes the time on or before which a presentation must be made. It is not necessary that examination of the presentation be completed, or even commenced, prior to expiry. The consequence, however, is that if the presentation is a non-complying presentation and the guarantee expires during the examination of the documents without a complying presentation having been made or the preclusion rule having come into operation under article 24(f), it is too late for the beneficiary to make a fresh and complying presentation. This, however, is a risk that the beneficiary knowingly takes when making a presentation on a date so close to expiry.

378 Obviously, the five-business-day period, and the preclusion sanction in article 24(f), apply only in the case of a demand, not in the case of a presentation that is not a demand.

(4) Deferment of running of time for examination

379 There are three cases in which the commencement of the time for examination in article 20(a) is deferred:

- The first is where the demand does not identify the guarantee under which it is made; the time for examination does not begin to run until the guarantee has been identified (article 14(f)).

[Page128:]

- The second is where the presentation of a demand indicates that it is to be completed later (article 14(b)), in which case it need not be examined until it has been completed (article 20(a)). For example, if the presentation of the demand indicates that the supporting statement required by article 15 is to be presented later, the time for examination does not begin until such presentation. If the demand contains no such indication, the guarantor should reject it in order to avoid the preclusion rule in article 24(f); and

- The third is where the commencement of examination is prevented by force majeure (see article 26(b)(ii) and paragraph 380).

(5) Suspension of running of time for examination

380 Where a demand made under a guarantee or counter-guarantee before an event of force majeure cannot be examined because of that force majeure, the running of the five-day period is suspended until the resumption of the business of whichever party – the guarantor or counter-guarantor – was affected by the force majeure (article 26(b)(ii), 26(c)(ii)) (see the comments on article 26 in Chapter 4). If the force majeure prevents the commencement of the examination, the case falls within paragraph 379. If it occurs during the five-day period allowed for the examination, then on cessation of the force majeure the guarantor has the unexpired part of the five-day period within which to complete its examination.

3.5.6 Non-complying demand, waiver and notice

(1) Determination that a demand under a guarantee is non-complying

381 Where the guarantor determines that a demand under the guarantee is not a complying demand, article 24(a) offers it the following choice:

- it may either reject the demand; or

- it may approach the instructing party or, in the case of a counter- guarantee, the counter-guarantor for a waiver of the discrepancies.

382 The above choice belongs entirely to the guarantor. A request from the beneficiary that the guarantor approach the instructing party for a waiver does not oblige the guarantor to do so. Even if the guarantor approaches the party that gave it its instructions in order to seek a waiver and is instructed as a result to waive the discrepancies, the guarantor is not bound to do so and may instead reject the demand as a non-complying demand. If the guarantor agrees to the waiver, it pays notwithstanding the discrepancies, which, as a result of the waiver, can no longer be raised.

(2) Waiver or amendment?

383 No amendment of the guarantee is necessary to allow the guarantor to take up discrepant documents: a waiver by the guarantor pursuant to an identical waiver granted by the instructing party is sufficient. It is also the more practical way to proceed, as considering the option of amending the guarantee to cure the discrepancies could entail further delays that might lead to the sanctioning of the guarantor on the basis of the preclusion rule (article 24(f)) if it has not rejected the discrepant demand in time.

[Page129:]

384 A rejected demand cannot be cured by the subsequent grant of a waiver, because it no longer exists (articles 17(d) and 18(a)). If the guarantee has not yet expired, the beneficiary may present a new demand that would be:

- either a complying demand cured of the discrepancies that led to the rejection of the previous demand;

- a demand conforming to an amendment that makes the earlier discrepancies acceptable; or

- if the beneficiary expects a waiver that makes its demand acceptable, a demand containing the same discrepancies.

385 In practice, if the guarantor is still in possession of the documents constituting the rejected presentation, it may agree that the beneficiary should resend only the cured document in which the discrepancy had been identified, without the need for the beneficiary to resend other documents that contained no discrepancy in the first place. Likewise, if the guarantee has been amended after rejection to make the earlier discrepancies acceptable, there is little commercial sense in the guarantor returning the documents to the beneficiary, only for that beneficiary to send them back as is. Instead, the guarantor and the beneficiary can agree that where the rejected demand is still in possession of the guarantor, it is deemed to be a new demand that is to be examined again and paid. This is not an amendment of the guarantee, but a mere facilitation service offered by the guarantor. As such, it needs no specific agreement from the instructing party.

(3) No payment under reserve or indemnity

386 The URDG do not cover the case of a guarantor paying a non-complying demand under the explicit reserve that the instructing party later waives the discrepancies. That is a matter for the applicable law, which might either determine that the payment is to be considered unconditional or treat the payment as not being in conformity with the guarantee.

Earlier versions of the UCP (No. 290 of 1974, No. 400 of 1983 and No. 500 of 1993) allowed for payments to be made under reserve or against an indemnity issued by the beneficiary or its bank where the nominated bank considered the discrepancies to be so minor that it felt confident that the issuing bank or the applicant would either not detect them or waive them, thus, in effect, anticipating such a waiver. This is no longer possible since the latest revision of the UCP (600) and is likewise impossible under the new URDG. Accordingly, a guarantor can only make a definitive payment to the beneficiary, not a payment under reserve of subsequent ratification by the instructing party. Likewise, a beneficiary is not concerned with the fact that the payment it has received under the guarantee may have resulted from the guarantor’s error in failing to identify a discrepancy and give a proper notice of rejection in a timely manner as required in article 24, thus depriving the guarantor of its claim for reimbursement against the party that gave it its instructions.

[Page130:]

(4) Determination that a demand under a counter-guarantee is non-complying

387 Article 24(b) mirrors article 24(a) and indicates that when the counter- guarantor determines that a demand under the counter-guarantee is not a complying demand, it may reject that demand or, in its sole judgement, approach the instructing party for a waiver of the discrepancies. In the case of guarantees, “instructing party” has to be read as “the party from which the counter-guarantor has received its instructions”, as a result of which a counter-guarantor is expected to approach its own counter-guarantor for the waiver and is not allowed to contact directly the ultimate instructing party at the top of the chain (see Diagram 12).

(5) No extension of time for examination

388 Approaching the instructing party for a waiver does not extend the five-day period allowed to the guarantor under article 20(a) to examine the demand (article 24(c)). It also does not suspend the running of this period. This is further reinforced by the preclusion rule in article 24(f), which applies if the demand is not rejected in time.

(6) No dispensation from article 16 in case of rejection

389 Rejecting the demand or approaching the instructing party for a waiver does not relieve the guarantor from performing its information duty under article 16. This is important if the guarantor chooses to reject the discrepant demand as opposed to approaching the instructing party for a waiver. In that case, the guarantor is expected to inform the instructing party of the demand in parallel to examining that demand. On the other hand, if the guarantor approaches the instructing party for a waiver, this necessarily carries in it an information of the demand that need not be replicated by submitting a separate information notice in order to comply with article 16.

(7) The guarantor’s decision to waive or reject

390 The second part of article 24(c) underscores that even if the counter- guarantor or the instructing party agrees to a waiver of the discrepancies, the guarantor is not obliged to do so and may reject the demand. The reason is that a waiver involves an alteration of the terms of the guarantee that needs to be agreed upon by the guarantor that issued the guarantee in order to be effective. Because article 24(c) indicates that it is ultimately the guarantor’s decision whether to act upon a waiver granted by the party that gave it its instructions, no estoppel argument should be accepted to the effect that the guarantor’s approach to the instructing party for a waiver under article 24(a) induced the instructing party to believe that the guarantor was agreeable to granting the waiver if properly instructed to that effect and to rely on such a belief to its detriment. This applies equally to a counter-guarantor approaching the instructing party for a waiver of discrepancies identified in the guarantor’s demand, as indicated in article 24(b).

[Page131:]

(8) Why the strict rule for the notice of rejection?

391 UCP 600 article 16(c), the source of inspiration for article 24(d), is the culmination of over 20 years of educational efforts spanning two UCP revisions (500 and 600), a position paper in 2002 (Examination of Documents, Waiver of Discrepancies and Notice under UCP 500) and countless opinions of the ICC Banking Commission, aimed at preventing the rejection procedure outlined in the UCP from turning into a trap for the party examining the presentation.

392 The rationale behind URDG 758 article 24(d) – and its UCP 600 counterpart – is to stop unfair practices witnessed in some instances where the guarantor, whether or not consciously siding with its customer, informs the presenter of the discrepancies in a piecemeal fashion over an extended period in order to leave as little time as possible to cure the discrepancies before expiry. True, an argument could be made that it is the beneficiary’s responsibility to present a demand that is a complying demand and the conduct of the guarantor, however questionable, cannot make good a defective demand. Nonetheless, keeping information of which the guarantor is aware from the beneficiary until it is too late for the beneficiary to act on this information is not a good faith practice that is conducive to honest dealings. Outside the URDG, the conduct of the guarantor would have to be judged according to the good faith standard, or its equivalents, in the applicable law. Under the URDG, any such conduct is banned and liable to sanction under the preclusion rule in article 24(f). That is why it is important for the guarantor or counter-guarantor examining a demand to strictly follow the procedure laid down in article 24(d) within the time limit indicated in article 24(e). The success of the URDG lies in offering the most reasonable balance among the legitimate interests of the parties. A similar reasoning has led to include in the UCP a preclusion rule since the revision of UCP 290 in 1974. It has been a hallmark of the UCP ever since and directly inspired the rule in URDG article 24.

(9) The content of the notice of rejection

393 The guarantor’s rejection of a non-complying demand can only take one form under the URDG, namely that of a single notice sent by the guarantor to the presenter of the demand stating the following two items:

(a) the guarantor is rejecting the demand; and

(b) each discrepancy for which the demand is rejected.

(a) THE GUARANTOR REJECTS THE DEMAND

394 The first tier of the two-tier rejection notice requires the guarantor to state in the notice that it is rejecting the demand. This requirement should be strictly respected and its wording should literally be copied in the notice of rejection. While this may appear to be too formalistic, especially since the description of the discrepancies in the second tier of the same notice leaves no doubt that the demand does not conform to the requirements of the guarantee or the rules (e.g. a notice indicating that the supporting statement is missing or dated later than the date of presentation), experience relating

[Page132:]

to the UCP demonstrates the merit of the requirement that the guarantor indicate explicitly in the notice that it is rejecting the demand. The additional certainty that this required statement brings to the rejection notice is likely to prove helpful in the tension that often results from the presentation of any demand for payment under a guarantee, its rejection and the exchange of messages that often follows.

(b) SPECIFICATION OF EACH DISCREPANCY

395 The guarantor should list in the notice of rejection each discrepancy for which it is rejecting the demand. If a demand is discrepant in two respects and only one is notified to the presenter, the guarantor cannot rely on the other discrepancy to reject the demand when it is presented afresh after the notified discrepancy has been cured. This is the effect of the preclusion rule in article 24(f).

396 The list of discrepancies must not only be complete, it also needs to be specific as to the reason why each discrepancy is regarded as such. A general indication such as “certificate not complying with terms of guarantee” or “conflicting data between documents” is not a specific indication of the reason why the guarantor is rejecting the demand. The reason is obvious and inherent to the function of the notice of rejection. The notice has been devised to enable the beneficiary to cure the discrepancies and present a fresh complying demand. Obviously, curing the discrepancies is likely to be more arduous and to take longer absent a specific indication of those discrepancies.

(10) To whom should the notice be given?

397 Like UCP 600 article 16(c), URDG article 24(d) requires the guarantor to give the notice of rejection to the party that made the presentation. Referring to the presenter instead of the beneficiary is deliberate. Where the presenter is the issuer of the document and makes the presentation on behalf of the beneficiary (e.g. an insurer sending the required insurance certificate and the demand directly to the guarantor as instructed by the beneficiary), that presenter is in the better position to rapidly cure the discrepancy and make a fresh presentation before expiry.

(11) Departure from UCP 600

398 The URDG only require the notice of rejection to indicate that the guarantor rejects the demand and each discrepancy for which the demand is rejected. Contrary to UCP 600 article 16(c)(iii)(a)-(d), there is no requirement for the notice of rejection also to indicate what the guarantor intends to do with the non-complying presentation. This was considered unnecessary in guarantee practice, essentially because original documents are seldom required, and was therefore consigned to a subsequent paragraph – paragraph (g) – that outlines the choices of the guarantor when dealing with a rejected presentation. The main consequence of this choice is that, contrary to the case under UCP 600, the guarantor’s failure to indicate in the notice of rejection what it intends to do with the non-complying presentation does not constitute a breach of the URDG and does not lead to the application of the preclusion sanction, although it may give rise to a separate basis for a claim for damages outside the

[Page133:]

URDG if, under the applicable law, the failure to return the documents to the presenter, to hold them at its disposal or to dispose of electronic records is carried out in circumstances that are prejudicial to the beneficiary.

(12) Each demand is separate

399 The rejection of a non-complying demand does not preclude the presentation of a subsequent demand on or before expiry. This is so even if the guarantee prohibits multiple demands (article 17(d)). The reason is that the first demand no longer counts after it has been rejected.

(13) Time within which the notice of rejection is to be sent

400 The notice required by article 24(d) must be sent without delay and in any event no later than the close of the fifth business day following the day of presentation (article 20(a)). This applies whether the guarantor rejects the demand at the outset under article 24(a) or does so after refusing to waive discrepancies despite a waiver by the counter-guarantor or instructing party. “Without delay” in article 24(e) means as soon as practicable after the guarantor has decided to reject the demand following examination. While it is best practice for a guarantor that has identified discrepancies in the presentation and has resolved to reject the demand, say, two business days after its presentation, to send the notice of rejection to the presenter without waiting the extra three business days allowed under article 24(e), that guarantor does not incur liability under the URDG if it sends the notice only on the fifth business day. This is not meant to condone negligence or dilatoriness, but is simply a drafting choice that aims to avoid breaking the rule in article 24(e) into two parts, each offering a different time line according to whether the guarantor approaches the instructing party for a waiver.

401 “Sent” means dispatched. The guarantor is not responsible if the notice of rejection does not reach the presenter.

(14) The UCP 600 model

402 As already indicated, the notice of rejection procedure in the URDG is modelled after the one outlined in UCP 600, but with slight changes to ensure that the procedure is adapted to demand guarantee practice where such practice differs from that of documentary credits (see paragraph 398 above) or to be consistent with the URDG drafting style. An example of the latter is the requirement in article 24(e) for the notice of rejection to be sent “without delay”, whereas UCP 600 article 16(d) requires it to be given “by telecommunication or, if that is not possible, by other expeditious means”. Obviously, it would be an incorrect reading of the URDG to conclude that the guarantor is allowed to send the notice of rejection through a less than expeditious means, such as normal mail. It is clear that the phraseology of the URDG and the UCP are meant to carry the same meaning in condemning negligent conduct. More importantly, both URDG article 24(e) and UCP article 16(d) cap the permitted period for sending the notice of rejection at no later than the close of the fifth business day (banking day for the UCP) following the day of presentation, which is the important part of the rule as this is what leads to the application of the preclusion sanction.

[Page134:]

(15) The preclusion rule

403 A guarantor failing to act in accordance with article 24(d) and (e) is precluded from claiming that the demand is not a complying demand (article 24(f)). In other words, the preclusion rule sanctions the guarantor’s failure to:

- give notice of rejection before the close of the fifth business day following the day of presentation;

- indicate in that notice that it is rejecting the demand; or

- list in that same notice each discrepancy for which the guarantor is rejecting the demand.

404 Contrary to the case under UCP 600, and for the reasons indicated in paragraph 406, a guarantor is not subjected to the preclusion rule for not indicating in the notice of rejection that it is returning any documents presented in paper form to the presenter or disposing of the electronic records in any manner that it considers appropriate.

(16) Preclusion rule is inoperative if guarantee expires during examination period

405 However, where there is a non-complying presentation and the guarantee expires before the end of the period allowed to the guarantor for giving notice of rejection under article 24(e), the guarantee automatically ceases to have effect and the preclusion rule does not operate. This is because the rationale for the sanction is to bar a guarantor from asserting a discrepancy identified in the first presentation but not notified to the presenter, should the presenter make a subsequent presentation. However, if the guarantee has expired during the five-business-day period during which the guarantor is allowed to notify rejection, the presenter cannot make a new presentation whether or not it has been notified of all the discrepancies that led to the rejection. Of course, the beneficiary may still expect to be informed of the discrepancies that prompted the rejection of it demand and has every right to contest them if its feels they are unfounded.

(17) Return of documents

406 After giving notice of rejection, the guarantor may return to the presenter any documents presented in paper form and may dispose of the electronic records in any manner that it considers appropriate without incurring any responsibility (article 24(g)). The following remarks need to be made:

- The power of disposal, including destruction, is mentioned only in relation to electronic records. The guarantor is not empowered to destroy paper documents, including mere copies, presented to it without specific instructions from the presenter to this effect. If it does, it may be liable for damages, although this would not trigger the application of the preclusion rule of article 24(f).

- The reference in article 24(g) to the return of the paper documents to the presenter is an option allowed to the guarantor, hence the use

[Page135:]

of the word “may”. Although not explicitly indicated in the article, the guarantor also has the option of not returning the documents to the presenter but holding them at the disposal of that presenter while awaiting further instructions. Where the beneficiary intends and is able to cure the discrepancies listed in the notice of rejection, it could be better to agree with the guarantor to keep the non-discrepant part of the presentation and, once it has been supplemented with the cured documents, to consider that a new presentation has been made. Likewise, where the beneficiary anticipates an amendment to the guarantee that has the effect of deleting the requirements that caused the discrepancies, there is little commercial sense in returning the rejected documents to the presenter only for them to be shipped back, as is, once the amendment is issued. In that case, the parties are better off agreeing that the guarantor shall keep the documents and regard them as a new presentation after the amendment.

(18) Guarantor includes counter-guarantor

407 Article 24(h) provides that, for the purpose of paragraphs (d), (f) and (g), guarantor includes counter-guarantor. Paragraphs (a) and (b) are not mentioned because they deal separately with rejection by a guarantor and a counter-guarantor, and paragraph (c) is linked to paragraphs (a) and (b). Paragraph (e) is not mentioned either because it automatically follows from the application of paragraph (d).

3.5.7 Disclaimer on effectiveness of documents

408 It has been noted earlier that, under article 5, guarantors are not concerned with external relationships, while article 19 requires guarantors to determine, on the basis of a presentation alone, whether a presentation appears to be a complying presentation. In keeping with these two principles, article 27 makes it clear that the guarantor is not concerned with such matters as the sufficiency, genuineness or legal effect of any signature or document, or statements contained in a document, nor with matters relating to the description, quantity, value, existence and so forth of goods, services or other performance represented by or referred to in any document presented to it. Furthermore, the guarantor incurs no liability for the good faith, acts, omissions, solvency, performance or standing of any person issuing or referred to in any capacity in any document presented to it. It follows that a guarantor incurs no liability if it makes a payment against an apparently genuine signature that has been forged or against a document that contains false statements, whether as to the nature of goods shipped, the date of shipment, a supposed breach by the applicant that has not in fact occurred or otherwise.

409 There are two qualifications to the disclaimer. First, the exemptions do not exempt a guarantor from its failure to act in good faith (article 30). Secondly, the guarantor is not entitled to accept a presentation that does not appear on its face to be a complying presentation (see article 19(a)).

[Page135:]

3.6 Making payment

410 In a nutshell. When a complying demand is presented, the guarantor – or the counter-guarantor under the counter-guarantee – has to make payment at the place for payment and transmit a copy of the complying demand and documents to the party from which it received its instructions. Payment has to be made in the currency specified in the guarantee or counter-guarantee unless the conditions set out in article 21 for change of currency have been met, whereupon payment must be made in the currency of the place for payment. Payment has to be made to the beneficiary, including a transferee beneficiary, or to the assignee of the proceeds of the guarantee if the guarantor has agreed to do so. Where an extend or pay demand is presented, the guarantor or counter-guarantor can choose either to pay or extend for a period acceptable to the beneficiary or, in the case of a counter-guarantee, the guarantor.

3.6.1 Payment

(1) Complying demand to be paid

411 When the guarantor – or counter-guarantor under a counter-guarantee – determines that a demand is a complying demand, it must pay, whether or not it has utilised the full five business days allowed for examination (article 20(b)). What constitutes payment is a matter for the governing law.

412 The absence of an indication in article 20(b) that the guarantor has to make payment “immediately” should not be read as condoning a payment that is deliberately delayed by the guarantor for whatever reason other than force majeure (see article 26). Article 20 clearly expects the guarantor to start the payment process when it has determined that the demand is a complying demand, whatever the first step of the payment process may be in the guarantor’s payment system (for example, sending the payment order to a correspondent bank for clearing purposes if it involves payment in a foreign currency) and whatever its internal procedure for determining whether a demand is a complying demand (for example, a determination of compliance

[Page137:]

of demand by a first examiner is not necessarily conclusive if the guarantor’s internal procedure requires two or more successive examinations).

413 The drafting of article 20(b) also takes into account comments received during the revision of URDG process indicating that unlike examination, which is essentially an internal process of the guarantor whose duration can be fixed in advance, payment itself is governed by a number of external factors including mandatory statutes or industry standards. This makes it difficult to cover payment in the URDG. One example is value dates, based on which a bank holding the beneficiary’s account can take one or more days between receiving the payment from the guarantor and actually crediting it to the account of the beneficiary. Another example is claw-backs, which occur in cases where the syndicate agent makes a payment to a lender in the syndicate by error, perhaps because set-off should have been asserted or because no payment was due in the first place, and seeks to reverse the accounting entry. In such cases, it is difficult to determine with certainty whether the guarantee has been paid. In short, a case where the guarantor has delayed payment for a reason other than an event beyond its control is a breach of article 20(b).

414 Article 20(b) is only qualified by article 23 under which, in the case of an extend or pay demand that the guarantor determines to be a complying demand, the guarantor does not have to pay but can instead choose to extend the validity period of the guarantee for the duration requested in the demand or agreed by the beneficiary.

(2) Place for payment

415 Upon determination that a demand is a complying demand, the guarantee must be paid at the place indicated in that guarantee. If no place for payment is indicated in the guarantee, it must be paid at the branch or office of the guarantor that issued the guarantee (article 20(c)). The same rule applies to the payment of a counter-guarantee where, absent indication to the contrary in that counter-guarantee, it shall be paid at the branch or office of the counter-guarantor that issued the counter-guarantee.

(3) No duty to pay other than at the place for payment

416 The guarantor is not obliged to pay at a place other than the one indicated in the guarantee or, absent such indication, at the branch or office of issue. This does not change in cases where force majeure under article 26 prevents payment at the particular place for payment but not elsewhere or it becomes illegal under the law of the place for payment to make payment in the currency specified in the guarantee (article 21). If, absent proper instructions from the instructing party, the guarantor agrees to the beneficiary’s request to pay a complying demand at a place other than the one indicated in the guarantee or the branch or office of issue, this does not affect the right of the guarantor to be reimbursed by the instructing party, although none of the consequences of such a change of place for payment shall be borne by that instructing party. Such consequences could include possible taxes at the new place for payment that may cut the guarantee amount ultimately credited to the beneficiary and

[Page138:]

oblige the guarantor to top up the payment by the tax amount, or any additional charges required by the guarantor or an intermediary bank for the extra service. Payment of the guarantee in these conditions would indeed be a payment service offered to the beneficiary (typically where the beneficiary is itself a customer of the guarantor) by the guarantor outside the URDG or indeed the guarantee relationship.

3.6.2. Transmission of copies of complying demands

417 URDG 758 article 22 is a departure from URDG 458 article 21, which required the transmission of the original demand. The new rule requiring the transmission of copies only reflects two considerations:

- First, demand guarantees seldom require the presentation of documents of title, where one expects an original to be required (which is why the UCP require a nominated bank to transmit the original documents). Conversely, the documents typically required in support of a demand, namely a supporting statement, an expert’s report or an award, also satisfy their intended purpose when transmitted as copies.

- Secondly, the demand provides the legal basis for the guarantor’s payment. Therefore, the guarantor should be entitled to retain it in case it needs to use it in support of a recourse against the party that gave the guarantor its instructions or for regulatory reasons related to transparency in payments.

418 Of course, where the party giving instructions for the issue of a guarantee or counter-guarantee wishes to receive the demand and related documents in original, it can simply include this as a requirement in its instructions. This is not a matter for the beneficiary and, accordingly, need not be stipulated in the guarantee (or, in the case of a counter-guarantee, the guarantor).

New article 22 and ICC opinion 454/2000

419 The drafting of article 22 requiring the transmission of a copy of the presented demand overrides Opinion 454/2000 that interpreted URDG 458 article 21 as requiring the transmission of the original – not a copy – of the demand received from the beneficiary. That Opinion was right (and it still is) under URDG 458 article 21. The change brought by URDG 758 article 22 is unlikely to take the market by surprise as in the vast majority of cases documents other than a demand presented under a demand guarantee are copies and not originals.

(1) Transmission duty

420 The guarantor to which a complying demand is presented must without delay transmit copies of the demand and any related documents to the instructing party or, where applicable, the counter-guarantor. Of course, the guarantor must first determine that the demand is a complying demand, for which purpose it has up to five business days following the presentation within which to examine the presentation (article 20(a)). “Related documents” are all the documents forming part of the presentation, including the supporting statement, but excluding documents not required

[Page139:]

by the guarantee, which the guarantor will disregard and which it may either return to the presenter or hold at its disposal (article 19(d)).

(2) Duty applies only to complying demands

421 Article 22 is confined to complying demands. The transmission duty under article 22 does not arise:

- in the case of a presentation that is not a demand (e.g. for the purpose of variation of amount); or

- where a demand is not a complying demand.

422 Where the demand is not a complying demand and the guarantor decides to reject it, the guarantor may return to the presenter any documents presented in paper form and dispose of the electronic records as it sees fit (article 24(g), see paragraph 406 above). The URDG do not allow the instructing party (or counter-guarantor) to require the transmission of a copy of the demand and of any related documents where the guarantor has rejected that demand, including where the instructing party (or counter-guarantor) claims, for instance, that the demand is fraudulent and intends to use the presented documents to support a claim for forgery. A demand that has not been paid and has therefore not resulted in a reimbursement claim against the instructing party is of no concern to the instructing party (or counter- guarantor), which cannot claim a right under the URDG in relation to it.

As will be further indicated under article 24(a), in cases where the guarantor has determined that the demand is not a complying demand and decides to approach the party from which it received its instructions for a waiver of the discrepancies, the guarantor retains the documents pending a decision by the instructing party (or the counter-guarantor) as to the waiver and the guarantor’s own determination whether to reject the demand even if the waiver is given. Strictly speaking, in this case, the duty under article 22 to transmit a copy of the demand and of the related documents to the instructing party (or counter- guarantor) also does not arise until a waiver is given and the guarantor has decided to act upon it. That being said, it is perfectly understandable that the guarantor and the instructing party (or counter-guarantor) may agree that a copy of the discrepant documents be transmitted to the instructing party (or counter-guarantor) to decide whether it grants its waiver.

(3) Counter-guarantor’s transmission duty

423 In the case of an indirect guarantee, the guarantor is required to transmit to the counter-guarantor, without delay, a copy of the complying demand and related documents. The counter-guarantor, in turn, has the duty to transmit the same without delay to the party from which it received its instructions, be it the instructing party or another counter-guarantor. What about a demand made under the counter-guarantee? Under the general rule stated in article 3(b), article 22 applies equally to a demand made by the guarantor under the counter-guarantee. Where the counter-guarantor determines such a demand to be a complying demand, it is required to transmit without delay a copy of the demand and of related documents to the party from which it

[Page140:]

received its instructions. This means that the counter-guarantor may end up transmitting to the party from which it received its instructions two separate sets of copies of demands: a copy of the beneficiary’s demand transmitted to it by the guarantor and a copy of the guarantor’s demand under the counter- guarantee. Where the guarantor’s demand under the counter-guarantee is not a complying demand, the counter-guarantor still has a duty to transmit to the party from which it received its instructions a copy of the beneficiary’s demand transmitted to the counter-guarantor by the guarantor, but obviously does not have a duty to transmit the guarantor’s demand under the counter- guarantee, because it is not a complying demand. While an argument could be made that an instructing party that, absent a complying demand by the guarantor under the counter-guarantee, is not required to indemnify the counter-guarantor should not be entitled to receive a copy of the beneficiary’s complying demand under the guarantee, article 22 does not lend itself to such a carve-out in the absence of a specific clause to this effect.

(4) Is there an information duty in addition to, or instead of, a transmission duty?

424 Article 16 requires the guarantor to inform the instructing party or the counter-guarantor of any demand received; it does not require the guarantor to inform anyone that it has rejected the demand or has made payment. As a matter of fact, if the guarantor has paid the guarantee, the instructing party or the counter-guarantor is likely to rapidly be informed of such payment by its receipt of the guarantor’s payment/reimbursement claim. No further information duty is then required under the URDG.

(5) Mode of transmission

425 Article 22 makes no provision as to the mode of transmission of the documents by the guarantor or counter-guarantor. Any expeditious and commercially reasonable mode suffices.

(6) Risk of loss or delay in transmission

426 The combined effect of articles 28 and 30 is that the guarantor is not liable for any loss or delay in transmission provided that it acted in good faith.

(7) Payment or reimbursement not to be withheld pending transmission

427 Article 22 indicates explicitly that neither the counter-guarantor nor the instructing party may withhold payment or reimbursement pending the guarantor’s transmission of a copy of the complying demand and related documents. Because this sentence was not explicitly stated in URDG 458 article 21, cases were reported where counter-guarantors or instructing parties sought to turn the transmission requirement into an additional payment condition of their indemnity undertaking. No such interpretation was warranted under URDG 458, and is even less warranted under URDG 758. It is open to a counter-guarantor to require in the counter-guarantee, and to an instructing party to require in the application or elsewhere, that the guarantor’s demand be accompanied by a copy (or even the original) of the beneficiary’s demand and related documents. This would be a very legitimate payment condition and binding on the guarantor.

[Page141:]

428 However, if the counter-guarantor or the instructing party, as the case may be, happens to receive copies of the demand and related documents before making payment and finds that the demand is not a complying demand, it may withhold payment on the grounds of the guarantor not having fulfilled the terms of its undertaking.

3.6.3 Assignment of proceeds

(1) Assignment of proceeds distinguished from transfer

429 Contrary to transfers (see paragraphs 237 et seq.), assigning the proceeds of a guarantee does not give the assignee any rights under the guarantee, whether in terms of making a presentation, agreeing to an amendment or otherwise. It is only where a complying demand is made by the assignor, which remains to all intents and purposes the beneficiary of the guarantee, that the assignee gets the proceeds. The sole effect of the assignment, if agreed to by the guarantor, is that the proceeds, instead of being paid to the assignor, have to be paid to the assignee. Accordingly, the assignee cannot collect until the assignor has made a complying demand. If the assignor fails to present a complying demand prior to expiry of the guarantee, the assignee has no claim against the guarantor and is left to whatever remedy is available under the applicable law against the assignor.

430 An assignment of proceeds also differs from a novation in that the assignee acquires its rights subject to any claims and defences that would have been available against the assignor, including set-off in respect of cross-claims by the assigned debtor (the guarantor) against the assignor arising prior to the guarantor’s receipt of notice of assignment or closely connected to the claim on the guarantee.

(2) “Subject to the applicable law”

431 Contracts sometimes contain provisions prohibiting assignments or subjecting them to the prior agreement of the debtor. A number of legal systems deny “anti-assignment” clauses any effect and allow the assignor to assign its rights to the assignee and the assignee to claim payment of the debt directly from the debtor as if there were no contractual restrictions on assignment (although the debtor may have a claim against the assignor for breach of contract). Other legal systems, however, give effect to such restrictions as the expression of the parties’ agreement, either generally or in certain contracts where the reliance of each party on the personal character of the other party is specifically articulated. Moreover, some legal systems restrict assignability to existing debts only, thus banning the assignment of future debt because it is too aleatory or uncertain. The URDG do not, and cannot, decree that assignments of proceeds of guarantees – a future, conditional debt – are effective regardless of the position that the applicable law takes in this respect. Article 33(g)(i) therefore affirms, as a general rule, that the beneficiary may assign any proceeds to which it may be entitled under the guarantee, unless the applicable law indicates otherwise.

[Page142:]

(3) Agreement of guarantor necessary for effectiveness of assignment

432 The effectiveness of an assignment of rights between the assignor and the assignee does not require the consent of the debtor, for this is a matter of contract and entails no proprietary effects. A different question is whether an assignment should be automatically binding on the debtor, which would then be required to pay its debt to the assignee on receipt of notice of the assignment. In support of this argument, it is often indicated that (a) national laws do not generally require the debtor’s consent to an assignment and (b) an assignment is subject to equities and claims, including set-off, available to the debtor against the assignor under the assigned debt, so that the debtor suffers no prejudice. This is not entirely true.

The debtor – here, the guarantor – might see its rights impaired as a result of an assignment of proceeds where, for example, some of the cross-claims available to the guarantor against the assignor are not available against an assignee. This could happen where the applicable law considers that the guarantor is not entitled to assert set-off vis-à-vis the assignee of proceeds where the debt owed by the beneficiary to the guarantor arose out of a transaction separate from the guarantee and under which the assignee is not a debtor. Such a situation would lead to the guarantor paying the assignee in full and then having to enforce its cross-claim by means of a separate action against the assignor.

433 The following example illustrates the case. Assume that there is a guarantor that is also a lender to the beneficiary under a loan agreement separate from the guarantee. The beneficiary owes liquidated damages to the guarantor for a breach under the loan agreement. Subject to the applicable law, the guarantor is entitled to set off the damages owed by the beneficiary under the loan against the guarantee amount that the guarantor owes the beneficiary following the presentation of a complying demand. Such a set-off might not be available to the guarantor against an assignee of the beneficiary’s rights to the proceeds that is not a party to the loan and does not owe the guarantor a reciprocal damage claim. In requiring the guarantor’s consent to the assignment, article 33(g)(ii) protects the guarantor against this situation and seeks to leave the guarantor in no worse position than if it had continued dealing with the beneficiary of the guarantee, unless the guarantor voluntarily changes that situation by agreeing to pay the proceeds to the assignee.

(4) Notification; acknowledgement; agreement

434 The guarantor’s notification of the assignment by either the assignor or the assignee is not sufficient to meet the requirement in article 33(g)(ii) for the guarantor to agree to the assignment⁵². Whether the guarantor’s acknowledgement of an assignment of proceeds notified to it amounts to an agreement to pay the assignee depends on the terms of the acknowledgement. Generally speaking, an agreement in the sense provided in article 33(g)(ii) is expected to indicate that the guarantor agrees to pay any proceeds under the guarantee to the assignee. It can result from a statement made by the

[Page143:]

guarantor either to the beneficiary – thereby creating a right to a third party, the assignee – or directly to the assignee.

435 If the law applicable to the effectiveness of the assignment to the debtor indicates in a mandatory rule that the debtor is bound by the assignment and required to pay the assignee when put in notice of the assignment, that law overrides article 33(g)(ii).

(5) Priority between competing assignees and other claimants

436 Article 33 does not deal with priority in the case of competing assignments of proceeds, a conflict between a transferee and an assignee of proceeds or a conflict between a judgment creditor, a transferee and an assignee. This is left to the law applicable to conflicts of priority, which is usually the law of the place of business of the assignor.

3.6.4 Currency of payment

(1) Primary rule: payment to be made in the agreed currency

437 Under article 8(f), it is recommended that all guarantees specify the currency of payment. The primary rule under article 21(a) is that the guarantor must pay a complying demand in the currency specified in the guarantee, whatever that currency may be and regardless of whether or not it is freely convertible. This rule applies even if the guarantee does not say that payment is to be made only in the currency specified in the guarantee. In some jurisdictions, the law allows the debtor the alternative of paying in the currency of the place for payment whether or not the contract so indicates, but under URDG 758 this is permissible only in cases falling under article 21(b). It is up to the parties – essentially the guarantor – to ensure before issuing the guarantee that its amount is labelled in a currency that can be procured to make a valid payment at the place for payment.

(2) Exceptions to the primary rule

438 There are two exceptions to the primary rule. The first, embodied in article 21(b) (i), concerns cases where the guarantor is unable to make payment in the specified currency due to an impediment beyond its control – in other words, a particular form of force majeure. Mere difficulty, higher cost or other hardship in making payment in the specified currency is not sufficient to trigger the application of article 21(b)(i): the guarantor must be unable to make such payment. This can happen in situations where (a) the specified currency no longer exists at the time of payment and the state concerned has not organised a replacement currency or the international community of states does not recognise this replacement currency; or (b) the specified currency cannot be obtained in the quantity required in the place for payment as a result of the suspension of its convertibility, i.e. the cessation of its trading on foreign exchange markets due to restrictions imposed on the export of its currency by the state of issue.

439 The second exception can be found in article 21(b)(ii) and applies where it is illegal under the law of the place for payment to make payment in the specified currency, as where the specified currency is a foreign currency and the law of the place for payment permits payment only in local currency.

[Page144:]

440 Where either of these two exceptions to the primary rule of article 21(a) applies, the guarantor is required to make payment in the currency of the place for payment even if the guarantee indicates that payment can only be made in the currency specified in the guarantee. So the word “only” adds nothing to the payment obligation. The URDG do not allow the guarantor to make payment in a third currency of its choice other than the currency of the place for payment in the cases covered by article 21(b), including where this choice is agreed with the beneficiary. If it does so, the guarantor cannot benefit from the protection of article 21(b) when seeking reimbursement from the instructing party.

441 Neither the inability to make payment in the currency specified in the guarantee nor the illegality thereof need to be permanent for article 21(b) to apply. The mere application of either of these two exceptions on the date on which a payment is due under a guarantee or counter-guarantee obliges the guarantor to make that payment in the currency of the place for payment.

(3) Limits to the scope of the primary rule

442 The rule in article 21 does not apply to cases where payment is precluded altogether due to a cause beyond the control of the guarantor or counter- guarantor that led to an interruption of its guarantee-related business, such as a state of war or insurrection. In such a case, article 26 (force majeure) applies, not article 21.

443 Article 21 also does not deal with the currency of account, that is, the currency by reference to which the guarantor’s payment obligation is to be measured. Often, the currency of payment and the currency of account in a demand guarantee will be the same, but it is possible to envisage circumstances in which they are different. An example is where local regulations require a guarantee to be denominated in the currency of the place for payment but where the beneficiary requires the amount of the guarantee to be indexed to the foreign currency of the supply contract in order to offset the risk of devaluation of the currency of payment. Whether a guarantee can be denominated in one currency and indexed to a different currency without restriction is a matter for the governing law, not the URDG.

(4) Why the currency of the place for payment?

444 There is a compelling argument for article 21 to require the use of the currency of the place for payment converted at the rate prevailing there in cases where payment cannot be made in the currency specified in the guarantee. The beneficiary will indeed expect to receive funds under the guarantee in the place in which payment is required to be made under the terms of the guarantee. The beneficiary will be ready to deal with those funds there and if it has to accept a different currency on “impossibility” grounds, this should be the closest equivalent payment in the place in which the funds are received. The logical choice in such a case is the currency of the place for payment⁵³.

[Page145:]

445 Where, in accordance with the above provisions, payment is made in the currency of the place for payment, the instructing party or, in the case of a counter-guarantee, the counter-guarantor is bound by a payment made in such currency. In such cases, the instructing party (or the counter-guarantor) cannot advance the modification of its instructions as a reason to be released of its reimbursement obligation.

(5) Choice of currency for reimbursement

446 A guarantor (or counter-guarantor) that has made payment in the currency of the place for payment, in application of the rule in article 21(b), can claim reimbursement either:

(1) in the currency in which payment was made; or

(2) in the currency specified in the guarantee (or counter-guarantee).

447 The choice offered to the guarantor is designed to ensure that, in the event that the currency of the place for payment in which payment was made is not freely convertible, the guarantor can be fully indemnified against its payment, while still having the option of claiming payment in the currency specified in the guarantee or counter-guarantee. This rule is expected to streamline the payment process and limit the costs much more than a rule that would have required reimbursement to be made in the currency in which payment was made.

(6) Rate of exchange

448 Under article 21(c), payment or reimbursement in the currency of the place for payment under article 21(b) is to be made according to the applicable rate of exchange prevailing at the place for payment when payment or reimbursement is due.

449 Four remarks need to be made in this respect. First, article 21(c) applies to:

(1) the guarantor making payment under the guarantee in the currency of

the place for payment;

(2) the counter-guarantor making payment under the counter-guarantee in the currency of the place for payment; and

(3) the instructing party reimbursing the guarantor (or, in the case of a counter-guarantee, the counter-guarantor) where payment was made in the currency of the place for payment and reimbursement is sought in the currency specified in the guarantee (or the counter-guarantee).

450 The second remark is that “rate of exchange” refers to the rate prevailing in the place for payment at which the currency specified in the guarantee can be exchanged for the currency of the place for payment effectively used for the payment of the guarantee.

[Page146:]

451 The third remark is that the choice of the rate of exchange at the place for payment seeks to put the beneficiary in a situation that is the closest possible equivalent to the situation in which it would have been had payment in the currency specified in the guarantee gone through. Indeed, when expecting to be paid in the place for payment, the beneficiary is expected to be ready to deal with the funds there, including by converting those funds into foreign currencies according to the rate prevailing at the place for payment.

452 The fourth remark is that the use of the word “prevailing” covers the cases (gladly, less common today) where multiple rates of exchange exist at the place for payment. These are generally the result of exchange controls. Article 21(c) directs the parties to refer to the prevailing market rate as opposed to a possibly different official rate that, if it exists at all, is often theoretical and does not actually allow guarantors to obtain funds in the relevant currency to make payment under the guarantee.

453 However, if the guarantor has not paid at the time when payment is due, the beneficiary may, at its discretion, require payment according to the applicable rate of exchange prevailing either when payment was due or at the time of actual payment. This option protects the beneficiary against an adverse change in the rate of exchange between the time payment falls due and the time it is belatedly made for a reason outside its control. In this way, the guarantor bears the loss caused by its own default.

3.6.5 Extend or pay

(1) Extend or pay demands generally

454 Research in the guarantee departments of a number of banks shows that the majority of demands – up to 90%⁵⁴– presented under demand guarantees require the guarantor either to extend the period of the guarantee or to pay the demand forthwith. “Extend or pay” demands are not necessarily improper, for a breach may have occurred that entitles the beneficiary (or leads the beneficiary to believe that it is entitled) to present a demand, although not only for payment. The beneficiary can indeed add an alternative to that demand: that of extending the guarantee for a defined period. Such an extension is designed to give the applicant an opportunity to remedy the breach and thus preserve the beneficiary’s relationship with the applicant. Moreover, the beneficiary may take the view that it is quicker and cheaper to have the breach remedied by the applicant than to draw on the guarantee and appoint another contractor to remedy the breach. The fact that guarantees, whether tender, performance, retention money or warranty guarantees, are issued for an amount that represents a fraction of the value of the applicant’s guaranteed obligation (5 to 8%) shows the wisdom behind the beneficiary’s choice to offer the applicant a chance to redeem the breach.

[Page147:]

(2) Variations on extend or pay demands

455 There have been reports of guarantees whose texts anticipate extension requests by the beneficiary, with the guarantor agreeing in anticipation, in the guarantee text, to extend the guarantee should such a demand be presented or, alternatively, to pay forthwith. Article 23 does not apply to those demands.

456 The order of the extend or pay alternative may be reversed: pay or extend, where the beneficiary presents a demand for payment indicating that it should be deemed to have been withdrawn if extension is granted until a determined date or period. This is covered by article 23. By contrast, where the beneficiary simply requests an extension, sometimes coupled with an intimation that, if extension is not granted, a demand for payment will follow, the beneficiary cannot be regarded as having presented a demand to be examined for compliance. It therefore falls outside the scope of article 23.

457 The following two diagrams offer a step-by-step guide to the procedure for dealing with extend or pay demands under article 23. Each step is then developed in more detail.

[Page148:]

Diagram 4

Extend or pay demands in direct guarantee

[Page149:]

(3) Summary of the procedure in the case of a direct guarantee

458 In the case of a direct guarantee, the sequence is as follows:

Step 1: Extend or pay demand

The beneficiary presents an extend or pay demand.

Step 2: Examination, information of demand under article 16 and transmission under article 22

The guarantor examines the demand to determine whether it is a complying demand and informs the instructing party of the demand without delay under article 16. If the guarantor determines that the demand is a complying demand, it shall without delay transmit a copy of the complying demand and any related documents to the instructing party.

Step 3: The payment choice

When the guarantor determines that the demand is a complying demand, it has the option of making payment forthwith.

Alternative to step 3: The suspension choice

If, instead of paying the complying demand, the guarantor decides to suspend payment, it must without delay inform the instructing party of the suspension period, which must not exceed 30 calendar days following the day of receipt of the demand (the day of receipt of the demand counts as day 0, and the following day counts as day 1 even if it is not a business day). If this information is provided without delay after the receipt of the demand, the guarantor is considered to have complied with the information duty required by article 16 (step 2 above).

Step 4: The extension choice

Obviously, this step is only relevant if the guarantor has chosen the suspension option in step 3 above. In this fourth step, if the instructing party instructs the guarantor to grant either:

(1) the extension requested by the beneficiary; or

(2) an extension for a different period agreed by the beneficiary,

the guarantor is free either to issue an amendment extending the validity period of the guarantee or to pay the demand and must inform the instructing party accordingly in both cases.

Alternative to step 4: If no extension, payment

If:

- the applicant and the beneficiary do not agree on an extension, or

- if they so agree but:

• the guarantor is not instructed to extend the guarantee before the end of the suspension period; or
• if so instructed, the guarantor decides not to extend the guarantee, then, on the expiry of the suspension period, the guarantor pays and so informs the instructing party.

[Page150:]

Diagram 5

Extend or pay demands in indirect guarantee

[Page151:]

[Page152:]

(4) Summary of the procedure in the case of an indirect guarantee

459 In the case of an indirect guarantee, the sequence is as follows:

Step 1: Extend or pay demand

The beneficiary presents an extend or pay demand.

Step 2: Examination, information of demand under article 16 and transmission under article 22

The guarantor examines the demand to determine whether it is a complying demand and informs the counter-guarantor of the demand without delay under article 16. If the guarantor determines that the demand is a complying demand, it shall without delay transmit a copy of the complying demand and any related documents to the counter-guarantor for transmission to the instructing party.

Step 3: The guarantor’s payment choice

When the guarantor determines that the demand is a complying demand, it has the option of making payment forthwith. The guarantor can then itself make a demand for payment under the counter-guarantee.

Alternative to step 3: The guarantor’s suspension choice

If, instead of paying the complying demand, the guarantor decides to suspend payment, it must without delay inform its counter-guarantor of the suspension of payment⁵⁵under the guarantee, which suspension must not exceed 30 calendar days following the day of receipt of the demand (the day of receipt of the demand counts as day 0 and the following day counts as day 1 even if it is not a business day).

Step 4: Extend or pay demand

The guarantor presents an extend or pay demand under the counter-guarantee.

Step 5: Examination by the counter-guarantor, information of demand under article 16 and transmission under article 22

The counter-guarantor examines the guarantor’s extend or pay demand under the counter-guarantee to determine whether it is a complying demand and informs the party from which it has received its instructions without delay under article 16. If the counter-guarantor determines that the demand is a complying demand, it must transmit without delay a copy of the complying demand and any related documents to the party from which it received its instructions.

Step 6: The counter-guarantor’s payment choice

When the counter-guarantor determines that the demand is a complying demand, it has the option of making payment forthwith.

Alternative to step 6: The counter-guarantor’s suspension choice

If, instead of paying the complying demand, the counter-guarantor decides to suspend payment, it must without delay inform the party from which it

[Page153:]

received its instructions of the suspension period,56 which must not exceed a period that is four calendar days shorter than the period during which payment of the demand under the guarantee was suspended. For example:

- Beneficiary presents an extend or pay demand on 1 July.

- Guarantor examines the demand and determines that it is a complying demand on 3 July.

- Guarantor decides to suspend payment under the guarantee until 27 July (under article 23(a), the guarantor could have suspended payment until 31 July). - Guarantor presents an extend or pay demand under the counter- guarantee on 5 July and informs the counter-guarantor that it has suspended payment under the guarantee until 27 July.

- Counter-guarantor examines the guarantor’s demand and determines that it is a complying demand on 7 July.

- Counter-guarantor has the option of either making payment forthwith or suspending payment under the counter-guarantee for any period of its choice up to 23 July.

Step 7: The counter-guarantor’s extension choice

If the party that instructed the counter-guarantor to issue the counter- guarantee instructs it to grant either:

(1) the extension requested by the guarantor; or

(2) an extension for a different period agreed by the guarantor,

the counter-guarantor is free either to issue an amendment extending the validity period of the counter-guarantee and instruct the guarantor to extend its guarantee or to pay the guarantor under the counter-guarantee. In both cases, it must inform the party from which it received its instructions accordingly.

Alternative to step 7: If no extension, payment of counter-guarantee

If:

- the counter-guarantor is not instructed to extend the counter-guarantee before the end of the suspension period of the counter-guarantee; or

- if so instructed, the counter-guarantor decides not to extend its counter-guarantee,

then, on the expiry of the suspension period, the counter-guarantor pays and so informs the party from which it received its instructions.

Step 8: The guarantor’s extension choice

If the counter-guarantor has extended the counter-guarantee and instructed the guarantor to grant either:

[Page154:]

(1) the extension requested by the beneficiary; or

(2) an extension for a different period agreed by the beneficiary, the guarantor is free either to issue an amendment extending the validity period of the guarantee or to pay the demand. In both cases, it must inform the counter-guarantor accordingly.

Alternative to step 8: if no extension, payment

If:

- the guarantor is not instructed to extend the guarantee before the end of the suspension period under the guarantee; or

- if so instructed, the guarantor decides not to extend the guarantee, then, on the expiry of the suspension period, the guarantor pays and so informs the counter-guarantor, which must inform the instructing party.

(5) Demand must be complying demand

460 The whole procedure outlined in article 23 is predicated upon the extend or pay demand presented under the guarantee or counter-guarantee being a complying demand. In particular, the extend or pay demand must conform to the terms of the guarantee and the requirements of articles 14 and 15. If the demand is neither a complying demand nor an incomplete demand indicating that it is to be completed later, the guarantor must take one of the courses of action specified in article 24(a). If the presentation of the demand is an incomplete presentation indicating that it is to be completed later, the duty to examine does not begin until the presentation has been completed (article 20(a)). It is only then, provided that the guarantor determines the demand to be a complying demand, that article 23 applies.

(6) Suspension distinguished from extension

461 It is important not to confuse suspension of payment and extension of the period of validity of the guarantee.

- Suspension. A guarantor that suspends payment is merely exercising the option granted to it by article 23(a) – in derogation from article 20(b) – not to make payment upon determination that the extend or pay demand is a complying demand. Suspension does not extend the validity period of the guarantee. The fact that the guarantee may expire during the suspension period does not affect the right of the beneficiary to payment, because, by presenting a complying demand before expiry, the beneficiary has crystallised its right to payment in the event the extension is not granted. Suspending payment is entirely the guarantor’s choice.

- Extension. As in the case of suspension, extending the guarantee period is also the guarantor’s decision, given that it concerns the guarantor’s own primary undertaking. However, if the guarantor extends the guarantee without proper instructions to this effect, it risks the loss of its right to reimbursement from the instructing party or, in the case of a

[Page155:]

counter-guarantee, the counter-guarantor. Any unauthorised extension that the guarantor has notified to the beneficiary, if acting in good faith, is an irrevocable amendment of the guarantee upon which the beneficiary is entitled to rely.

(7) Guarantor’s option to suspend

462 Under URDG 458 article 26, a guarantor to which a complying extend or pay demand was presented was obliged (the word “shall” being used for this purpose) to suspend payment for such time as was reasonable to enable the applicant and the beneficiary to reach agreement on the extension. URDG 758 have reversed this practice. New article 23 replaces “shall” by “may” to emphasise that the guarantor now has a choice either to suspend payment or to pay forthwith, without incurring any liability towards the instructing party in either case. In both cases, the guarantor is not obliged to inform, let alone seek the authorisation of, the instructing party before making payment under the complying demand or suspending such payment.

463 Two reasons justify the new standard in article 23(a). The first is that the decision to extend or to pay is the decision of the guarantor alone, without anything in the rules, including article 16, requiring the guarantor to seek anyone else’s assent. If the guarantor were to decide right at the outset that it is unwilling to grant the extension requested in the demand, it is pointless, and indeed misleading, for the URDG to impose on the guarantor a mandatory suspension of payment and to oblige the applicant and the beneficiary to engage in negotiations on an extension that would not be granted by the guarantor in any event.

464 The second reason is that, by the time an extend or pay demand is presented, the circumstances that initially prompted the guarantor to issue the guarantee could have changed so dramatically that the guarantor may prefer to pay and obtain reimbursement while this is still possible. Examples prompting such a choice include the severance of the banking relationship between the instructing party and the bank guarantor, the deterioration of the instructing party’s creditworthiness or the enactment of economic restrictions that subject new transactions with nationals from the beneficiary’s country to exorbitant conditions or to outright prohibition of renewals.

(8) Calculation of the suspension period

465 When the guarantor determines that the extend or pay demand is a complying demand, it can either pay the demand forthwith or suspend payment for a period not exceeding 30 calendar days following its receipt of the demand. When calculating the 30-day maximum period, the date of receipt of the demand is excluded and the first day that follows is regarded as day 1 whether or not it is a business day at the place for presentation. The URDG do not provide a specific rule to deal with cases where the end of the suspension period falls on a day that is not a business day at the place for presentation (article 25(d) applies only to expiry dates). In such cases, the law applicable to the guarantee will determine if the suspension period should be extended to the first following business day at the place concerned.

[Page156:]

Within the 30-day maximum time frame, the guarantor can choose the length of the suspension period at its own discretion. Thus, there is no obligation on the guarantor to suspend payment for the full 30 days, whatever the arguments of the applicant as to the expected length of its negotiations with the beneficiary for extension or the progress of such negotiations outlined in any report it may deliver to the guarantor.

466 The new rule in article 23(a) obviously departs significantly from the rule in URDG 458 article 26, under which the guarantor was required to suspend payment for such time as was reasonable to permit the applicant and the beneficiary to reach agreement on the granting of the extension. Excluding uncertain standards such as “reasonable period” is one of the hallmarks of the new URDG.

(9) Transmission of demand duty under article 22

467 Whether the guarantor has decided to make payment upon determining that the extend or pay demand is a complying demand or to suspend such payment, it must without delay transmit a copy of the complying demand and any related documents to the instructing party (article 22). The instructing party is entitled to those copies even if it is agreeable to the requested extension being granted.

(10) Extend or pay demands under counter-guarantees

468 In the case of an indirect guarantee (see Diagram 3), an extend or pay demand made by a guarantor under a counter-guarantee needs to meet the following three conditions in order to be considered as a complying demand:

- First, the guarantor must have already received an extend or pay demand under its guarantee. Two situations should be contrasted with this rule:

(1) Where the guarantor has received a demand for payment without the alternative of an extension, it is not entitled to present an extend or pay demand under the URDG, but only a demand for payment that the counter-guarantor will pay if it complies with the terms of the counter-guarantee and the rules, including article 15(b). This is the reason why article 23(b) requires an extend or pay demand under the counter-guarantee to “follow” the suspension of payment under the guarantee, an option available only if the demand made under the guarantee is an extend or pay demand.

(2) Where the guarantor has not received any demand whatsoever from the beneficiary, it is not entitled to present an extend or pay demand (or any demand at all) under the counter- guarantee. Regardless of how unfair such a demand would be if it was presented, the guarantor would be unable to meet the requirement in article 15(b) to state in support of its demand that it has received a complying demand under its guarantee – that is, unless article 15(b) is excluded in the counter-guarantee.

[Page157:]

- Second, the guarantor must have determined that the extend or pay demand received under its guarantee is a complying demand. If it is not, article 23(a) does not apply, payment of the guarantee cannot be suspended and the prerequisites for the application of article 23(b) would be missing.

- Third, the guarantor must have suspended payment under its guarantee before becoming entitled to avail itself of article 23(b) and to present in turn an extend or pay demand under the counter-guarantee. If the guarantor has chosen not to suspend but to pay – which it is entitled to do under article 23(a) – the guarantor is expected to present a demand for payment under the counter-guarantee, not an extend or pay demand.

(a) CALCULATION OF THE SUSPENSION PERIOD UNDER THE COUNTER-GUARANTEE

469 When making an extend or pay demand under the counter-guarantee, the guarantor is expected under article 23(c) to indicate in its demand the period for which it has suspended payment under the guarantee. This period shall not exceed the maximum period of 30 days allowed under article 23(a). The counter-guarantor may then suspend payment for a period not exceeding a period that is 4 calendar days shorter than the suspension period indicated by the guarantor (the counter-guarantor may suspend payment for a period that is 10 days shorter than the suspension period indicated by the guarantor). The purpose of the reduction by at least four days is twofold. First, it allows the guarantor the time to decide whether to extend or pay in light of the counter-guarantor’s own decision to do the same. Secondly, it also spares the guarantor the financial burden of having to pay the beneficiary before it has received payment from the counter-guarantor.

(b) INFORMATION DUTY UPON SUSPENSION AND TRANSMISSION OF A COMPLYING DEMAND

470 If the counter-guarantor decides to suspend payment, it must so advise the party from which it received its instructions, that is, the instructing party or an earlier counter-guarantor. If the counter-guarantor pays the demand, it is entitled to reimbursement from that party. Regardless of whether the counter-guarantor decides to pay or to suspend payment, it must without delay transmit a copy of the complying demand and any related documents to that party (article 22).

(c) COUNTER-GUARANTOR’S DECISION MAY BE DIFFERENT FROM GUARANTOR’S

471 A consequence of the independence of the counter-guarantee from the guarantee (article 5(b)) is that the counter-guarantor and the guarantor are free to decide independently of one another whether to suspend or pay. If the guarantor chooses to suspend payment of the complying extend or pay demand received under its guarantee, the counter-guarantor may still choose not to suspend but to pay forthwith. The opposite does not hold true. If the guarantor has not suspended payment, it has to pay and can therefore only present a demand for payment under the counter-guarantee. Usually, however, the position is that the guarantor and the counter-guarantor either

[Page158:]

both pay or both suspend. This is the reason for the four-day minimum time gap between the maximum suspension period allowed under the guarantee and the one allowed under the counter-guarantee (article 23(b)).

(11) Information duty where guarantor suspends payment

472 Where the guarantor decides to suspend payment, it must without delay inform the instructing party of the period of suspension (article 23(c)). In the case of an indirect guarantee, this information duty is owed to the counter-guarantor, which, in turn, must inform the instructing party of the suspension of payment under the guarantee and any such suspension under the counter-guarantee. Article 23(c) indicates that compliance with this requirement fulfils the information duty under article 16, which is required in the case of any demand, whether or not it is a complying demand.

(12) Article 23(c) v. article 16

473 The interaction between article 23(c) and article 16 manifests itself at three different levels:

- If the examination of the extend or pay demand is completed without delay, say one business day following the day on which it is presented (which is generally expected to be the case in the majority of guarantees where no more than a demand supported by a statement and possibly an additional document is required), and that demand is found to be complying, then informing the instructing party under article 23(c) also satisfies the information requirement under article 16. A rule to the contrary would require the guarantor to provide within a short time gap – possibly a few hours – two notices of information to the instructing party: one informing it of the demand and another one indicating that it has decided to suspend payment following determination that the demand is complying. Requiring such notices to be kept separate in order to comply with the cumulation of the information duties under articles 16 and 23 would certainly defeat rational sense, which is not the purpose of the URDG.

- Conversely, if the guarantor is not certain upon receipt of the demand that examination can be completed promptly so as to enable information to be given under article 23(c) in conformity with the “without delay” requirement under article 16 – either because of the sheer number of documents that the presentation includes or because a preliminary examination shows possible discrepancies and the guarantor is resolved to approach the instructing party for a waiver under article 24(a) – the guarantor’s safer course is to inform the instructing party under article 16. This is because the guarantor may be held to be in breach of its obligation under article 16 if it delays informing the instructing party of the demand until examination and the demand is found to be a non-complying demand (thus prompting no article 23(c) information duty). Arguably, however, the absence of loss to the instructing party renders any claim for damage moot at best.

[Page159:]

- Where the guarantor has indeed informed the instructing party of the extend or pay demand under article 16 prior to examination and the demand is later found to be a complying demand and the guarantor has suspended payment, the guarantor must still comply with the duty to provide the more detailed information under article 23(c). In addition, when the guarantor has decided whether to extend or pay, it must give information about that decision under article 23(f). There will therefore be some cases in which there is a threefold duty of information: under articles 16, 23(c) and 23(f).

(13) Process and time of suspension

474 The guarantor must without delay inform the instructing party or, in the case of a counter-guarantee, the counter-guarantor, of any suspension. Article 23(c) does not expressly state either the manner in which or the time within which the guarantor’s decision to suspend is to be made or notified to the parties. All that article 23(c) requires in this respect is for the guarantor to inform without delay the instructing party (or the counter-guarantor) of the period of suspension. In practice, any act by which the guarantor manifests its decision to suspend payment fulfils the purpose of article 23(c), for example a notice to the beneficiary copied to the instructing party, as long as it is performed without delay. Failing this, the guarantor is to be treated as electing not to suspend and must then make payment.

(14) No information to the beneficiary is required

475 Article 23 does not require the guarantor to inform the beneficiary of the suspension and, indeed, no such information is needed. The reason is that, when presenting an extend or pay demand, the beneficiary is deemed to have accepted in advance the possibility that the guarantor may opt not to make payment as directed in article 20(b) but to suspend that payment for the maximum period allowed in article 23(a). No right of the beneficiary is impaired by this assumption, because the timely presentation of a complying demand has crystallised its right to payment in the event that extension is not granted.

(15) Position of the parties during the suspension period

476 The purpose of the suspension period is twofold. First, it offers the guarantor the time to go through its internal credit and collateral processes with a view to possibly agreeing to the requested extension. Second, it also allows the applicant and the beneficiary an opportunity to discuss the beneficiary’s request for extension with a view to reaching agreement. Neither the applicant nor the beneficiary is compelled under the URDG to engage in such negotiations. An interesting case is where the applicant or another instructing party decides from the outset that it will not agree to the extension and indicates this to the guarantor. Will the guarantor be bound by the suspension it has indicated to the instructing party in its information under article 23(c)? The rules do not address this issue specifically, and it could be argued that the guarantor is no longer bound by the suspension it has

[Page160:]

announced and is therefore obliged to pay forthwith. However, on balance, that argument should not be allowed to prosper because it would be incompatible with the whole tenor of the rules to allow the instructing party’s conduct to affect the relationship between the guarantor and the beneficiary. When the guarantor suspends payment, the beneficiary is entitled to assume that there is the possibility of an extension being granted and that it will be able to negotiate to that end. The correct answer is therefore that the guarantor is bound by the suspension that it has announced, regardless of the reaction of the party from which it received its instructions when informed of the suspension under article 23(c).

477 The beneficiary, having given the guarantor the option to extend and thereby leading it to suspend payment, is not allowed to present a fresh demand for payment (unless the extend or pay amount is a partial demand and the fresh demand is for the residual amount available under the guarantee) until the expiry of the suspension period, even if it feels that its negotiations with the applicant will not lead to an agreement. If the suspension period expires without the requested extension being granted, the guarantor must pay.

(16) Deemed withdrawal of demand

478 If, within the period of suspension, the guarantor grants the extension requested in the demand or otherwise agreed by the beneficiary, the payment part of the extend or pay demand is deemed to be automatically withdrawn and, in effect, subsumed into the amendment extending the guarantee period (article 23(d)). There is no need for the beneficiary to explicitly indicate to the guarantor the withdrawal of the payment option of its extend or pay demand. The same holds true where the counter-guarantor grants the extension requested in the demand or otherwise agreed by the guarantor.

(17) Guarantor’s decision

479 The mere fact that the applicant has agreed with the beneficiary to extend the guarantee is not sufficient to trigger the application of article 23(d). Two further conditions must be satisfied. The guarantor itself must have granted the extension and it must have done so on or before expiry of the suspension period. This is because, if the suspension period notified in the information notice required by article 23(c) were to expire without the extension having been granted, the guarantor would come under an immediate duty to pay the demand without the need for any further demand. The same holds true for the counter-guarantor under the counter-guarantee.

(18) Guarantor’s discretion to refuse extension and pay

480 The guarantor is not obliged to grant a requested extension even where it has suspended the payment of a complying demand presented under its guarantee. The guarantor can decide to pay instead of extending the guarantee and make that payment as soon as the suspension period is over. This is so even if the extension requested by the beneficiary in the complying extend or pay demand has been agreed between the beneficiary and the applicant and the instructing party or counter-guarantor has instructed the guarantor to grant the extension.

[Page161:]

481 The reason why URDG 758 article 23(e), like URDG 458, gives the guarantor the discretion to decide whether or not to grant an extension is that any extension prolongs the period for which the guarantor is at risk beyond the period agreed when the guarantee was issued. A unilateral extension of the guarantee period would run counter to the general principle underpinning the rule that the terms of the guarantee are paramount and that only modifications agreed by the parties – the guarantor and the beneficiary – can be given effect.

(19) Guarantor required to present a new demand under the counter-guarantee if it decides to pay under the guarantee

482 If the guarantor decides to pay instead of extending the guarantee as instructed by the counter-guarantor, it has to present a new demand for payment under the counter-guarantee. The reason is that article 23(d) indicates that the payment part of the guarantor’s extend or pay demand under the counter-guarantee is deemed to be withdrawn if the requested extension is granted⁵⁷. The second sentence of article 23(d) indicating that the complying demand shall be paid without the need to present any further demand applies only if no extension is granted by the counter-guarantor.

(20) No estoppel, waiver or preclusion limiting the guarantor’s choice

483 Article 23(e) makes it clear that it is the guarantor’s exclusive prerogative to decide whether to extend or pay a complying demand, including after suspending payment. Therefore, no legal or equitable argument of estoppel, waiver, preclusion, lack of good faith or similar should be accepted for the purpose of compelling the guarantor to extend the guarantee against its will. Indeed, when faced with the clear words of article 23, no instructing party can honestly argue that the suspension of payment decided by the guarantor instead of immediate payment has induced it to believe that the guarantor was agreeable to extend the guarantee where instructed to do so. Neither should an argument be accepted to the effect that the instructing party has suffered detriment, for example when conceding advantages to the beneficiary in the underlying relationship with a view to obtaining better extension terms, by relying on what it believed to be the guarantor’s willingness to grant extension as evidenced by the suspension of payment. Of course, the above does not hold true in cases where the guarantor has strayed from the URDG in informing the instructing party that it is willing to extend the guarantee where instructed to do so.

(21) Potential for different decisions under the guarantee and counter-guarantee

484 A consequence of the independence of the counter-guarantee from the guarantee (article 5(b)) is that the counter-guarantor and the guarantor are both free to decide whether to extend or pay independently of one another. For example, the fact that the counter-guarantor extends the counter- guarantee does not mean that the guarantor has to extend its guarantee as well; the guarantor may instead decide to pay forthwith. The opposite holds

[Page162:]

true as well, although it would leave the guarantor: (i) committed for the extended period of the guarantee; (ii) being put in funds by the counter- guarantor temporarily as the instructing party is sure to claim restitution from the guarantor for unjust enrichment if the beneficiary does not subsequently present a demand for payment; and (iii) unable to claim the payment of any charges for the extended period because the counter- guarantor has terminated the counter-guarantee by making payment (assuming payment is made for the full amount available under the counter- guarantee). Usually, however, the position is that the guarantor and the counter-guarantor either both pay or both extend. This is the reason for the four-day minimum time gap between the maximum suspension period allowed under the guarantee and the one under the counter-guarantee (article 23(b)).

(22) Effect on the guarantor’s choice of the expiry of the guarantee during the suspension period

485 A complying extend or pay demand presented shortly before the expiry date of the guarantee, prompting the guarantor to choose to suspend payment for the maximum period allowed under article 23(a), could well lead to the expiry of the guarantee before the suspension period is over. The question that arises then is whether this expiry curtails the guarantor’s discretion to either extend or pay at the end of the suspension period, which hypothetically falls after the expiry date. The answer is clearly no. As in the case of article 20(a), where the continuation beyond expiry of the five-day examination period does not hinder the beneficiary’s right to payment if the demand is a complying demand, the continuation of the suspension period in the case of article 23(a) beyond expiry also does not hinder the beneficiary’s right to payment if the guarantor chooses not to grant extension. This is explicitly indicated at the end of article 23(d).

486 The same applies when the guarantor grants an extension at the end of the suspension period and this falls after expiry. In effect, suspension freezes the payment obligation under the guarantee throughout the suspension period. Any ensuing extension amends the guarantee with retroactive effect, covering the overlapping suspension period and replacing the original expiry date. In practice, it is as if the guarantee was initially issued for the new extended expiry date without any interruption. The same applies in the case of a counter-guarantee.

(23) Effect of unauthorised extension

487 Strictly speaking, it is the guarantor’s decision whether to extend the guarantee. Because extending the guarantee is an amendment to the agreement between the guarantor and the beneficiary, it is incumbent upon the guarantor and beneficiary – and not on anyone else – to decide how the terms of their agreement should be modified. However, in practice, a prudent guarantor seldom extends the guarantee without first seeking the instructing party’s authorisation and then ensuring that it complies strictly with the terms of this authorisation. Indeed, the guarantor acts in breach of

[Page163:]

its mandate if it grants the requested extension without authority from the instructing party or if it grants an extension in terms different from those indicated in its instructions, whether in terms of the duration of the extension or any other conditions to which the instructing party linked its consent when granting the extension. Acting in this way may lead to the exclusion of the guarantor’s right to claim reimbursement for any payment it might make if a complying demand for payment is presented after the extension. If, notwithstanding the above, the guarantor grants an extension that was not first authorised by the instructing party in favour of a beneficiary which was unaware of the lack of authorisation, the guarantor is bound by the extension exactly as it is in the case of any other amendment issued under article 11.

488 Experience shows that it is only in extreme cases that a guarantor may be amenable to granting an extension absent prior authorisation from the instructing party. An example is where the instructing party becomes insolvent, which may make the guarantor’s post-payment reimbursement claim pointless. In that case, and particularly where that insolvency has not hindered the performance of the underlying contract, the guarantor may elect to extend the guarantee as the best way to avert the present and immediate certainty of having to pay the complying demand. At worst, if the applicant’s breach is not remedied, the beneficiary will present a fresh demand and the guarantor will later pay the same amount that it would have had to pay in the first place.

(a) EXTENSION FOR PERIOD OTHER THAN THAT REQUESTED OR AGREED

489 If the instructing party does not agree to the period of extension requested by the beneficiary the guarantor has to pay, unless the instructing party has instructed the guarantor to grant an extension for a period shorter than that requested by the beneficiary and the beneficiary has accepted such a period. In that case, if the guarantor is willing to extend the guarantee for the period indicated in the instructing party’s instructions, the guarantee will be amended accordingly.

(b) INFORMATION AS TO THE DECISION TO EXTEND OR PAY

490 The guarantor or counter-guarantor has a duty under the rules to inform without delay the party from which it received its instructions of its decision to extend under paragraph (d) or to pay. Article 23(f) refers to the “party from which it received its instructions” rather than “instructing party” in order to cover chains of counter-guarantees where the counter-guarantor gives notice not to the instructing party but to another counter-guarantor from which it received its own counter-guarantee (see Diagram 12).

(c) NO LIABILITY FOR SUSPENSION

491 The guarantor and the counter-guarantor assume no liability for any payment suspended in accordance with article 23 (article 23(g)). The beneficiary cannot, therefore, complain about the guarantor’s decision to suspend rather than pay, since it is the beneficiary’s own action in seeking extension as an alternative to payment that triggers the steps outlined in article 23

[Page164:]

beginning with the suspension. It follows that, under the URDG, the beneficiary is not entitled to interest for the period of suspension. Of course, a guarantor that has delayed payment beyond the maximum suspension period without granting the requested extension cannot avail itself of the disclaimer in article 23(g).

(d) OTHER POSSIBLE OUTCOMES

492 Article 23 deals with two situations only, namely the grant of the extension by the beneficiary or the beneficiary’s refusal of the extension. However, there are also other possible outcomes. For example, the beneficiary may agree to withdraw the demand in both its payment part and its extension alternative, most likely in return for a concession agreed by the applicant. This is covered in article 18(a), which indicates that the demand becomes ineffective, leaving the beneficiary free to present a subsequent demand even if the guarantee prohibits multiple demands.

3.7 Termination of the guarantee

493 In a nutshell. Open-ended guarantees, that is, guarantees with no expiry terms, do not reflect good practice and add too much hazard into the transaction, and the meagre advantage that they can be considered to bring to the beneficiary is outweighed by the wariness and inevitable strain that they bring to the relationship between the applicant and the beneficiary. URDG 458 recommended that demand guarantees and counter-guarantees provide an expiry term, be it in terms of a date or an event. URDG 758 go beyond that recommendation in providing a functional equivalent to an expiry date in guarantees and counter-guarantees that provide no expiry term. These expire three years after their date of issue (article 25(c)). This mode of expiry adds to the traditional expiry upon full payment or reduction and release from liability (article 25(b)). This substantially decreases the odds of a guarantee or counter- guarantee being used as a form of leverage to extract a commercial concession in relation to the underlying relationship. The only situation where, by effect of the URDG, a guarantee or counter-guarantee can be extended beyond its expiry term is where an event of force majeure prevents a presentation, examination or payment from being made and does not cease before the expiry of the guarantee or counter-guarantee. In such cases, the rules protect a right that accrued before the force majeure and provide for an extension of the validity period for a determined time as indicated in article 26. Termination and force majeure are explained in more detail in the following paragraphs.

[Page165:]

3.7.1 Termination

494 Article 25(b) lists the events that under URDG 758 result in the termination of the guarantee. They also apply to a counter-guarantee. These events are:

- expiry, whether an expiry date or an expiry event and, where both are specified in the guarantee, the earlier of the two;

- when no amount remains payable under the guarantee pursuant to one of the three events listed in article 25(a); or

- on presentation to the guarantor of the beneficiary’s signed release from liability under the guarantee. “Signed” is a defined term.

495 There is one further case, not mentioned in article 25(b), where a guarantee comes to an end, namely where it is rejected by the beneficiary after it has been issued.

(1) No intrinsic value for the guarantee document

496 In all three cases listed in article 25(b), the guarantee comes to an end whether or not the guarantee document is returned to the guarantor. This rule seeks to put an end once and for all to any remnant of the unfair practice that plagued international guarantees in the 1970s, when State-owned beneficiaries in some developing countries with strong bargaining power owing to the richness of their natural resources feared that they might fall victim to an expiry date of which they did not keep track. To control this risk, they required guarantees to remain valid until formal release. Any expiry date that might have been included in the guarantee was considered, at best, as merely indicative. No such practice ought to exist, and no guarantee or counter-guarantee should become the hostage of a beneficiary’s bad record keeping. The guarantee document does not have and should not be imbued with any intrinsic value, nor should its return to the guarantor be a prerequisite for termination. Unlike a cheque or a promissory note, for example, the accidental destruction of the guarantee document or its mutilation does not affect the guarantor’s right to payment (unless the presentation of the original guarantee document is listed as a payment condition in the guarantee). It is just an instrument embodying the guarantor’s undertaking that is devoid of any formalistic value. This is what article 25 stresses in the opening statement in paragraph (b).

497 Realistically, however, because the URDG are contractual in nature and cannot outlaw a practice, however abusive or unfair, parties are offered the chance to control the use of the guarantee document as a means of expiry by including in their guarantee an expiry event that will occur upon presentation by the beneficiary to the guarantor of the original guarantee document whenever such an event may happen. This is not a recommended practice.

(2) Changing URDG 458

498 While URDG 458 article 24, like URDG 758 article 25(b), indicated that, where a guarantee has been terminated by payment, expiry, cancellation or otherwise, retention of the guarantee document does not preserve any rights of the beneficiary under the guarantee, URDG 458 article 23 went the

[Page166:]

other way by indicating that a guarantee would terminate upon the return of the guarantee document to the guarantor. This sent a mixed message as to whether or not the guarantee document was totally devoid of any intrinsic value. It also gave rise to disputes where a guarantee document was returned to the guarantor, following a clerical error of the beneficiary or otherwise, without the authorisation of the beneficiary. URDG 758 puts an end to this confusion: the return of the guarantee document is not, in itself, a cause for termination of the guarantee. For such a return to have the effect of a termination, it needs to be accompanied by an indication of the beneficiary’s intention to release the guarantor. No specific terms are required for this indication, but it needs to be clearly stated.

(3) Caveats to article 25(b)

499 Article 25(b) is not necessarily exhaustive; other grounds of termination may arise under the applicable law. For example, the applicable law may provide that deliberate destruction of a guarantee document by the beneficiary with intention to extinguish the guarantee has that effect.

500 In determining what constitutes expiry, regard must be had to article 26 under which force majeure may result in a limited extension of the guarantee. In such cases, article 25(b) applies to the extended expiry date, not the expiry date specified in the guarantee.

(4) Banning open-ended guarantees

501 Under article 8(g), it is recommended that every guarantee should specify its expiry, either in terms of an expiry date or as an expiry event. However, guarantees containing neither one nor the other are regularly reported. While including an expiry provision in a guarantee is highly recommended, strictly speaking, it is not mandatory: a demand guarantee issued without indicating an expiry date or event is not null and void. In such cases, a court of law can step in to supplement the parties’ deficiency and fill the vacuum through its construction of the parties’ intent. In other words, a guarantee that does not contain explicit language as to its expiry is not necessarily a perpetual commitment. For instance, some legal systems simply ban perpetual commitments. In those systems, independent guarantees without an expiry provision are open to construction by a court of law, which can either override the irrevocability rule in URDG article 4(b) and allow the guarantor to exit its commitment with adequate notice to the beneficiary or try to identify from the parties’ course of conduct or other indicia what they may have possibly agreed in terms of expiry. It is needless to say that this is as far as one can get from certainty and predictability.

(5) Termination three years after issue

502 With the aim of fostering certainty, article 25(c) provides that, if the guarantee specifies neither an expiry date nor an expiry event, it will terminate after the lapse of three years from the date of issue. Article 25(c) follows on by providing a similar rule for counter-guarantees. In cases where it is also devoid of any expiry provision, a counter-guarantee will terminate 30 days after the guarantee terminates.

[Page167:]

503 Putting an end to open-ended guarantees was a key objective of the revision from the outset. The drafting group derived comfort from the breakthrough achieved by UN in the Convention on Independent Guarantees and Stand-by Letters of Credit, which provides in article 12(c) that where a guarantee does not state an expiry date or event, or if the event on which expiry is stated to depend has not yet been established by presentation of the required document, the guarantee expires six years from its date of issue. Another precedent, rarely remembered, is UCP 151 of 1951, where article 41 limited the validity of a revocable credit providing no expiry date to six months from the date of notification to the beneficiary⁵⁸.

504 Over the course of the revision, the principle of providing an expiry period in the rules absent an expiry provision in the guarantee was reshaped in two respects. First, a majority of national committees expressed their preference for shortening the expiry period in article 25(c) to three years from the date of issue, thereby departing from the six-year period in the UN Convention. Secondly, based on strong feedback received on the revised draft, the application of the expiry period in article 25(c) was restricted to the case of guarantees that neither provide an expiry date nor an expiry event. The consequence of this change is that guarantees providing for an expiry event that never occurs are now susceptible to remaining valid for an indefinite period, subject only to the applicable statutes of limitation. While some may consider this change unfortunate, it was the only sensible solution after the national committees voted in favour of decreasing the expiry period to three years. Indeed, terminating guarantees by default three years after the date of issue where those guarantees provide for termination upon the occurrence of a future event would have excluded the URDG from all guarantees in long-term projects where expiry events are frequently scheduled to occur more than three years after the date of issue.

(6) Contractual modifications to expiry

505 The termination rule for counter-guarantees is not only limited to cases where both the guarantee and counter-guarantee provide neither an expiry date nor an expiry event: it also applies where the guarantee stipulates an expiry provision (and therefore does not fall under article 25(c)) but the counter-guarantee does not. The rule in article 25(c) is essentially a default rule that is overridden by any expiry provision drafted in the undertaking.

506 Similar to the case where a guarantee fails to specify either an expiry date or an expiry event is the case where a guarantee fails to specify an expiry date but specifies an expiry event that takes the form of a non-documentary condition whose occurrence cannot be determined from the guarantor’s own records. In such cases, the expiry event is deemed to be not stated as provided in article 7. The guarantee is accordingly considered as not specifying any expiry provision, with the consequence that article 25(c) leads to its expiry three years from the date of issue (or, in the case of a counter- guarantee, 30 days after the expiry of the guarantee).

[Page168:]

(7) Legal characterisation of the three-year expiry period

507 The three-year period acts as the functional equivalent of an expiry date explicitly stipulated in the guarantee that falls three years after its issue. The applicable law should grant the default expiry period in article 25(c) the same value as a guarantee clause that explicitly includes the following phrase: “This guarantee shall expire three years after its issue”. Put differently, the expiry period in article 25(c) cannot be challenged unless an expiry clause that is explicitly stipulated in the guarantee is open to challenge too⁵⁹.

The same rule applies in the case of a counter-guarantee that states neither an expiry date nor an expiry event. Such a counter-guarantee terminates 30 days after the guarantee terminates, whether the termination of the guarantee is consecutive to the occurrence of the expiry term in that guarantee or, absent such a term, the three-year period provided in article 25(c).

(8) Calculating the three-year expiry period

508 When calculating the three-year period, the date of issue of the guarantee is included and the guarantee comes to an end on the day following the expiry of that period (article 3(d)). There is, however, an extension where the expiry date falls on a day that is not a business day (article 25(d)). Starting the three-year period from the date of issue was deemed preferable to the alternative of starting it from the time when the guarantee becomes available for presentation of demand (article 4(c)), because the condition laid down in the guarantee to make it available for presentation may itself never occur. For example, an advance payment guarantee stipulating that the beneficiary is entitled to present a demand only when the advance payment is credited to the applicant’s bank account maintained with the guarantor might remain unavailable for presentation five years down the line because no advance payment was ever credited. This example shows the risk of starting article 25(c)’s three-year period from any point other than a fixed calendar date.

(9) Expiry date falling on a non-business day

509 Where the expiry date falls on a day that is not a business day at the place for presentation, it is extended to the first following business day at that place. Article 25(d) applies not only in cases falling under article 25(c) but also where the guarantee itself specifies an expiry date. However, the rule does not apply where expiry results from an expiry event occurring on a non-business day, whereupon there is no extension. This is unlikely to cause any disruption, since an expiry event, unlike an expiry date, requires an active act of the guarantor, whether this involves being open for the delivery of a document specified in the guarantee or determining from its own records whether a non-documentary condition has occurred (see the definition of an expiry “event” in article 2). Both events are normally unlikely to occur on a non-business day.

Horror stories of never-ending guarantees recounted around the fireplace by veterans of international guarantee practice generally relate to guarantees issued without stipulating an expiry date because the applicant, and its bank guarantor, were given no choice but to strictly adhere to a mandatory guarantee form that expressed termination upon formal release by the beneficiary. Fortunately, this type of guarantee is less frequently encountered today.

[Page169:]

(10) Information duty upon termination

510 Where, to the knowledge of the guarantor, the guarantee terminates on any of the grounds specified in article 25(b) other than the advent of the expiry date, the guarantor must without delay so inform the instructing party or, where applicable, the counter-guarantor, which must then inform the instructing party (article 25(e)). However, contrary to URDG 458 article 25, the guarantor is not bound to an information duty where termination results from the advent of an expiry date, since this will be known to the instructing party and any counter-guarantor.

3.7.2 Force majeure

(1) An overview of article 26

511 Through no fault of either party, the presentation, examination or payment of a demand may be prevented by an event of force majeure affecting the guarantor or counter-guarantor, such as the outbreak of hostilities at the place for payment, a general strike of the guarantor or counter-guarantor’s employees leading to the interruption of their business and so forth. Legal systems generally allow the parties to define what constitutes a force majeure event and to allocate or apportion its consequences in their contracts. Statutory provisions in civil codes, laws of contract, laws of obligations and similar provide rules that determine the consequences of force majeure only in the absence of an agreement between the parties on this issue. At one end of the spectrum, practice has yielded “hell or high water” clauses, under which the debtor is commits to perform its obligation or, alternatively, to indemnify its creditor even in the case of force majeure. At the other end of the spectrum, meanwhile, there are clauses freeing the debtor of its obligation where performance becomes more onerous albeit not impossible. The successive versions of UCP, as well as of ISP98 and URDG 458, provide rules governing force majeure, as do a great number of international texts and model contracts⁶⁰.

(2) Inadequacy of force majeure provisions in UCP and ISP

512 The force majeure provision in UCP 600 contrasts sharply with the one in ISP98. Both are inadequate for demand guarantees.

513 Under article 36 of UCP 600, an issuing or confirming bank accepts no responsibility for the consequences of force majeure. This means, for example, that if force majeure prevents presentation on the day before expiry and the impediment ends the day after expiry, the beneficiary is deprived of the benefit of the documentary credit for a mere two-day interruption. However, in the case of documentary credits, this is less detrimental to the beneficiary than it may appear at first sight. Indeed, in the case of a confirmed documentary credit, where force majeure affects the business of the confirming bank, the beneficiary is free to make a presentation to the issuing bank which is separately liable and directly committed to the beneficiary. Similarly, force majeure affecting the issuing bank does not

[Page170:]

preclude presentation to the confirming bank. The case is different in a typical indirect guarantee structure, where the beneficiary has no relationship with the counter-guarantor that would allow it to make a presentation to that counter-guarantor if the guarantor is affected by a force majeure. Consequently, the impact of a rule mirroring the one in the UCP is more pronounced in the case of demand guarantees because it not only affects the beneficiary, whose rights are certain to be forfeited because of the guarantor’s closure in the case of force majeure, but also precludes a guarantor that has made a payment under its guarantee from obtaining payment under the counter-guarantee if that counter-guarantee expires before the end of the force majeure, preventing the guarantor from presenting a complying demand under the counter-guarantee.

514 ISP98 go to the other extreme. Rule 3.14(a) extends the guarantee for a period of 30 days after the place for presentation reopens for business. This could leave the guarantor exposed for an indeterminate period after expiry and was considered to be too uncertain to accept in a demand guarantee context.

515 The URDG 758 adopt a novel solution that is considered to be the most adapted to demand guarantee practice. It seeks to offer fairer treatment to the beneficiary, while protecting the guarantor and counter-guarantor from the consequences of suspending, extending or making payment under their undertaking as directed by article 26. The new solution also happens to be a middle course between the solution promoted by UCP 600 and the one in ISP98. In a nutshell:

- Where the guarantee expires at a time when force majeure prevents the beneficiary from making a presentation under the guarantee, the guarantee and any counter-guarantee are extended for a period of 30 calendar days from their original expiry date, after which, if force majeure persists, the guarantee and counter-guarantee come to an end even if the beneficiary was unable to make its presentation.

- Where a presentation has been made but force majeure prevents its examination and the guarantee expires before the cessation of that force majeure, the guarantee and any counter-guarantee are extended for a period of 30 calendar days from their original expiry date.⁶¹During this period, force majeure either ceases, whereupon the running of time for examination resumes where it was interrupted by force majeure, or it does not, in which case examination starts to run again upon resumption of the guarantor’s business when the force majeure ceases, whenever that may be. If the presentation is then found to be complying, the beneficiary is entitled to be paid. As indicated above, this is because the only condition for the beneficiary’s right to be paid is that a complying demand is presented before expiry of the guarantee.

[Page171:]

- Where force majeure merely prevents payment of a demand already found to be a complying demand, and the guarantee expires before the cessation of the force majeure, the beneficiary’s right to payment has crystallised and cannot be affected by force majeure or any expiry that might occur before the force majeure ceases. The guarantee and any counter-guarantee is extended for a period of 30 calendar days from their original expiry date and payment is due as soon as the guarantor resumes its business, whenever that may be.

The above is explained in more detail in the following paragraphs.

(3) FORCE MAJEURE ACCORDING TO ARTICLE 26(A)

516 Three cumulative conditions have to be met for an event to be regarded as a force majeure that triggers the consequences outlined in article 26:

(1) the event must fall within the scope of one of the two groups covered in article 26(a);

(2) the event must interrupt the guarantee business of the guarantor or, in the case of a counter-guarantee, the counter-guarantor; and

(3) the event must have prevented presentation, examination or payment because the guarantee (or counter-guarantee) expired before the resumption of business.

(a) FIRST CONDITION:THE FORCE MAJEURE EVENT

517 To constitute force majeure under article 26, the supervening event must fall into one of two groups outlined in paragraph (a):

- The first group consists of events that are assumed to be beyond the guarantor’s control, namely acts of God, riots, civil commotions, insurrections, wars and acts of terrorism. These six types of event are mentioned specifically. Any other event requires evidence that it is beyond the guarantor’s control in order for it to fall into the second group and hence be characterised as force majeure under article 26.

- The second group consists of any other event that is beyond the guarantor’s control. By way of example, this could cover the following events:

(i) Industrial action that the guarantor did not provoke and that it could not have avoided by reasonable measures if such action leads to the interruption of the guarantor’s business as it relates to guarantees.

(ii) Widespread illness affecting the guarantor’s staff and necessitating closure of the branch out of which the guarantee business is conducted.

(iii) A failure of a computer system and possible back-ups for reasons beyond the guarantor’s control, if such failure leads to the interruption of the guarantor’s business as it relates to guarantees.

[Page172:]

518 To characterise the supervening event as force majeure, some legal systems also require that it should be unpredictable and make it permanently impossible for the debtor to perform its obligation. This is not required under article 26.

(B) SECOND CONDITION: IMPACT ON THE GUARANTOR’S GUARANTEE BUSINESS

519 In order to be regarded as a force majeure that triggers the consequences indicated in article 26, an event must not only fall within the scope of one of the two groups of events covered in article 26(a) but must also lead to the interruption of the demand guarantee business of the guarantor or, in the case of a counter-guarantee, the counter-guarantor for a certain period during which the guarantee expires. Three points should be noted:

- First, a force majeure affecting only the beneficiary by preventing it from making a timely presentation falls outside the scope of the URDG. To take an example contemporaneous with the drafting of this Guide, the disruption of European flights from 15 April 2010 onwards due to the eruption of the Icelandic volcano Eyjafjallajökull was not a force majeure as defined in article 26. While undoubtedly beyond the control of the guarantors, the volcanic eruption only affected the ability of beneficiaries to make a timely presentation, because courier companies and air transporters were unable to deliver documents shipped to the guarantors at the scheduled time. It did not lead to an interruption of the guarantors’ business relating to demand guarantees⁶².

- Second, a force majeure affecting the guarantor’s ordinary banking business but not its demand guarantee business falls outside the scope of article 26 and, indeed, of the URDG as a whole. Thus, if ordinary banking business is conducted at branch (A) of a bank and demand guarantee business at branch (B) in the same country, force majeure affecting branch (A) but not branch (B) is irrelevant. Where the branches are in different countries, this result is reinforced by article 3(a), under which branches of a guarantor in different countries are regarded as different entities.

- Third, if the guarantee indicates a place for presentation other than the place of issue, as allowed in article 14(a), and force majeure only interrupts the guarantor’s guarantee-related business at the place of issue, article 26 does not apply. The reason is that force majeure did not impact the guarantor’s examination of the presentation or its payment capacity at the place for presentation, assuming that it is indeed the intention that the presentation is examined and the demand is paid in that place for presentation. By contrast, if the agreed place for presentation is simply a representative office of the guarantor or an intermediary acting as “mail box”, on the understanding that the presentation will then be forwarded to the guarantor’s place of business where guarantees are transacted, examined and paid, and the guarantor’s place of business is impacted by force majeure, article 26 applies. The reason is that the test

[Page173:]

for suspension and extension that appears in article 26 does not relate to the difficulty caused by force majeure to the beneficiary’s ability to make a timely presentation but to the guarantor’s ability to examine that presentation to determine its compliance and, if so, pay the beneficiary.

520 Contrary to ISP98 Rule 3.14(b), article 26 does not allow the guarantor to change the place for presentation with a view to proposing a reasonable substitute to the place affected by the force majeure. It is free to do so but needs the agreement of the party from which it received its instructions to avoid possibly risking the forfeiture of its right to reimbursement because it has unilaterally altered the terms of the guarantee. Of course, this prospect depends largely on the applicable law.

(C) THIRD CONDITION: PREVENTING PRESENTATION, EXAMINATION OR PAYMENT BECAUSE OF EXPIRY

521 The third condition laid down by article 26 for an event to be regarded as a force majeure is that the interruption of the guarantor’s demand guarantee business prevents the beneficiary from making a presentation or the guarantor from examining a presentation or paying a demand before the expiry of the guarantee⁶³. The following remarks need to be made:

- If the force majeure ends before the expiry of the guarantee, it no longer prevents presentation, examination or payment and, as a result, article 26 does not apply.

- Paragraphs (b) and (c) of article 26 refer only to the expiry of the guarantee and counter-guarantee. However, a case can be made for their application to any other deadline indicated in the guarantee or counter-guarantee. For example, they could apply to guarantees providing for payment in instalments, where each instalment is payable only if a complying demand is presented within a fixed time window, following which the instalment ceases to be available for drawing and the guarantee amount is decreased proportionately. If force majeure results in an interruption of the guarantor’s business during this time window, article 26 could provide a useful solution to the parties. However, this is not specifically provided in the URDG, and it is up to the parties to agree – or the competent judge or arbitrator to decide – whether article 26 could serve such a purpose.

- If the guarantee has expired before the force majeure event occurs, it is too late for the beneficiary to make a presentation. In such cases, force majeure is irrelevant, and article 26 does not apply.

522 In all cases where the supervening force majeure meets the conditions laid down in article 26, its consequences depend on whether it is the presentation, examination or payment that is affected by the force majeure. It also depends on whether the force majeure occurred under the guarantee or the counter- guarantee, as article 26 does not attribute the same consequences to both.

[Page174:]

(4) Force majeure affecting presentation under the guarantee

523 Where force majeure prevents presentation of the demand under the guarantee before expiry, the guarantee and any counter-guarantee are extended for a period of 30 days from the date on which they would otherwise have expired. Two remarks need to be made in this respect:

- Even where force majeure only affects presentation under the guarantee but not under the counter-guarantee, article 26(b)(i) requires an automatic extension of both the guarantee and the counter-guarantee. Where force majeure affects presentation under the counter-guarantee but not the guarantee, article 26(c)(i) applies instead of article 26(b)(i).

- For the purpose of calculating the 30-day extension period, the original date of expiry of the guarantee and the counter-guarantee is included.

(5) Guarantor to inform counter-guarantor of force majeure and extension

524 In answer to the question of how the counter-guarantor is meant to know that its counter-guarantee has been extended at a time when it may not be aware that force majeure has prevented a presentation under the guarantee, article 26(b)(i) directs the guarantor to inform the instructing party or, in the case of a counter-guarantee, the counter-guarantor of the force majeure and the extension as soon as practicable. In this situation, a counter-guarantor that receives such information from the guarantor is in turn required to inform the instructing party accordingly. “As soon as practicable” was preferred to “without delay” because it takes better account of the impediments that a force majeure can sometimes place in the way of providing information. For instance, an act of terrorism that causes the communications system in the area of the guarantor’s place of business to shut down makes it impracticable for the guarantor to inform the instructing party of the force majeure until normal communication resumes. Conversely, widespread illness that causes a guarantor to close the branch out of which its guarantee business is transacted does not normally prevent the guarantor from informing the instructing party of the force majeure by using means of communication available outside that branch. If necessary, regard should be had to international standard demand guarantee practice in order to determine what is practicable in cases of this type.

525 The working assumption under article 26(b)(i) is that the guarantee has expired at a time when presentation or payment is prevented by force majeure. At the end of the 30-day extension period, the guarantee and counter-guarantee expire and no presentation can be made even if the force majeure continues to prevent the presentation of the demand. The result is still a considerable enhancement of the beneficiary’s position (and that of the guarantor in the case of a counter-guarantee) in comparison to URDG 458 article 13.

[Page175:]

526 The diagram below illustrates the process under article 26(b)(i):

(6) Force majeure affecting examination under the guarantee

527 Where force majeure occurs after a presentation is made under the guarantee but prevents the examination of the demand and the related documents from being commenced or completed within the five business days allowed by article 20(a), then:

(1) the guarantee and any counter-guarantee are both extended for a period of 30 days from the date on which they would otherwise have expired; and

(2) the running of time for examination is suspended until the resumption of the guarantor’s business, whenever that may be. Thus, if two business days have elapsed between the presentation of the demand and the advent of the force majeure, the guarantor has three further business days after the resumption of its business to complete its examination of the demand.

528 Suspension until resumption of the guarantor’s business is the right solution where a presentation has already been made, because the beneficiary has already crystallised its right under the guarantee by ensuring that the presentation was made to the guarantor on time. If, following the completion

[Page176:]

of examination, the demand is found to be a complying demand, the beneficiary’s right to payment is not affected by the supervention of the force majeure subsequent to presentation.

529 If the force majeure ceases before the end of the 30-day extension, the beneficiary can use the extra time of the extension to cure any discrepancies that the guarantor may have indicated in the notice of rejection if the demand is found to be a non-complying demand and present a fresh complying demand. Moreover, if the demand presented before the force majeure is a partial demand and the guarantee does not prohibit multiple demands, the beneficiary can present one or more other partial demands up to the maximum guarantee amount during the 30-day extension period as well.

(7) Resumption of business

530 In this context, “resumption of business” means resumption of the guarantor’s demand guarantee business and, for the purpose of article 26(b) (ii), must be held to occur not when business is actually resumed but on the date by which the guarantor ought to have been able to resume its business, having taken all reasonable steps to do so. The guarantor is not entitled to keep its doors shut for longer than is necessary to deal with the effects of the force majeure after it has ended.

(8) Consequences of a permanent force majeure

531 Article 26(b)(ii) assumes that the effect of the force majeure is only temporary and accordingly caters for the rights and obligations of the parties after it has ended. Where a force majeure establishes a permanent state of affairs, for instance because all the records of a presentation made before the force majeure are destroyed as a result of the force majeure, the question is whether other evidence is available to establish the facts, such as providing the guarantor with copies of the already made presentation through backup systems. Where no such evidence is available, the URDG do not provide a particular rule and leave it to the applicable law to determine.

[Page177:]

532 The diagram below illustrates the process under article 26(b)(ii):

(9) Force majeure affecting payment under the guarantee

533 Where the demand, along with any related documents, has been examined before the force majeure and found to be a complying demand but the force majeure prevents payment, for example where widespread illness has resulted in the closure of the guarantor’s issuing branch, payment must be made when the force majeure ceases, even if the guarantee has expired by then.

534 Cessation of the force majeure should not be taken literally as meaning the very day on which the pandemic or other event of force majeure comes to an end but the day on which, as the result of its coming to an end, the guarantor is able to resume business, having taken reasonable steps to do so. When the guarantee is paid after cessation of the force majeure, the guarantor may present a demand under the counter-guarantee within 30 days of its cessation (and not after the actual payment under the guarantee), even if it has already expired.

535 If the complying demand presented before force majeure is a partial demand and the guarantee does not prohibit multiple demands, the beneficiary can present one or more other partial demands up to the maximum guarantee amount during the 30-day extension period as well.

[Page178:]

536 The diagram below illustrates the process under article 26(b)(iii):

(10) Force majeure affecting the counter-guarantor

537 Where the force majeure affects presentation, examination or payment under the counter-guarantee, article 26(c) covers its consequences with a rule similar to that provided under article 26(b) where the force majeure affects the guarantor’s business, subject to one important difference. Indeed, where force majeure affects presentation under the counter-guarantee, that counter-guarantee is extended for 30 calendar days from the date on which the counter-guarantor informs the guarantor of the cessation of the force majeure. Contrary to article 26(b)(i), the guarantee itself is not extended.

538 The reason for the departure from the rule in article 26(b)(i), which provides that the 30-day extension commences from the expiry date of the guarantee and counter-guarantee, is that a demand under the counter-guarantee necessarily assumes that the guarantor has received a complying demand under its guarantee (see article 15(b)) and has the obligation to make payment thereunder, even if payment has not necessarily already taken place. Extending the counter-guarantee for 30 days from its date of expiry could still leave the guarantor exposed to the risk of having to pay the beneficiary under the guarantee without being able to present a demand under the counter- guarantee if force majeure persists after the 30-day extension. This would be

[Page179:]

unfair to the guarantor at a time when it is engaged in the guarantee process only to carry out the instructions of the counter-guarantor.

539 Until it receives the information from the counter-guarantor required under article 26(c)(i), the guarantor will not necessarily know that the force majeure has ended, thus starting the 30-day period. The counter-guarantor must “then” inform the instructing party of the force majeure and the extension. The word “then” refers to the time when the counter-guarantor has informed the guarantor of the cessation of the force majeure, thus starting the 30-day period, not to the time of cessation of the force majeure.

540 The rules in article 26(c)(ii) and (iii) governing the suspension of the time for examination and prescribing the time for payment are the same as those applicable to force majeure affecting the guarantor under article 26(b)(ii) and (iii), to wit:

- the running of time for an examination whose completion is prevented by the force majeure is suspended until resumption of the counter- guarantor’s business; and

- a demand determined to be a complying demand but not paid before the advent of force majeure must be paid when the force majeure ends.

541 The following three diagrams illustrate the operation of article 26(c) where force majeure prevents the presentation, examination or payment of a demand under a counter-guarantee.

[Page180:]

[Page181:]

(11) Instructing party bound by article 26

542 A potential concern relates to whether the automatic extension of the counter-guarantee because of a force majeure affecting the guarantee could put in peril the counter-guarantor’s claim for reimbursement against the instructing party. In the case of article 26(b)(i), for instance, it could well be that the counter-guarantee has expired and the counter-guarantor has already released the collateral posted by the instructing party by the time the guarantor is able to find a practical means of communication to provide information of the force majeure and the extension. The same could occur under article 26(b)(iii), where the guarantor is allowed to present a demand under the counter-guarantee 30 days after the cessation of force majeure even if that counter-guarantee has expired.

543 As a matter of fact, the guarantor (or, in the case of an indirect guarantee, the counter-guarantor) need not be concerned about the instructing party’s ratification of any extension, suspension or payment under article 26(b) or (c). Article 26(d) provides that the instructing party is bound by any change to the terms of its instructions that may be prompted by the application of article 26. Because it is the instructing party that chooses, or ultimately ratifies, the incorporation of the URDG in the guarantee or counter-guarantee issued upon its instructions, it will come as no surprise – and should be regarded as a fair solution – that the instructing party is expected to cover the consequences of its instructions being carried out, including in the case of force majeure and the application of article 26.

(12) Guarantor and counter-guarantor have no further liability

544 The guarantor and the counter-guarantor assume no further liability for the consequences of the force majeure (article 26(e)). Thus, for example, if the beneficiary suffers loss of interest or any other loss as a result of the delay in payment, it has to bear this loss itself.

545 In a nutshell. Although not a party to the guarantee or the counter-guarantee, the instructing party plays a pivotal role in shaping the rights and obligations arising from the guarantee or counter-guarantee. At the outset, it is the instructions of the instructing party to the guarantor or, in the case of an indirect guarantee, the counter-guarantor that start the process leading to

[Page182:]

the issue of the guarantee. The terms of the guarantee itself are generally determined in those instructions or later ratified or adhered to by the instructing party. Any negligence in the carrying out of those instructions, including the duties set out in the rules, exposes the guarantor to the loss of its indemnity claim under the application. The URDG set out a number of rights and obligations for the instructing party, which it is deemed to have accepted when referring to the URDG in the application. This warrants an overview of the relationship between the guarantor and the instructing party.

3.8.1 Can the URDG control the relationship with the instructing party?

546 In general, the URDG do not control the relationship between the instructing party and the guarantor or counter-guarantor. That is left to the terms and conditions of their agreement. However, under article 1(c), where, at the request or with the agreement of the instructing party, a demand guarantee or counter-guarantee is issued subject to the URDG, the instructing party is deemed to have accepted the rights and obligations expressly ascribed to it in the rules. This is the case whether the instructing party’s agreement derives from a specific application for the issue of the guarantee in question or from general business conditions covering all guarantees (hence the use of the phrase “or with the agreement of ” in the first line of article 1(c)). Without a rule of this kind the provisions relating to the rights and duties of the instructing party might be ineffective.

(1) Conditions for the application of article 1(c)

547 Article 1(c) only comes into play once the guarantee or counter-guarantee has been issued, and then only if (i) it is issued subject to the URDG and (ii) the instructing party requested or agreed to the guarantee or counter- guarantee being issued subject to the URDG. If the issuer incorporates the URDG into the guarantee on its own initiative, article 1(c) does not apply.

(2) Examples of the application of article 1(c)

548 There are various rules in the URDG that expressly affect the instructing party. Without a provision such as article 1(c) in the rules, the instructing party cannot invoke rules in the URDG that create a right that is to its benefit nor be bound by rules that restrict its rights or impose obligations on it. The rules in the URDG that create a right for or impose an obligation on the instructing party include:

– the articles imposing a duty on the guarantor or counter-guarantor to provide information or transmit documents to the instructing party (e.g. articles 16, 22, 23, 25 and 26);

– article 5, which provides for the independence of the guarantee or counter-guarantee from the application;

– article 21, which provides that the instructing party is bound by a payment made in a currency other than the one specified in the guarantee;

[Page183:]

– article 26, which provides that the instructing party is bound by an extension, suspension or payment given or made under that article;

– the disclaimers in articles 27, 28 and 29, which prevent the instructing party from holding the guarantor liable for the consequences of acts or abstentions, provided they were carried out in good faith (article 30); and

– article 31, which requires the instructing party to indemnify the guarantor against all obligations and responsibilities imposed by foreign laws and usages, including where those foreign laws and usages impose terms into the guarantee or the counter-guarantee that override its specified terms.

549 Without article 1(c), the instructing party, while instructing the guarantor to apply the URDG, could argue that it is not bound by the duties imposed on it by the rules. Obviously, this does not mean that the whole URDG are incorporated in the application. Otherwise, the application itself would turn into a demand guarantee with the absurd consequence, for instance, that the guarantor’s reimbursement claim against the instructing party under the indemnity relationship would supposedly require the guarantor to support its “demand” by a statement of breach under article 15(a). Article 1(c) applies only to the rights and obligations expressly ascribed to the instructing party in the URDG and declares those rights and obligations to be binding on that instructing party as a result of its instruction to the guarantor to issue a guarantee subject to the URDG.

3.8.2 Application not taken up

550 A guarantor that, at the time of receipt of the application for the issue of the guarantee, is not prepared (for example because the creditworthiness of the instructing party is unacceptable to the guarantor) or unable to issue the guarantee (for example because of economic sanctions against the beneficiary’s country) should without delay so inform the party that gave the guarantor its instructions.

551 Article 9 is essentially exhortatory (hence the use of “should”): it lays down a standard of good guarantee practice but could not be made into a binding rule, given that there may be no relationship between the guarantor and the party from which it receives its instructions and, therefore, no obligation of any kind on the prospective guarantor. Fostering good guarantee practice was considered a sufficient reason to retain article 9 in order to encourage prospective guarantors to communicate their decision and to do so without delay. The case is different when the guarantor is requested to issue an amendment to an already issued guarantee. The corresponding rule is to be found in article 11(a).

3.8.3 Indemnity for foreign laws and usages

552 As a general rule, the guarantor is required strictly to abide by the terms of its guarantee. Where it does so and makes payment in compliance with those terms, it is assured of its right to reimbursement by the party from which it

[Page184:]

received its instructions, be it the instructing party or the counter-guarantor. However, there are situations where a mandatory law or usage may impose an obligation or a responsibility on the guarantor that it has no choice but to comply with regardless of what the terms of the guarantee may indicate. Examples include stamp duties, licences to undertake certain activities in regulated sectors, mandatory expiry provisions and so forth, all of which may override possibly conflicting terms of the guarantee or the rules. If such a mandatory law or usage is in force in the location of the guarantor’s branch that issued the guarantee, the guarantor is not entitled to indemnity from the instructing party or counter-guarantor for the consequences of this law or usage, outside a specific agreement to that effect. The reason is that the guarantor is presumed to be aware of this law or usage and to have issued the guarantee in accordance with its consequences. Conversely, where the obligation or responsibility arises not under the guarantor’s law but under a foreign law or usage that applies to the guarantee regardless of what the terms of that guarantee may indicate, the guarantor is entitled to be indemnified, for all the consequences of this law or usage, by the party on whose instructions it acted when issuing the guarantee⁶⁴.

553 In light of the above, the conditions giving rise to the application of article 31 are three fold:

(1) the obligation or responsibility must arise out of a foreign law or usage;

(2) that foreign law or usage must be mandatory; and

(3) by applying to the guarantee, that obligation or responsibility must have modified the terms of the guarantee as issued pursuant to the instructions received by the guarantor and have caused that guarantor to make a payment or perform an act other than what it was instructed to do. It is that loss that would lead to indemnity under article 31. Those conditions are explained in more detail below.

(1) Foreign laws

554 The term “foreign laws” in article 31 refers to the laws of a country other than that in which the guarantor’s branch or office issuing the guarantee is situated. Obligations and responsibilities arising from mandatory laws and usage in the location of the guarantor’s branch that issued the guarantee fall outside the scope of article 31. Any other law is a “foreign law”, including: (a) the law of the location of the guarantor’s head office if the guarantee was issued by a branch in another country; and (b) a law chosen by the parties under article 34 other than the law of the location of the guarantor.

(2) Foreign usages

555 “Usages” in article 31 may refer to usages of a particular trade or profession (e.g. banking), a particular locality or a particular market. Contrary to

[Page185:]

mandatory law, usages are not expected to override explicit terms of the guarantee. However, they can supplement those terms where a particular issue that is not addressed in the guarantee arises under the guarantee. In such cases, the competent judge or arbitrator has to decide which usage in the relevant practice is sufficiently widespread to be considered binding on the parties to the guarantee as an implied term that supplements and modifies the terms of the guarantee and deals with any issues that may have been left uncovered by an explicit term.

(3) Mandatory laws

556 Mandatory laws are not covered by the URDG, these being a matter for the law of the forum state. Rules of mandatory law fall into two categories: rules that cannot be excluded by the agreement of the parties but which the law of the forum does not find it necessary to impose on contracts governed by a foreign law (for example, rules on contract formalities) and internationally mandatory – or super-mandatory – rules that apply regardless of the otherwise applicable law (for example, rules on competition policy or consumer protection). The URDG, which take effect by way of contractual incorporation, are superseded by mandatory rules.

557 Mandatory provisions of national law in both categories outlined in the preceding paragraph apply to any situation falling within their scope, irrespective of the law otherwise applicable to the contract, because their application is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation⁶⁵. Courts of the forum where those laws are enacted, as well as, in exceptional situations, courts in other jurisdictions, are given the powers necessary to apply those laws based on public policy, whatever the agreement of the parties to the contract. Examples include consumer protection laws, currency exchange controls, securities exchange laws, the protection of workers under labour laws and cultural heritage laws protecting antiquities.

558 In this context, “law” should not be construed literally as the act of a legislative body but also as including acts of governments and independent regulatory authorities to the extent that they apply to the given situation regardless of the parties’ agreement. The URDG do not distinguish between “overriding mandatory provisions” and “provisions that cannot be derogated from by agreement”, which are generally construed more restrictively, and focus instead on the mandatory character of the provision.

(4) Indemnity against obligations

559 A foreign law or usage may impose obligations that the guarantor has to respect in the course of carrying out its duties under the guarantee and the URDG, such as the obligation to obtain a licence, pay taxes or prolong the validity of the guarantee beyond its expiry terms. According to whether the obligation imposed by the foreign law or usage consists of the payment of money or the performance of another act, such as obtaining a licence, the instructing party or counter-guarantor is responsible for the reimbursement

[Page186:]

to the guarantor of the amount paid in this respect or the costs incurred in performing the act or procuring its performance.

(5) Indemnity against the overriding of the terms of the guarantee

560 Article 31 also covers cases where the foreign law or usage overrides the terms of the guarantee or any of the URDG rules incorporated in the guarantee or imports new terms into the guarantee. For example, the law of the location of the foreign beneficiary may contain mandatory rules prescribing a fixed period for the duration of a guarantee or a specific expiry event irrespective of the guarantee’s expiry terms. Thus, where a guarantee states that it is valid for a period of five years but the applicable foreign law contains a mandatory rule to the effect that no guarantee shall terminate other than upon signed release by the beneficiary, a guarantor that pays a complying demand after the period of five years but before release has been granted is entitled to be indemnified by the party from which it received its instructions. This is because the foreign law has effectively overridden the five-year validity period stated in the guarantee.

(6) Effect of guarantor’s prior knowledge of foreign law or usage

561 The rules do not make the guarantor’s right of indemnity under article 31 dependent on its ignorance of the foreign law or usage in question, nor do they impose any duty on the guarantor to inform the instructing party or counter-guarantor of the existence of the law or usage under which the obligation or responsibility arises. This should not be taken as an indication that the rules condone cases where the guarantor is aware that the terms of the guarantee it is instructed to issue conflict with, and will be overridden by, a mandatory foreign law but nevertheless carries out its instructions and issues the conflicting guarantee without so informing the party from which it received those instructions. The rules simply leave the assessment of such conduct and the extent to which it breaches a general duty of good faith or care to be determined by the applicable law.

3.8.4 Liability for charges

562 Article 32(a) imposes on a party that instructs another party to perform any service under the URDG a duty to pay for those services. This includes, but is not limited to, the issue of a guarantee, a counter-guarantee or an amendment to the same, the advice of a guarantee, the rejection of a non-complying demand and the costs of payment in a specific currency or at a particular place. Like other rules in the URDG, the duty allocated in paragraph (a) to the party giving instructions can be modified in the relevant instructions, as indicated in paragraph (b), where reference is made to a guarantee stating that charges are for the account of the beneficiary.

(1) Liability where charges cannot be collected

563 Where the guarantee states that charges are for the account of the beneficiary, the party instructed to perform the service in question must collect the charges from the beneficiary. Where the charges cannot be collected from

[Page187:]

the beneficiary, the instructing party will pay them (article 32(b)). However, this duty arises only where the party instructed to perform the services (the guarantor or the advising party) has endeavoured to collect those charges and was not able to so obtain them. By contrast, if the party that is expected to collect the charges does not collect them at a time when it is able to do so, it cannot look to the instructing party for payment. The URDG do not state how far the party performing the services has to go to collect the charges. That is a matter for international standard demand guarantee practice.

564 Similar rules apply where a counter-guarantee states that charges relating to the guarantee are for the account of the beneficiary and those charges cannot be collected. The counter-guarantor remains liable for the charges and can claim reimbursement from the instructing party.

(2) Guarantee not to be made conditional on payment of charges

565 It can be tempting for a guarantor to issue a guarantee for which it has not been paid the charges due while conditioning its availability for the presentation of any demand on the payment of those charges (article 4(c)). This is bad practice and should be avoided, as it may lead to misunderstandings and uncertainty (article 32(c)). For instance, where a guarantor that has not been paid its issue charges by the instructing party nevertheless issues a guarantee and indicates that no demand can be presented until its charges are paid, a serious question arises as to the compatibility of such a clause with article 5(a), which indicates that the guarantee is independent of the application and the guarantor is in no way concerned with this relationship. In practice, a situation of this type amounts to a revocable guarantee, because the instructing party can prevent the guarantee from coming into effect by not paying the charges.

566 A beneficiary or, in the case of a counter-guarantee, a guarantor is entitled to assume that a guarantee, amendment or advice that has been issued is binding on the issuer and subject only to explicit conditions that comply with article 7 and that are supposed to reflect, through the presentation of documents, the occurrence of events relating to the underlying relationship. The payment of charges should remain outside the guarantee and be dealt with before guarantee is irrevocably issued.

---

---