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A commentary on URDG 758

URDG 758

Article 1 Application of URDG

a. The Uniform Rules for Demand Guarantees (“URDG”) apply to any demand guarantee or counter-guarantee that expressly indicates it is subject to them. They are binding on all parties to the demand guarantee or counter-guarantee except so far as the demand guarantee or counter- guarantee modifies or excludes them.

b. Where, at the request of a counter-guarantor, a demand guarantee is issued subject to the URDG, the counter-guarantee shall also be subject to the URDG, unless the counter-guarantee excludes the URDG. However, a demand guarantee does not become subject to the URDG merely because the counter-guarantee is subject to the URDG.

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 these rules.

d. Where a demand guarantee or counter-guarantee issued on or after 1 July 2010 states that it is subject to the URDG without stating whether the 1992 version or the 2010 revision is to apply or indicating the publication number, the demand guarantee or counter-guarantee shall be subject to the URDG 2010 revision.

URDG 458

Article 1

These rules apply to any demand guarantee and amendment thereto which a Guarantor (as hereinafter described) has been instructed to issue and which states that it is subject to the Uniform Rules for Demand Guarantees of the International Chamber of Commerce (Publication No. 458) and are binding on all parties thereto except as otherwise expressly stated in the Guarantee or any amendment thereto.

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Comment

This article deals with the scope of application of the URDG, the parties that are bound by it and the version that applies where this is not specified in the demand guarantee or counter-guarantee.

Changes from URDG 458

- The exclusion or modification of a URDG rule no longer needs to be stated expressly, with the exception of article 15 (see article 15(c)).

- New rule on asymmetrical guarantees and counter-guarantees.

- New rule on extent of application of URDG to the instructing party.

- New transition rule.

Article 1(a)

Scope of application generally

1.1 The URDG apply to demand guarantees and counter-guarantees as defined by article 2. They take effect as contractually incorporated rules (see paragraph 1.15).

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

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

b. The undertaking must be for the payment of money, not for other kinds of performance. Non-money undertakings (e.g. to perform the underlying contract in replacement of the defaulting obligor) are outside the scope of the rules even though the guarantor’s failure to perform may itself attract a money liability.

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

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

e. But as between the applicant and the beneficiary, it must be intended that the guarantee will be invoked only if there has been default in the underlying contract or other relationship. It is this which distinguishes the demand guarantee from the documentary credit (see further paragraph 1.10).

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f. The guarantee or counter-guarantee must expressly indicate that it is subject to the URDG (but see the case of article 1(b)), or alternatively the URDG must in some other way have effect under the applicable law (see paragraph 1.18).

1.3 Any undertaking that satisfies these six conditions is a guarantee covered by the rules, whether described as a guarantee, bond, letter of credit or otherwise and whether issued by a bank, insurance company or other body or person. Furthermore, undertakings satisfying the above conditions are within the rules for whatever stage of the underlying contract to which they may relate, from the pre-contract tender (or bid) guarantee at one end to the maintenance (warranty) guarantee at the other. By contrast, guarantees which are not signed (as defined), are payable without demand or expressly exclude the requirement for a demand to be signed are outside the rules. This also applies to suretyship guarantees (see paragraphs 1.11 et seq.) and indemnities against loss (see paragraph 1.14).

Standby letters of credit

1.4 Standby letters of credit are technically within the rules, but issuers of standby credits will usually find it more convenient and satisfactory to adopt UCP or ISP98 if they intend to use mechanisms more closely akin to those utilised for documentary credits.

Direct and indirect guarantees

1.5 The rules cover both direct and indirect guarantees. Leaving aside two-party guarantees, that is, guarantees issued for the guarantor’s own account or at the request of the beneficiary itself, direct guarantees are three-party guarantees in which the guarantor, at the request of the instructing party, issues its guarantee directly to the beneficiary, which may be in the same country as the guarantor or in a different country. However, in the case of guarantees for international transactions, the beneficiary may wish to have the benefit of a guarantee from a local issuer, in which case the guarantee is issued by an issuer in the beneficiary’s country against a counter-guarantee issued by the instructing party’s bank or other issuer at the request of the instructing party. These are typically four-party guarantees, but there may be more parties in the case of chain counter-guarantees involving two or more counter-guarantors (see Diagram 12).

Guarantees for domestic transactions

1.6 Although demand guarantees are essentially a creature of international trade, they are regularly issued in support of domestic transactions and can be made subject to the URDG in such transactions too.

Multi-party guarantees

1.7 It is not uncommon for guarantees to be issued for the account of two or more applicants or in favour of two or more beneficiaries or by two or more guarantors. In such cases, coordination of the joint or fractional interests, whether of applicants, beneficiaries or guarantors, can be secured through

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the appointment of a trustee or agent to represent all the holders of such interests. For example, a demand guarantee covering a large liability might be issued by a trustee or agent on behalf of a syndicate of guarantors. Alternatively, one guarantor may issue the guarantee on its own but sell off participations to other parties, whose relationship is with the issuing guarantor, not the beneficiary.

Two-party guarantees

1.8 Two-party guarantees are those issued for the guarantor’s own account or at the request of the beneficiary itself. In contrast to the 1992 version of the rules, URDG 758 are not limited to guarantees and counter-guarantees issued at the request or on the instructions of another party but also apply to guarantees and counter-guarantees issued for the issuer’s own account (see the definitions of “guarantor” and “counter-guarantor”). For example, a bank may issue a guarantee covering its own liability to the beneficiary under a loan agreement or a contract for the supply of goods or services. The advantage of such a guarantee to the beneficiary is that the guarantor’s obligations under the underlying contract are reinforced by an independent payment undertaking that in principle has to be fulfilled even where the applicant would have a defence to a claim made under the contract itself, so that the right to payment is insulated from the rest of the contract. The other form of two-party guarantees is a guarantee issued at the beneficiary’s request, as where an exporter requests its bank to issue a guarantee covering the price of goods payable by the importer. The exporter both applies for and benefits from the guarantee⁶⁶. Yet another example is the case where two branches of the same legal entity act under different roles in a direct or indirect guarantee structure.

Guarantees not issued in connection with an underlying contractual relationship

1.9 The rules are also capable of covering guarantees not issued in connection with an underlying contract. An example is where a court or arbitral tribunal orders a party to procure the issue of a demand guarantee to secure the payment of costs, fees or damages awarded at the end of the proceedings. Statutes can also impose on certain professionals, notably in the financial and real estate sectors, an obligation to procure the issue of guarantees to cover their obligations vis-à-vis their clients or regulatory bodies. Such guarantees, though covering non-contractual obligations, fit perfectly within the URDG.

Demand guarantees distinguished from documentary credits

1.10 Demand guarantees and documentary credits have certain characteristics in common. Both are documentary in character and independent of the underlying relationship between applicant and beneficiary. The crucial distinguishing feature lies in the party primarily liable for performance. In the case of a documentary credit, the issuer is the first port of call for payment and, in principle, the beneficiary is not permitted to bypass the contractually agreed payment mechanism by enforcing the underlying contract, unless that mechanism fails for some reason. Thus, when the exporter fulfils its contractual

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obligations and presents complying shipping documents, it is entitled to payment under the documentary credit. By contrast, though the guarantor’s liability is not dependent on the applicant’s default in performance, the purpose of a demand guarantee is to give an assurance of payment if the applicant fails to perform its obligations under the underlying contract. As a result, it is an abuse for the beneficiary to make a demand under the guarantee without an honest belief that the applicant is in breach of its obligation under the underlying relationship.

Demand guarantees distinguished from suretyship guarantees

1.11 In contrast to a demand guarantee, which is payable solely on presentation of documents and relates to a specified or maximum sum stated in the guarantee, a suretyship guarantee is payable on actual default, and the measure of the surety’s liability is that of the principal debtor (although some suretyship guarantees may be capped). Such a guarantee, which is accessory to the principal obligation, therefore falls outside the rules, which are confined to primary payment obligations.

1.12 However, the status of a guarantee framed as a demand guarantee and stated to be payable against a signed demand and other specified documents is not affected by the fact that it contains a reference to the underlying transaction. Indeed, article 8 specifically recommends the inclusion of a reference to the underlying relationship in order to identify the transaction to which the guarantee relates.

1.13 Whether a guarantee is a demand guarantee or a suretyship guarantee is determined by the language of the guarantee as a whole. Terms that express a duty to pay independent of default, for example “regardless of objection by the instructing party”, “without proof of default or loss” or words to similar effect are indicative of a demand guarantee. By contrast, where the duty to pay is stated to be dependent on proof of default by the applicant or limited to the loss suffered by the beneficiary as a result of the applicant’s breach, the guarantee is a suretyship guarantee. Considerable difficulty can arise where terms of both types are used in one and the same guarantee, as where the guarantee is stated to be payable on first written demand and this is followed by words requiring evidence of default. Such combinations should be avoided. The mere description of the guarantee as a demand guarantee or as a suretyship guarantee is not determinative; the instrument must be read as a whole to determine its nature.

Demand guarantees distinguished from indemnities

1.14 An indemnity shares some characteristics of a demand guarantee in that, in contrast to a suretyship guarantee, it is a primary liability not dependent on another party’s default. However, it differs from a demand guarantee in that it is not an undertaking to pay a specified or maximum sum but simply an undertaking to hold another party harmless against loss, the amount of which therefore has to be ascertained. Like a suretyship guarantee, an indemnity accordingly falls outside the rules.

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Matters not covered by the URDG

1.15 As stated earlier, the URDG comprise a set of contractually incorporated rules (the term “contractually” is used in a broad sense to cover any binding engagement, even where it is not characterised as a contract by the applicable law). Their effect is thus limited to what a contract can validly provide. Matters outside the scope of the rules fall to be determined by the agreement between the parties and/or the applicable law.

1.16 By requesting the issue of a guarantee subject to the URDG, the instructing party is considered to have accepted those rights conferred and obligations imposed on the instructing party by the rules, but apart from this the URDG do not regulate relations between the instructing party and the guarantor (article 1(c)). These are left to be dealt with by their contract. Among the other matters that fall outside the scope of the URDG and are governed by the contract between the parties and/or the applicable law are the confirmation of guarantees (a practice largely confined to standby credits), syndications and participations, the underlying relationship between applicant and beneficiary, the effect of fraud and the availability of provisional measures such as injunctions. Fraud and injunctive relief are matters for the applicable law and the courts and cannot be regulated by contractual provisions.

Model forms

1.17 The model forms, which are included as an appendix to the published URDG and are reproduced in Appendix 1 to this Guide, are an optional facility offered to issuers and users to facilitate their use of the URDG in their guarantees and counter-guarantees.

Mode of application

1.18 Under paragraph (a) of article 1 the URDG take effect through express contractual incorporation into the guarantee or counter-guarantee. This does not preclude their application by some other method under the applicable law, for example by implication from the terms of the guarantee or counter-guarantee, by express adoption of the rules in a separate agreement between the parties to the guarantee or counter-guarantee, by treating the URDG as embodying international trade usage or by a course of prior dealing in which the rules were consistently incorporated. Moreover, express incorporation is dispensed with in cases falling under article 1(b) and (c). See paragraphs 1.25 et seq. below.

1.19 Paragraph (a) respects party autonomy by providing that the parties are free to modify or exclude any of the rules, though only in so far as they do not change the essential nature of the guarantee as a demand guarantee.

“Binding on all parties thereto”

1.20 The URDG primarily affect guarantors, counter-guarantors and beneficiaries as defined in the rules. However, the rules also contain provisions concerning the applicant and, if different, the instructing party. For example, certain documents, such as those triggering a reduction in the guarantee amount, are presented by or on behalf of the applicant, not the beneficiary. Again, the

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instructing party, if not the applicant, is the party upon which the burden of a payment under a guarantee or counter-guarantee ultimately falls, and the purpose of article 1(c) is to ensure that any benefits conferred or obligations imposed on the instructing party by the rules have effect even though in general the rules do not apply to the relation between the instructing party and the guarantor (see paragraph 1.30). But in general, the rules do not affect the relationship between the instructing party and the guarantor or counter-guarantor.

1.21 In a direct guarantee, where the guarantor issues the guarantee directly to the beneficiary, the only parties normally involved are the applicant, the instructing party if not the applicant, the guarantor and the beneficiary. In an indirect guarantee, one or more counter-guarantors are interposed between the applicant and the guarantor.

1.22 The relationships governed by the rules are therefore those between guarantor and beneficiary, guarantor and counter-guarantor, counter-guarantor and another counter-guarantor and, to a very limited degree, instructing party and guarantor or counter-guarantor, as well as those between advising party and beneficiary, guarantor and advising party, advising party and second advising party and second advising party and beneficiary. There is no relationship within the rules between the beneficiary and an instructing party other than the applicant, or between the instructing party or applicant in an indirect guarantee and the guarantor. This does not preclude the possibility that there is some coincidental relationship between such parties independently of the rules.

Exclusion or modification of the URDG

1.23 In general, it is open to the parties to exclude or modify one or more of the provisions of the URDG, since the rules are essentially based on the contract between the parties. There are, however, three limitations. First, to be within the rules at all the payment undertaking must be either a demand guarantee or a counter-guarantee as defined in the rules, that is, it must be an independent guarantee or counter-guarantee as opposed to a suretyship guarantee or counter-guarantee. The entire URDG are predicated on a guarantee independent of the underlying relationship, so any attempt to apply them to a suretyship guarantee would be futile. This, indeed, is apparent from article 1(a) itself, which refers to modification or exclusion by the demand guarantee or counter-guarantee. Thus, parties seeking to exclude or modify any of the key rules of the URDG, such as article 5 or article 7, should be cautioned, as they may lead a court to conclude that their URDG guarantee contains terms that are indicative of a suretyship. Second, while the parties can exclude or modify a rule either by explicit reference to the rule in question or implicitly by means of a provision that in some way departs from that rule, the requirement for a supporting statement under article 15 must be expressly excluded, as indicated in article 15(c). It is not sufficient that the guarantee makes no reference to the presentation of a supporting statement. Third, the incorporation of the URDG into the guarantee signifies the intention of the parties to apply the definitions of the URDG unless they are expressly

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excluded or modified. Thus, traditional language such as “first written demand” should be read as requiring a demand as defined by article 2, namely a demand that is (a) in a document and (b) signed, applying the definitions of “document” and “signed” in article 2.

1.24 An exclusion or modification need not identify the article that has been excluded or modified, nor, indeed, need it be expressed at all. This is an important change from URDG 458 article 1, which required exclusions or modifications of URDG articles to be expressly stated in the guarantee or counter-guarantee, although this requirement was seldom followed in practice. Under the URDG 758, the mere fact that a provision in the guarantee or counter-guarantee is inconsistent with the rules suffices to exclude or modify them, subject to the qualifications stated in paragraph 1.23 above. For example:

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

- a guarantee that allows the beneficiary to present only one demand excludes article 17(b) without the need to indicate expressly that it does so;

- a guarantee that requires the guarantor to determine if a demand is a complying demand within one business day of presentation varies article 20(a) without the need to indicate expressly that it does so; and

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

Preparatory works

The first draft of the revised URDG, which was released for comments on February 2008, and the second draft, released on 6 August 2008, required a modification or exclusion of a URDG article to be expressly stated. Sticking tothe precedent set in URDG 458 article 1, the drafting group proposed that exclusions or modifications should be explicit to avoid the uncertainty that could arise out of an inconsistency between an express term in the guarantee and a rule of the URDG. However, comments received on the drafts questioned the authority of a URDG rule that has not been expressly excluded in the guarantee but that is inconsistent with an explicit term of that guarantee. Those comments showed the difficulty of arguing that a URDG rule overrules an explicit guarantee term to the contrary. Based on those comments, the drafting group and the supervising Task Force on Guarantees deleted from thethird draft of 6 January 2009 the requirement for modifications or exclusions to be stated expressly and opted in favour of a pragmatic approach pursuant to which terms stated in the guarantee that modify a rule of the URDG automatically modify or exclude that rule without the need to say so explicitly(with the exception of article 15).

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Article 1(b)

Application of the URDG in asymmetrical indirect guarantees

1.25 Reference has already been made to cases in which the URDG may have effect under the applicable law without express incorporation into the guarantee (see paragraph 1.18). However, article 1(b) contains the first of two exceptions to the need for express incorporation (for the second exception, see paragraph 1.29). Article 1(b) addresses cases where the counter-guarantor requests the guarantor to issue the guarantee subject to the URDG but fails to indicate that the counter-guarantee itself is governed by the URDG. Such an asymmetry causes an imbalance between the duties and the expectations of the parties that is likely to lead to uncertainty and possible litigation. An example would be an inconsistency in the payment terms between a guarantee that is subject to the URDG and a counter- guarantee that is not. The guarantor would be expected, under article 15(a), to require the presentation of a statement of breach by the beneficiary, while the counter-guarantor would not be entitled to require the guarantor to state that it has received a complying demand under the guarantee. The result would be that the guarantor’s duty is left uncontrolled unless the counter-guarantee includes a clause explicitly requiring the guarantor to state that it received a statement of breach from the beneficiary.

1.26 The new URDG remedy the consequences of such asymmetries. Article 1(b) states that where, at the request of a counter-guarantor, a guarantee is issued subject to the URDG, the counter-guarantee shall also be subject to the URDG, unless it expressly states otherwise. Indeed, where the counter- guarantor has prompted the guarantor to issue its guarantee subject to the URDG, it is only reasonable that the counter-guarantor should be required to accept the obligations imposed on counter-guarantors by the URDG. A counter-guarantor that intends not to be bound by the very rules that it expects the guarantor to be bound by can be expected, at a minimum, to exclude the rules outright in its counter-guarantee. Any other solution is destined to become a trap for the guarantor. This rule does not apply where the guarantor incorporates the URDG in the guarantee on its own initiative and not at the request of the counter-guarantor. However, where a counter- guarantor requests that the guarantee be issued subject to the URDG, it is only reasonable that the counter-guarantor should be required to accept the obligations under the counter-guarantee imposed on it by the rules. In such cases, the effect of article 1(b) is to make it unnecessary for the counter- guarantee to specify that it is governed by the URDG.

It is debatable whether the choice by the counter-guarantor of “OTHR” in SWIFT message MT760 that would not be accompanied by the choice of a different set of rules such as UCP is an exclusion of the URDG for the purpose of article 1(b). This article is a statement of best practice that seeks to foster transparency in demand guarantee practice. This purpose is better served by an explicit exclusion of the URDG in field 77C or by choosing “NONE” in field 40C in the SWIFT message.

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1.27 The application of the URDG to the counter-guarantee in the context of article 1(b) in no way affects the independence of the counter-guarantee from the guarantee under article 5(b). Article 1(b) simply deems a counter- guarantor that has asked for a guarantee to be issued subject to URDG to have agreed to apply the same to its own counter-guarantee, nothing more.

Limits to the application of the URDG under article 1(b)

1.28 The rule in article 1(b) does not apply where it is the counter-guarantee, not the guarantee, that states that it is to be governed by the URDG. In such cases, the guarantee does not become subject to the URDG. The rule in article 1(b) does not apply both ways. The reason is that many guarantees in public procurement are issued according to a mandatory model form imposed by mandatory regulation. A rule to the effect that a guarantee is deemed to be subject to the URDG merely because the counter-guarantee incorporates the URDG could result in State-owned beneficiaries rejecting URDG guarantees for modifying the imposed template. In practice, however, as the experience under URDG 458 shows, it will almost always be the case that a counter- guarantee subject to the URDG will include in the guarantee instructions a requirement for that guarantee to be subject to the URDG as well.

Article 1(c)

When the instructing party is bound by rules without express incorporation

1.29 The second case where no express incorporation of the URDG is required relates to the duties and liabilities of the instructing party under the rules. 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), in cases 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 URDG article 1(c)).

Examples of the application of article 1(c)

1.30 There are various rules that expressly affect the instructing party, and the purpose of article 1(c) is to enable the instructing party to benefit from those rules that are in its favour or to be bound by the rules that restrict its rights or impose obligations on it. Without such a provision, there would be no link between the rules and the instructing party other than the one provided by contract. Among the rules in the URDG that confer a right or impose an obligation on the instructing party are the following:

- 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);

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- 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 foreign currency;

- 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.

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. As in the cases covered by article 1(b), this could lead to a prejudicial asymmetry.

1.31 Article 1(c) only comes into play once the guarantee or counter-guarantee has been issued and then only if (a) it is issued subject to the URDG and (b) the instructing party requested or agreed to this. If the issuer acts on its own initiative when incorporating the URDG into the guarantee, article 1(c) does not apply. As a consequence, the instructing party is neither bound by the rules nor entitled to invoke them unless it is considered to have accepted them or to have become entitled to avail itself of them under the applicable law. It is true that article 9 provides that a guarantor (or in this context a prospective guarantor) that is not prepared or is unable to issue a requested guarantee should without delay so inform the party from which it received its instructions, but this is merely an indication of good practice and could not be made into a binding rule, given that there may be no relationship between the parties and therefore no obligation of any kind on the guarantor.

Article 1(d)

Which version of the URDG applies?

1.32 Under article 1(d), a guarantee or counter-guarantee issued on or after 1 July 2010, when URDG 758 came into force, is deemed to be governed by those rules, not by URDG 458, unless the guarantee or counter-guarantee provides otherwise. However, there is nothing to preclude the parties from incorporating URDG 758 into a guarantee or counter-guarantee issued prior to 1 July 2010, though in the case of an indirect guarantee it would be important to ensure that the guarantee and the counter-guarantee were governed by the same edition of the rules. The date of issue is the date when the guarantee leaves the control of the guarantor (article 4(a)), which is not necessarily the same as the date of the guarantee.

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Article 1(d) obviates the need for a special transition rule in the guarantee or SWIFT

1.33 While the issue of the transition to a new set of rules arises under other ICC rules as well, ICC did not include a transition rule similar to article 1(d) in the URDG. In the case of the UCP for instance, this omission had virtually no consequences because SWIFT catered for the issue. Indeed, SWIFT, the network through which the vast majority of documentary credits are issued, accompanied the entry into force of UCP 600 with a change to its MT700 format indicating that credits issued on or after 1 July 2007 were deemed to be governed by UCP 600 unless a prior version was explicitly chosen. Because the proportion of URDG guarantees issued through SWIFT is substantially lower than that of UCP documentary credits, ICC considers that a smooth and efficient transition from URDG 458 to URDG 758 necessitates the rule in article 1(d). The obvious advantage of this rule is that there is no need to change any field in SWIFT MT760, which is generally used for the issue of guarantees, to ensure its adaptation to the new URDG 758. Indeed, field 40C lists a number of options for the applicable rules, including “URDG”. By choosing the URDG option in field 40C on or after 1 July 2010, the guarantor automatically chooses URDG 758 by virtue of article 1(d).

Transitional symmetry in indirect guarantees

1.34 During the revision, a question was raised as to whether a special transition rule should be drafted for the special case of indirect guarantees where a counter-guarantee subject to the URDG is issued before 1 July 2010, when the URDG 758 enter into force, while the guarantee itself is issued on or after that date. It is accepted that such a situation would give rise to a regrettable asymmetry that could, however, be easily remedied by indicating in the counter-guarantor’s instructions that the guarantee should be subject to URDG 458. This relatively easy remedy and the fact that the issue, should it ever arise, is likely to be confined to a limited period of time led the drafting group to decide not to include a specific transition rule other than the one that appears in article 1(d).

Cross-references within URDG 758

- Article 2 (definitions).

Cross-references to other ICC rules

- UCP 600 article 1.

- ISP98 Rules 1.01 and 1.04.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- Article 1.

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Illustration 1-1

A has entered into a construction contract with B. At A’s request, G Bank issues a guarantee in favour of B providing that “in the event of A defaulting in the performance of its obligations under the above-mentioned contract we will pay you the amount of your loss up to a maximum of 10 million euros”. This is a suretyship guarantee under which the guarantor’s liability is dependent on the fault of the applicant and is limited to the loss suffered by the beneficiary. It therefore falls outside the rules.

Illustration 1-2

The facts are as Illustration 1-1, except that the guarantee does not refer to default but simply states “we will pay you on first written demand the amount of any loss you may suffer in connection with the above-mentioned contract up to a maximum of 10 million euros”. This is a contract of indemnity under which the undertaking is to pay whatever loss is suffered by the beneficiary, up to a maximum amount. It also falls outside the rules.

Illustration 1-3

The facts are as in Illustration 1-1, except that the guarantee provides: “we undertake to pay you on first written demand the amount specified in such demand up to a maximum of 10 million euros”. This is a true demand guarantee that falls within the rules, since the obligation to pay is dependent solely on the presentation of a written demand, together with the supporting statement required by article 15, and the amount or maximum amount of the obligation is to be ascertained solely from the terms of the guarantee.

Illustration 1-4

Grundschuld GmbH, which carries on business in Frankfurt, instructs its local bank, Freundlichebank, to procure the issue of a guarantee in favour of Paradise Corp in Riyadh. Freundlichebank instructs Rubaiyat Bank in Riyadh to issue a guarantee under URDG 758 against Freundlichebank’s counter- guarantee. The counter-guarantee contains no reference to the URDG. It is nevertheless governed by the rules, Freundlichebank having requested Rubaiyat Bank to issue a guarantee incorporating them.

Illustration 1-5

The facts are as in Illustration 1-4, except that Freundlichebank’s counter-guarantee incorporates URDG 758 but makes no reference to the URDG in the text of the guarantee transmitted to Rubaiyat Bank for issuance. The counter-guarantee is governed by the URDG as per article 1(a), but Rubaiyat Bank’s guarantee is not governed by the URDG because article 1(b) does not apply here.

Illustration 1-6

On 15 July 2010, Delta Company instructs its bank to issue a demand guarantee to support a transaction between Epsilon SA, a subsidiary of Delta Company, and a foreign beneficiary, Kappa Ltd, with which Epsilon has contracted to

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build a factory. The form of application for issue of the guarantee states that the guarantee will be issued “subject to URDG”. Pursuant to article 1(c), the guarantee is subject to URDG 758 and Delta accepts the rights conferred and obligations imposed on the instructing party by the rules. Thus, Delta can require the guarantor to inform it of the presentation of any demand, of the suspension of payment, if so decided by the guarantor upon receipt of a complying extend or pay demand, and of the expiry of the guarantee and can also require the guarantor to terminate the guarantee upon the advent of the expiry date stated in the guarantee notwithstanding the beneficiary’s argument to the contrary. Conversely, article 1(c) does not lead to the URDG applying to any other aspect of the relationship between Delta and the guarantor, such as the reimbursement by Delta of amounts paid by the guarantor under the guarantee.

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URDG 758

Article 2 Definitions

In these rules:

Advising party means the party that advises the guarantee at the request of the guarantor;

Applicant means the party indicated in the guarantee as having its obligation under the underlying relationship supported by the guarantee. The applicant may or may not be the instructing party;

Application means the request for the issue of the guarantee;

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

Beneficiary means the party in whose favour a guarantee is issued;

Business day means a day on which the place of business where an act of a kind subject to these rules is to be performed is regularly open for the performance of such an act;

Charges mean any commissions, fees, costs or expenses due to any party acting under a guarantee governed by these rules;

Complying demand means a demand that meets the requirements of a complying presentation;

Complying presentation under a guarantee means a presentation that is in accordance with, first, the terms and conditions of that guarantee, second, these rules so far as consistent with those terms and conditions and, third, in the absence of a relevant provision in the guarantee or these rules, international standard demand guarantee practice;

Counter-guarantee means any signed undertaking, however named or described, that is given by the counter-guarantor to another party to procure the issue by that other party of a guarantee or another counter-guarantee, and that provides for payment upon the presentation of a complying demand under the counter-guarantee issued in favour of that party;

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

Demand means a signed document by the beneficiary demanding payment under a guarantee;

Demand guarantee or guarantee means any signed undertaking, however named or described, providing for payment on presentation of a complying demand;

Document means a signed or unsigned record of information, in paper or electronic form, that is capable of being reproduced in tangible form by the person to whom it is presented. In these rules, a document includes a demand and a supporting statement;

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Expiry means the expiry date or the expiry event or, if both are specified, the earlier of the two;

Expiry date means the date specified in the guarantee on or before which a presentation may be made;

Expiry event means an event which under the terms of the guarantee results in its expiry, whether immediately or within a specified time after the event occurs, for which purpose the event is deemed to occur only:

a. when a document specified in the guarantee as indicating the occurrence of the event is presented to the guarantor; or

b. if no such document is specified in the guarantee, when the occurrence of the event becomes determinable from the guarantor’s own records.

Guarantee see demand guarantee;

Guarantor means the party issuing a guarantee, and includes a party acting for its own account;

Guarantor’s own records means records of the guarantor showing amounts credited to or debited from accounts held with the guarantor, provided the record of those credits or debits enables the guarantor to identify the guarantee to which they relate;

Instructing party means the party, other than the counter-guarantor, who gives instructions to issue a guarantee or counter-guarantee and is responsible for indemnifying the guarantor or, in the case of a counter-guarantee, the counter- guarantor. The instructing party may or may not be the applicant;

Presentation means the delivery of a document under a guarantee to the guarantor or the document so delivered. It includes a presentation other than for a demand, for example, a presentation for the purpose of triggering the expiry of the guarantee or a variation of its amount;

Presenter means a person who makes a presentation as or on behalf of the beneficiary or the applicant, as the case may be;

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

Supporting statement means the statement referred to in either article 15(a) or article 15(b);

Underlying relationship means the contract, tender conditions or other relationship between the applicant and the beneficiary on which the guarantee is based.

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Comment

Article 2 lists numerous definitions that are to be applied when interpreting the rules. The list of definitions has been expanded significantly compared to the list in URDG 458. Indeed, most of the definitions are new. However, the rules no longer contain a definition of “writing”. Although this term featured in early drafts, it was dropped because all the elements are now contained in the linked definitions of “document” and “signed”. Article 2 needs to be read in conjunction with article 3.

Changes from URDG 458

- New article. A comprehensive set of definitions of terms used in the URDG 758 is now assembled in a single provision.

List of definitions is not exhaustive

2.1 Article 2 does not contain a complete list of definitions in the URDG. Some definitions appear in the substantive articles where the relevant term is used only in that article. These additional definitions, to which should be added the rules of interpretation in article 3, concern the following terms:

- force majeure – article 26(a)

- multiple demands – article 17(b)

- multiple demands prohibited – article 17(c)

- partial demand – article 17(a)

- place for payment – article 20(c)

- second advising party – article 10(a)

- transferee – article 33(c)

- transferor – article 33(c)

Advising party

2.2 The beneficiary or guarantor may receive advice of the issue of a guarantee or counter-guarantee either directly from the guarantor or counter-guarantor or through the agency of another party, referred to in the rules as the advising party. The term “party” is used instead of “bank”, because guarantees frequently involve non-bank entities. The principal provisions dealing with the advising party are contained in article 10, though article 32(c) also refers to the advising party. An advising party may use the services of another party to communicate the advice. Such a party is known as the second advising party (see article 10(a)).

Cross-references within URDG 758

- Articles 10, 11(d) and 32(c).

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Applicant

2.3 The applicant is the party indicated in the guarantee as having its obligation under the underlying relationship supported by the guarantee. It is not necessary that the party in question shall be named as applicant in the guarantee. In URDG 458, the term “principal” was used, but URDG 758 follow modern guarantee practice for demand guarantees as well as for standby letters of credit and documentary credits in using the term “applicant”. “Underlying relationship” is itself a defined phrase (see paragraphs 2.56 et seq.). Every guarantee is designed to support a contractual or other relationship between the applicant and the beneficiary. This applies even to a guarantee issued for the guarantor’s own account, which supports the guarantor’s obligation under an underlying contract or other relationship. The word “applicant” is used to denote the party to the underlying relationship with the beneficiary. The applicant may or may not be the same as the party from which the guarantor or counter-guarantor receives instructions for the issue of the guarantee or counter-guarantee and is entitled to an indemnity for its outlay. Hence the applicant is referred to as the party “indicated in the guarantee…” rather than as the party on whose instructions the guarantee is issued. See further paragraphs 2.45 et seq. discussing the meaning of “instructing party”.

Cross-references within URDG 758

- Articles 3(f), 8(a), 14(g) and 15(a).

Preparatory works

The definition of applicant appearing in article 2 avoids what turned out to be too restrictive an approach in the first revised draft of 19 February 2008, in which only a party expressly named in the guarantee as an “applicant” could be the applicant. While this approach had the merit of certainty, many guarantees are issued without referring to the term “applicant”, instead using “by order of ” or words to similar effect. Accordingly, the drafting group opted in the subsequent drafts for a functional standard identifying the applicant as the party indicated in the guarantee as having its obligation under the underlying relationship supported by the guarantee. The new approach also has the merit of underlining the importance of the function of a guarantee in supporting an underlying obligation.

Application

2.4 An application is a request for the issue of a guarantee. The request may be made either by the applicant or by the instructing party if different from the applicant. The application may or may not contain the terms of the indemnity provided by the instructing party to the guarantor or counter-guarantor. Those terms can sometimes be included in a set of general terms and conditions of business between the guarantor and the instructing party to which the particular application refers.

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Cross-references within URDG 758

- Articles 5(a), 5(b) and 9.

Authenticated

2.5 Authentication is the electronic equivalent of a signature on a paper document. An electronic signature is a data process by which a person to whom an electronic document is presented can verify that the sender is the person by whom the document purports to have been sent and that the data have remained complete and unaltered during transmission. Deletions or alterations in an electronic document prior to transmission are irrelevant to the authentication requirement, which relates solely to the period of transmission.

2.6 There are various methods for authenticating an electronic message which, according to the preference of the involved parties, may range from basic methods such as typing a name in an e-mail or using a simple code or password to digital signatures created by asymmetric encryption in which the identity of the signatory is confirmed by a certificate issued by a qualified certification authority. The level of security depends, among other things, on the length of the encryption key. Strong cryptography typically involves the use of very lengthy encryption keys, such as a key derived from the product of two large primes that is difficult to factor back into those primes without knowing them, thus making the message highly secure.

2.7 The URDG are technology-neutral: they do not specify any particular level of security for the authentication of electronic documents. This is a matter for the parties to agree, failing which the mode of authentication must conform to international standard demand guarantee practice.

Authentication and paper documents

2.8 Paper documents are not required to be authenticated except by signature where a signature is required by the terms of the guarantee or the rules. It suffices that the presentation appears on its face to be a complying presentation (article 19(a)).

Authentication and signing

2.9 All forms of authenticated teletransmission, whether sent directly or through a telecommunications network such as SWIFT, and whether transmitted in the form in which they are intended to be read or broken up into packets of structured data and reassembled, qualify as signed documents for the purpose of the rules. These include messages sent by cable (wire), telex, authenticated fax (for which the technology was not available when URDG 458 was first issued), e-mail and even telephone messages if they can be transformed into characters.

Apparent authenticity

2.10 The URDG include some provisions on the apparent authenticity of documents. Thus, where a guarantee is advised by an advising party, that

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party warrants the apparent authenticity of the guarantee (article 10(a)). Similarly, where the advising party utilises the services of a second advising party, the latter warrants the apparent authenticity of the advice it has received (article 10(b)). This is consistent with the general principle underlying the URDG, pursuant to which parties deal with the documents on the basis of what those documents purport to indicate on their face, not with the facts behind those documents or their legal effect.

2.11 The term “authenticity” in article 10 tracks the definition of the term “authenticated” in article 2 and applies wherever a paper document is used.

Cross-references within URDG 758

- Articles 10 and 14(c).

Preparatory works

The definition of “authenticated” is based on eUCP article e3(b)(i), which defines electronic records as data that are capable of being authenticated as to the apparent identity of a sender, the apparent source of the data contained in it and whether they have remained complete and unaltered. After consultation, the URDG drafting group limited those three verification tests to two, based on the consensus that the verification of the apparent source of the data (e.g. SWIFT as opposed to telex) adds nothing to the level of security that is achieved by verifying the apparent identity of the sender and whether the data received have remained complete and unaltered. Practically speaking, in order to determine whether an electronic document is authentic, you need to verify its integrity, in the sense that it has not been altered between sending and receipt, and identify who has sent that document. Both tests are covered in the definition of “authentic” in URDG article 2. Taking into consideration the apparent source of the data is an issue of conformity of presentation. This is the reason why it is covered in article 14(c).

The URDG drafting group also considered retaining a more rigorous standard than verifying whether the data received “have remained complete”. After consultation, it was considered that a standard requiring the party to which a document has been presented to verify that the data received “are complete” is unrealistic. Indeed, even where SWIFT messages are used, it is difficult for the recipient to do anything other than compare the number of data characters that the presenter sent with the number of data characters that were received. Where the figure is the same, the recipient can conclude that the data received have remained complete during the transmission, thus meeting one of two conditions of authenticity laid down in the URDG (the other condition being the verification of the identity of the sender).

Beneficiary

2.12 The beneficiary is the party in whose favour a guarantee is issued. Since “guarantee” includes a counter-guarantee, “beneficiary” includes a guarantor

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to which a counter-guarantee is issued, as is made clear in article 3. Practice also shows situations where the beneficiary is also the guarantor. This is the case, for instance, where the guarantor issues a guarantee for its own benefit (a branch guaranteeing in favour of another branch of the same company its own obligations or those of another party) or acts as a trustee for the beneficiary, which is thus the indirect beneficiary. Situations of this type are not covered in the URDG.

Cross-references within URDG 758

- Articles 3, 4, 5, 8, 10, 11, 12, 14, 15, 19, 21, 25, 32 and 33.

Business day

2.13 The phrase “business day” is used rather than “banking day” to reflect the fact that guarantees are regularly issued by non-bank entities. “Business day” is defined as a day on which the place of the business where an act of a kind subject to these rules is to be performed is regularly open for the performance of such an act. The definition is relevant to:

- the time for examination under article 20;

- the time for notice of rejection of a demand under article 24(g); and

- the expiry of a guarantee under article 25.

2.14 Only a place of business that is regularly open for demand guarantee-related acts (“acts of a kind subject to the URDG”) is relevant. Thus, if an issuing bank has two branches, one dealing with documentary credits and demand guarantees and the other with retail banking business, and the former is not open on Saturdays, then a demand guarantee issued by the former branch and due to expire on a Saturday is considered to expire on a non-business day even if the latter branch is regularly open for business on Saturdays.

2.15 The use in the definition of the phrase “an act of a kind subject to these rules” instead of, for instance, “an act relating to a guarantee subject to these rules” underscores the fact that the act does not need to relate specifically to the guarantee under consideration. The regular opening of the place of business for any guarantee business meets the definition. During the revision, an example was brought to the attention of the drafting group where a bank whose guarantee business was normally closed on Saturdays opened exceptionally one Saturday when it was closely monitoring the expected default of a major counterparty that was expected to trigger demands under a number of its guarantees. That exceptional and non-regular opening of the place of business does not meet the “business day” definition requirement.

2.16 What constitutes a business day varies from country to country and even from one city to another within some countries. In Israel, Sunday is a business day; in England it is not. “Business day” is to be contrasted with “calendar day”, which covers all seven days of the week, including public holidays. The rules use the term “business day” when prescribing short, easily determinable

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periods, typically “five business days” or “the next business day”. For the longer period of 30 days specified in articles 23(a), 25(c) and 26(b)(i) and (c) (i) it was considered easier to refer to calendar days.

2.17 Since the guarantee and the counter-guarantee are independent of each other (see article 5(b)), the meaning of “business day” must be applied separately to each. What is a business day for the issuer of a guarantee is not necessarily a business day for the issuer of a counter-guarantee.

2.18 The rules say nothing about business hours. This contrasts with UCP 600 article 33, which states that a bank has no obligation to accept a presentation outside its business hours. The reason for this contrast is that the URDG use the term “business days” in a context where days, not hours, matter. Indeed, this is the case for the end of the period for the examination of a demand allowed to the guarantor and the extension of the validity of the guarantee where its expiry date falls on a non-business day. When a day ends is a matter for the governing law or trade usage in the relevant sector and region. In many jurisdictions, a day runs from midnight to midnight. For example, if the last of the five business days provided by the rules for the rejection of a discrepant demand ends on a Tuesday, then, unless otherwise agreed, the guarantor has until the midnight separating Tuesday from Wednesday to send the notice of rejection, which could be done outside business hours by e-mail, fax or any other means.

Cross-references within URDG 758

- Articles 20(a), 24(e) and 25(d).

Charges

2.19 This term covers any commissions, fees, costs or expenses due to any party acting under a guarantee governed by the rules. The phrase “acting under a guarantee governed by these rules” is to be interpreted broadly as covering any services provided under the rules for which a party is entitled to invoice charges under article 32, whether the charges are for the issue or advice of a guarantee or counter-guarantee, transfer of guarantee, suspension of payment, notice of rejection, transmission of rejected documents or otherwise.

Cross-references within URDG 758

- Articles 8, 32 and 33.

Complying demand

2.20 This term refers to any demand that meets the requirements for a complying presentation. All demands involve a presentation but not every presentation involves a demand, since a presentation may be made for the purpose of increasing or reducing the guarantee amount or providing evidence of the occurrence of an expiry event. Where a rule in the URDG applies only to a demand but not to a presentation that is not a demand, it indicates this by using the term “demand” instead of “presentation”. Examples include article s20 – Time for examination; article 21 – Currency of payment; article 22 –

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Transmission of copies of complying demand; and article 24 – Non-complying demand, waiver and notice, all of which apply only in the context of a demand for payment but not in the context of a presentation that is not a demand.

Cross-references within URDG 758

- Articles 15(b), 17(e), 18, 20(a), 21(a), 22, 23, 24 and 26.

Complying presentation

2.21 In order to see whether a presentation is a complying presentation, it is necessary to look, first of all, at the terms of the guarantee. In particular, the presentation must be made on or before expiry at the specified place for presentation, and any demand must be accompanied by the document or documents specified in the guarantee and must be a demand for payment in the currency specified in the guarantee. Where the guarantee is silent as to a relevant aspect of a presentation, resort must be had to the rules. If there is no provision in the guarantee or the rules, the presentation must conform to international standard demand guarantee practice. In this manner, a hierarchy of sources is provided to determine conformity. 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 accordance with international standard demand guarantee practice. There are two exceptions to this strict hierarchical approach. Under the first exception, 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 require presentation of a supporting statement. So in this case, it is necessary to move to the second hierarchical tier to test conformity even though the first-tier test has been satisfied. The second exception lies in article 7, pursuant to which non-documentary conditions are deemed as not stated even if they are explicitly stated in the guarantee or counter-guarantee.

Preparatory works

The second draft of the revised rules of 6 August 2008 referred to international standard demand guarantee practice “in so far as not inconsistent with the guarantee or these rules”. The purpose was to underscore the hierarchy among the three tests against which the conformity of a presentation ought to be checked. In the course of the revision, a consensus emerged in favour of expressing that hierarchy by adding “first, second and third” to the definition. This approach was considered a clearer way of indicating that international standard demand guarantee practice is to be considered as a potential test for conformity only to the extent that no provision in the guarantee or the URDG covers the issue at hand. Accordingly, the qualification of international standard demand guarantee practice – “in so far as not inconsistent with the guarantee or these rules” – was deleted as unnecessary.

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2.22 A presentation is not a complying presentation unless and until it is complete. Article 14(b) allows an incomplete presentation if it indicates that it is to be completed at a later date (which must be before the expiry of the guarantee), but in that case the time allowed for examination does not begin to run until the presentation is completed (article 20(a)).

2.23 Many of the rules in URDG 758 reflect existing international standard demand guarantee practice, but there will inevitably be situations falling outside the rules or explicit guarantee terms that need to be resolved. For this purpose, regard may be had to the prevailing international standard demand guarantee practice. International standard demand guarantee practice may be relevant in determining, among other things, the level of security to be used to authenticate a document where the parties have not covered this in the guarantee itself, the standard of care to be exercised in the examination of documents (see paragraph 356), 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 illustrative case indicated in paragraph 335 above is also a helpful demonstration of the importance of the use of international standard demand guarantee practice as an aid to solve a problem not covered in the rules.

2.24 It will, of course, take time for demand guarantee practice to evolve into international standards relating to matters not covered by the URDG, but the importance of international practice is amply attested to by the fact that, in the case of the UCP, previously uncodified banking practice developed to the point where ICC felt able to produce a booklet on it as a guide to document checkers. The current edition is International Standard Banking Practice for the Examination of Documents under Documentary Credits, 2007 Revision for UCP 600 (ICC Pub. No. 681). As in the case of the UCP, opinions rendered by the ICC Banking Commission and DOCDEX decisions (see paragraphs 35.2 et seq.) are the natural reservoir for international standard demand guarantee practice. These opinions and DOCDEX decisions are regularly compiled and published by ICC.

Cross-references within URDG 758

- Articles 14, 15, 19 and throughout the rules.

Counter-guarantee

2.25 A counter-guarantee is an undertaking given to another party in order to procure the issue of a guarantee by that party. The definition refers to “another party” in order to cover chains of counter-guarantees, where the counter-guarantee is given not to the guarantor but to another counter- guarantor that will then give its own counter-guarantee to the guarantor. The second counter-guarantee in the chain is itself a guarantee for the purpose of the definition.

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Diagram 12

A chain of counter-guarantees

2.26 A chain of counter-guarantees is typically structured where the counter- guarantor that is requested by the instructing party to arrange for a guarantee to be issued by the beneficiary’s bank does not have a correspondent banking relationship with that bank. That guarantor therefore needs to ask one or more intermediary counter-guarantors to each issue its own counter- guarantee in favour of the next counter-guarantor in the chain that will ultimately lead to offering the guarantor a counter-guarantee issued by a party acceptable to it.

2.27 The definition of counter-guarantee is broad. It covers “any undertaking, however named or described”. This broad scope allows it to encompass all undertakings that the parties decide to subject to the URDG, regardless of how they may be denominated. The only condition is that the relevant undertaking be an independent undertaking, in order to satisfy the rule laid down in article 5. A standby letter of credit meets that requirement and can be subject to the URDG if agreed by the parties.

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Cross-references within URDG 758

- Throughout the rules.

Counter-guarantor

2.28 A 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, that is, a two-party counter-guarantee (see paragraphs 27 and 135).

Cross-references within URDG 758

- Throughout the rules.

Demand

2.29 A demand is a document signed by the beneficiary demanding payment under the guarantee and includes a demand for payment under a counter- guarantee (see article 3(b)). “Document” and “signed” are themselves defined terms. The interpretation rule in article 3(b) allows the transposition of the definition of demand to cover a demand for payment presented under a counter-guarantee.

Cross-references within URDG 758

- Articles 4, 8, 14, 15, 16, 17, 18, 20, 21, 22, 23, 24, 25, 26 and 33.

Demand guarantee or guarantee

2.30 “Demand guarantee” is used in article 1 to convey from the outset that the URDG are concerned with independent guarantees, not suretyship guarantees. It is subsequently shortened to “guarantee” and is defined as any signed undertaking, however named or described, providing for payment on presentation of a complying demand. “Complying demand”, “presentation” and “signed” are all defined terms. For the necessary elements of a guarantee within the meaning of the rules, see paragraph 1.2. As in the case of a counter- guarantee, a standby letter of credit that the parties decide to subject to the URDG would fit with this definition. A guarantee includes a counter-guarantee except where the context requires otherwise (see article 3(b) and paragraph 3.3).

Cross-references within URDG 758

- Throughout the rules.

Document

2.31 The URDG define “document” broadly, covering both paper and electronic records of information, whether signed or unsigned, though in the case of an electronic record it must be capable of being reproduced in tangible form by the person to whom it is presented. In the rules, “document” includes a demand and a supporting statement. There is no express reference in the definition to a guarantee or counter-guarantee. Although they are clearly also documents, they are treated as distinct by the rules. Thus, the definition of “signed” begins with

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the phrase “when applied to a document, a guarantee or a counter-guarantee”. The absence of any reference to guarantees and counter-guarantees in the definition of “document” has no significance for the purpose of the rules.

2.32 It is not sufficient that the person presenting an electronic document is able to reproduce it in tangible form; it is necessary, for obvious reasons, that the document can be so reproduced by the person to whom it is presented. What is the position if the document is presented in an electronic format that the guarantor’s computer system is unable to read, for example because the recipient does not have the necessary software to enable the message to be understood? Article 14(c) emphasises the importance of specifying the format in the guarantee itself, but this is not mandatory, and in the absence of any such specification it suffices that the document is presented in an electronic format that allows it to be authenticated, failing which the document is deemed not to have been presented.

2.33 Similarly, in the definition of “authenticated”, the emphasis is on the addressee of the presentation, not the sender. An electronic presentation can only be considered as having been authenticated when the person to whom it is made can verify the apparent identity of the sender and whether the data received have remained complete and unaltered.

Cross-references within URDG 758

- Articles 3, 6, 7, 8, 13, 14, 15, 17, 19, 22, 24(g), 25, 27, 28 and 33.

Expiy

2.34 A guarantee should specify its expiry, failing which article 25(c) determines the time of expiry. “Expiry” means the expiry date or the expiry event or, if both are specified, the earlier of the two. That these two methods of specifying expiry are intended to be exhaustive is shown by article 25(c), which provides that if the guarantee states neither an expiry date nor an expiry event it shall terminate three years from the date of issue. See below for “expiry date” and “expiry event”.

Cross-references within URDG 758

- Articles 8, 14, 17, 20, 23, 25 and 26.

Expiry date

2.35 This means the date specified in the guarantee on or before which a presentation may be made. URDG 458 article 22 used the phrase “specified calendar date”, which is more specific, referring to a particular date in the calendar, for example, 12 February 2011. In the new rules, the word “calendar” is omitted, so that it suffices if the calendar date is ascertainable from the terms of the guarantee at the time of its issue, as where the guarantee is stated to expire 12 months after issue. Where the guarantee specifies an expiry date, the guarantee does not expire until the end of the day in question as determined by the applicable law (see paragraph 2.18) and the beneficiary has until that time to present a demand.

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2.36 When both an expiry date and an expiry event are specified, expiry occurs on the earlier of the two.

2.37 If the guarantee fails to specify either (a) an expiry date or (b) an expiry event the occurrence of which is ascertainable from a document specified in the guarantee or from the guarantor’s own records, expiry cannot be ascertained from the guarantee, with the result that it must be determined by reference to article 25(c), that is, three years from the date of issue or, in the case of a counter-guarantee, 30 days after the expiry of the guarantee.

2.38 Expiry is not dependent on the return of the guarantee document to the guarantor (article 25(b)).

Cross-references within URDG 758

- Article 25.

Expiry event

2.39 This is an event that, under the terms of the guarantee, results in its expiry, whether immediately or within a specified time after the event occurs. However, in accordance with the principle that guarantors deal with documents, not external facts (see article 6), an expiry event is deemed to occur only:

a. when a document specified in the guarantee as indicating the occurrence of the event is presented to the guarantor, or

b. if no such document is specified, when the occurrence of the event becomes determinable from the guarantor’s own records.

2.40 As an example of (a), a tender guarantee may provide for expiry upon presentation of a certificate that the beneficiary has received the performance guarantee required by the underlying contract. A performance guarantee may specify that it is to expire on the presentation of an architect’s or engineer’s certificate of completion of works or on the beneficiary’s certificate to the effect that the goods to be supplied under the underlying contract have been shipped. In each case, expiry occurs not on the date of the event itself but at the precise time of presentation to the guarantor of the document indicating the occurrence of the event, unless the guarantee itself provides for expiry at a later time (e.g. a retention money guarantee expires five days after the presentation of the engineer’s certificate of completion of works). Thus, in contrast to an expiry date, which leaves the beneficiary free to present the required document at any time during the day of expiry, an expiry event is geared to the time of the presentation of the document indicating the occurrence of the event. Unless indicated otherwise in the guarantee or counter-guarantee, any person can present to the guarantor the required document indicating expiry. Generally, one would expect the person who is to benefit from the expiry of the guarantee, that is, the applicant, to be the most diligent in procuring this presentation.

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2.41 Only a document specified in the guarantee falls under paragraph (a). A document indicating the occurrence of the expiry event that is not specified in the guarantee is irrelevant in determining the time of occurrence of the expiry event. This is a result of the general rule in article 19(d) requiring the guarantor to disregard any document presented but not required by the guarantee or referred to in the URDG. In such cases, it is necessary to fall back on paragraph (b), under which the event is deemed to have occurred when its occurrence becomes determinable from the guarantor’s own records. The definition of “guarantor’s own records” (see paragraph 2.44) limits these to records showing amounts credited to or debited from accounts held with the guarantor and identifying the guarantee to which they relate, for example records of the guarantor showing debits to the applicant’s account totalling the full amount payable and paid under the guarantee. An example is where a credit enhancement guarantee states that it will expire upon reimbursement of the credit (a non-documentary condition under article 7), but the amount of the reimbursement is credited to the beneficiary’s deposit account held with the guarantor, thereby allowing the guarantor to determine from its own records the occurrence of expiry. By contrast, records showing merely the issue or receipt of a documentary credit by the guarantor, or the presentation to the guarantor of documents not specified in the guarantee, fall outside the definition of “guarantor’s own records” and are not sufficient to show the occurrence of an expiry event.

Cross-references within URDG 758

- Article 25.

Preparatory works

Until the third draft of the revised rules, the definition of “expiry event” indicated that the event is deemed to occur upon the earlier of the presentation of the required document and the event becoming determinable from the guarantor’s own records. In the ensuing discussion, it was pointed out that, if the guarantee provides that expiry should occur upon the presentation of a document, the guarantor cannot substitute that explicit guarantee term by a determination based on its own records. The guarantor has to wait for the specified document to be presented, even if it has the means to determine from its own records that the event has actually occurred. An example is where the guarantee provides for expiry upon presentation to the guarantor of a sending bank’s statement of wire transfer. That statement is required even if the guarantor is the bank holding the deposit account to which the funds are credited and therefore can determine from its own records the arrival of the funds in the relevant account. Accordingly, “the earlier of ” was deleted from the definition.

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Rather than forming an example of undue formalism, this choice emphasises a key principle of the rules, namely that the onus of redeeming a deficiency of either the applicant or the beneficiary absent an explicit clause in the guarantee to that effect should not be placed on the guarantor. Other applications of this principle appear in article 17(e)(i), which states that a demand made for an amount exceeding the amount available under the guarantee is non-complying without the possibility for the guarantor to pay that demand for up to the available amount, and article 19(e), under which a guarantor is not obliged to recalculate a beneficiary’s calculations under a formula stated in the guarantee, even if that recalculation could redeem an otherwise discrepant demand or lead to the rejection of an otherwise complying demand.

Illustration 2-1

A guarantee issued by a London bank on 12 March 2009 is stated to expire after the shipment of the goods covered by the underlying contract, as evidenced by the presentation to the guarantor of a copy of the bill of lading relating to the shipment. The goods are shipped on 14 September and the applicant presents a copy of the bill of lading to the guarantor on 26 September. The guarantee expires on 26 September.

Guarantee

2.42 See demand guarantee (see paragraph 2.30).

Guarantor

2.43 The guarantor is the party issuing a guarantee, including a party acting for its own account (see paragraph 1.8). “Guarantor” includes a counter-guarantor. The definition of guarantor is displaced where the context requires otherwise. In article 9, for example, it is clear that “guarantor” refers to the person requested to issue the guarantee, since it deals with cases where the guarantor is unable or unwilling to issue the guarantee.

Cross-references within URDG 758

- Throughout the rules.

Guarantor’s own records

2.44 These are the records of the guarantor (whether held in the issuing branch or in another branch in the same country or abroad) showing amounts credited to or debited from accounts held with the guarantor, provided they enable the guarantor to identify the guarantee to which the credits and debits relate. This definition is relevant to the meaning of an expiry event and the treatment of a non-documentary condition under article 7 or an event specified as a variation event under article 13. It avoids too robotic an application of the rule excluding non-documentary conditions.

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Cross-references within URDG 758

- Articles 7 and 13.

Preparatory works

The second draft of the revised rules released for comments on 6 August 2008 contained a definition of guarantor’s own records that had a broader scope than the one that was finally included in the adopted URDG. Essentially tracking ISP rule 4.11, determinations from the guarantor’s own records was initially defined as including determinations of:

i. when, where and how documents are presented or otherwise delivered to the guarantor;

ii. when, where and how communications affecting the guarantee are sent or received by the guarantor; and

iii. amounts transferred by the guarantor or into or out of accounts maintained with the guarantor.

This list could potentially include all typical banking activities that do not require the guarantor to undertake a factual investigation outside the sphere of its normal activity in order to ascertain whether an event has occurred. For example, the issue by a bank guarantor of a wire transfer, the receipt of funds in a deposit account maintained with a bank guarantor, the identification of a rate on a publicly available index, the notification of a documentary credit or the presentation of documents under that credit were all covered by “guarantor’s own records” in the earlier draft rules. In the course of the revision, references to (a) when, where and how documents are presented to the guarantor and (b) when, where and how communications affecting the guarantees are sent or received by the guarantor were deleted. The substantial restriction of the scope of the definition that resulted from this deletion was a response to concerns that were strongly expressed in comments received from a number of national committees as to the risk of liability facing the guarantor in cases where it fails to identify in a timely manner a document that is deemed to be in its possession. Take, for example, a document presented under a letter of credit, but which is actually kept in a department or a branch other than the one where the guarantee is processed, whether in the same country or abroad, and unbeknownst to that department or branch. “Guarantor’s own records” now only covers the records concerning credits to or debits from accounts held with the guarantor.

Instructing party

2.45 The phrase “instructing party”, which in previous versions of the URDG meant the counter-guarantor, now has a different meaning, denoting the party, other than the counter-guarantor, that gives instructions for the issue of a guarantee or counter-guarantee and is responsible for indemnifying the guarantor or, in the case of a counter-guarantee, the counter-guarantor. The

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word “indemnifying” is used rather than “reimbursing”, because the latter implies that the guarantor has made payment, whereas the guarantor should be entitled to obtain payment:

i. from the instructing party, as soon as the guarantor has received a complying demand; or

ii. from the counter-guarantor, when the guarantor presents a complying demand under the counter-guarantee.

2.46 In many cases the instructing party will be the applicant, but this is not necessarily true. It is not uncommon for a parent company to issue the instructions for the issue of a guarantee for the account of its subsidiary, either because the subsidiary’s financial status is not sufficient to enable the guarantor to issue the guarantee, in which case the guarantor will want to look to the parent, or because within the internal organisation of a group of companies one entity is responsible for handling supplies and another for finance. Where the 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. The term used in the rules accordingly depends on the relationship in question. Where a requested guarantee has not (or not yet) been issued, so that the question of indemnifying the putative guarantor has not yet arisen, the phrase “instructing party” is replaced by “party that gave the guarantor its instructions” (see article 9).

2.47 The definition of instructing party specifically excludes a counter-guarantor. The reason is that the inclusion of a counter-guarantor would, in the case of an indirect guarantee, result in there being two parties giving instructions, the party giving instructions for the issue of the counter-guarantee and the counter-guarantor itself, which would cause confusion.

2.48 The URDG do not address situations where both the applicant and the instructing party jointly undertake to indemnify the guarantor. This is usually done through tripartite agreements bringing together all three parties in a binding deed. Those agreements are quite sophisticated and generally cover the rights and duties of the parties, including whether the guarantor should approach the applicant or the instructing party, or both, for a waiver of discrepancies or the acceptance of an amendment. Agreements of this type would also be expected to cover cases where the applicant or the instructing party consents to the waiver or amendment while the other remains silent or insists on strict compliance with the initial guarantee terms. The URDG leave it to the parties to agree on the detailed treatment of such complex issues in the relevant agreement. The URDG only cover situations where one of the two parties, that is, the instructing party but not the applicant, undertakes to indemnify the guarantor and allocate the ensuing rights and obligations accordingly.

Cross-references within URDG 758

- Articles 1, 16, 21, 22, 23, 24, 25, 26, 29, 31 and 32.

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Illustration 2-2

Grundschuld GmbH, which carries on business in Frankfurt, instructs its local bank, Freundlichebank, to procure the issue of a guarantee in favour of Paradise Corp in Riyadh to support the obligations of Grundschuld’s associated company, Landrecht, under a contract to supply equipment to Paradise. Freundlichebank instructs Rubaiyat Bank in Riyadh to issue a guarantee under URDG 758 against Freundlichebank’s counter-guarantee. In this illustration, Grundschuld GmbH is the instructing party, Landrecht is the applicant, Paradise Corp is the beneficiary, Freundlichebank is the counter-guarantor and Rubaiyat Bank is the guarantor.

Presentation

2.49 Presentation is the delivery of a document under a guarantee or the document so delivered. The word “delivery” is used rather than “receipt”, because what is involved is the act of the party making delivery, whereas receipt is the act of the recipient. However, the time of delivery and the time of receipt are the same.

2.50 The words “presentation” and “demand” are not synonymous. “Document” includes a demand. However, a presentation is not limited to a demand but includes any other document delivered under a guarantee, such as a presentation for the purpose of triggering expiry or an increase or reduction of the amount of the guarantee pursuant to a variation clause in the guarantee. Typically, a reduction clause will provide for the progressive reduction of the guarantee against the presentation of documents showing staged performance under the underlying contract, for example transport documents showing part-shipment, while a guarantee may provide for an increase in the guarantee amount in stated conditions, for example as each portion of retention money is released. The two concepts, demand and presentation, do not systematically carry the same consequences. For example, the five-day period under article 20(a) and its corollary, the preclusion rule under article 24(f), are appropriate for a demand but not for a presentation that is not a demand.

Cross-references within URDG 758

- Articles 3, 4, 7, 11(c), 13, 14, 19, 20, 24, 25 and 26.

Presenter

2.51 The presenter is the person who makes a presentation as the beneficiary or the applicant or as a person acting on behalf of the beneficiary or the applicant. The presentation will be made by or on behalf of the beneficiary where it is a presentation of a demand or of documents to support an increase in the guarantee amount. It will be made by or on behalf of the applicant to support a reduction of the guarantee amount. The phrase “on behalf of ” in the definition seeks to cover cases where the required document is in the possession of, or to be issued by, a third party, for example an insurance company, in which case the beneficiary often asks that party to

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send the document directly to the guarantor. Another example is where an attorney (in fact or at law) is entrusted with making a presentation on behalf of the beneficiary. Under the URDG, the guarantor is not expected to require the presenter to disclose on whose behalf it is making the presentation, although it may choose to do so as a matter of its own operational policy or the applicable law. The disclaimers in article 27 protect the guarantor from the consequences of absence of authority of the presenter.

Cross-references within URDG 758

- Articles 14(d), 19(d) and 24(d) and (g).

Signed

2.52 “Signed”, when applied to a document, a guarantee or a counter-guarantee, means that an original is signed by or on behalf of its issuer. This applies not only to paper documents but also to electronic documents. Documents may be signed:

- if they are electronic, by means of an electronic signature that can be authenticated by the party to which it is presented, or

- if they are in paper form, by handwriting, facsimile signature, perforated signature, stamp, symbol or other mechanical method without need for any additional means of authentication.

See also the discussion of authentication in paragraph 2.5.

2.53 What constitutes the original of a paper-based document generated much discussion under UCP 500 following contradictory court decisions. It is the subject of a detailed ICC Banking Commission Policy Statement entitled “The determination of an ‘original’ document in the context of UCP 500 sub-article 20(b)” (document 470/871 (rev)), which is reproduced as Appendix 3 to this Guide. It is recommended for further guidance on originals versus copies.

2.54 Due to linguistic variations, the precise meaning of “facsimile” signatures raised questions during the revision. It means the reproduction by engraving, imprinting, stamping or other means of a manual signature. It is sometimes confused with a “facsimile” in the sense of a fax transmitted by a telefax machine, but that has nothing to do with facsimile signatures. Paper documents signed by facsimile signature are accepted as originals. By contrast, if a document signed by handwritten or facsimile signature is transmitted by telefax, the print-out is neither a signed nor an original document. However, the concept of originality has no place in relation to electronic documents, as indicated in article 3(c): “Any requirement for presentation of one or more originals or copies of an electronic document is satisfied by the presentation of one electronic document.” See further paragraph 3.6.

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Cross-references within URDG 758

- Articles 15, 19, 25 and 33.

Preparatory works

The revision of the URDG started off by keeping URDG 458’s requirements as regards “writing” and “written” for documents whose submission is required in original or authenticated form. Comments received during the revision raised the question of whether a document that is neither an original document nor a document that can be authenticated would be an “unwritten” document in the eyes of the URDG. These comments revealed the obvious absurdity of the term. Instead of attempting to expand the scope of the definition, the drafting group accordingly changed the defined term to “signed”, which was approved by the national committees.

Supporting statement

2.55 This is the statement that is required to be incorporated in or to accompany or follow a demand as provided by article 15(a) and (b). The phrase “supporting statement” is used instead of “accompanying statement”, the phrase used in URDG 458, because under the new rules the statement of breach need not be incorporated in or accompany the demand but may follow it later, though in this case it is necessary for the presentation to state that it is to be completed later (see article 14(b) and paragraph 14.10).

Cross-references within URDG 758

- Articles 14(g), 15, 17 and 33(f).

Underlying relationship

2.56 The underlying relationship is the contract, tender conditions or other relationship – whether or not contract-based – between the applicant and the beneficiary on which the guarantee is based. For example, where a guarantee is given to support performance under a construction contract between the applicant and the beneficiary, the underlying relationship is the construction contract. In the case of a tender (or bid) guarantee, it is the tender conditions, which typically include an undertaking by the tenderer to sign the contract if it is awarded to it and to procure the issue of a performance guarantee in place of the tender guarantee. Where a guarantee is issued for the guarantor’s own account, the underlying transaction or other relationship is the one that imposes on the guarantor the obligations whose performance the guarantee is designed to secure. The underlying relationship is almost always contractual but could conceivably be non-contractual, such as a relationship established by statutory provisions or a court order.

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2.57 The definition of an underlying relationship is primarily relevant to article 5, which provides that a guarantee is independent of the underlying relationship, thus emphasising the autonomy of the guarantee. Other provisions referring to the underlying relationship are: article 8(d), which states that a guarantee should identify the underlying relationship; article 15, which requires a statement of breach of the applicant’s obligations under the underlying relationship; and article 33(d)(ii), which requires that, on the transfer of a transferable guarantee, the guarantor be furnished with a statement by the transferor that the transferee has acquired the transferor’s rights under the underlying relationship.

Cross-references within URDG 758

- Articles 5, 8(d), 15(a) and 33(d)(ii).

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URDG 758

Article 3 Interpretation

In these rules:

a. Branches of a guarantor in different countries are considered to be separate entities.

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

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

d. When used with a date or dates to determine the start, end or duration of any period, the terms:

1. “from”, “to”, “until”, “till” and “between” include; and
2. “before” and “after” exclude, the date or dates mentioned.

e. The term “within”, when used in connection with a period after a given date or event, excludes that date or the date of that event but includes the last date of that period.

f. Terms such as “first class”, “well-known”, “qualified”, “independent”, “official”, “competent” or “local” when used to describe the issuer of a document allow any issuer except the beneficiary or the applicant to issue that document.

Comment

Article 3 is a new article and contains rules of interpretation supplementing the definitions in article 2.

Changes from URDG 458

- New article.

Article 3(a)

Branches of a guarantor

3.1 Under article 3(a), branches of a guarantor in different countries are considered to be different entities. Thus, in theory, a guarantee could be issued by branch A in one country against a counter-guarantee from branch B of the same issuer in another country, though in practice this happens relatively infrequently. Likewise, a guarantee could be issued by branch A in

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one country and be advised to the beneficiary by branch B of the same issuer in another country. Internal accounting or regulatory reasons may also lead the head office in one country to issue a guarantee in favour of its branch in another country. Such reasons may include the need to circumvent the consequences of the branch’s insufficient working capital and allow it, through the issue of head office guarantee, to enter into new transactions. An identical rule has been a core part of the UCP since the revision of 1951 (UCP 151 article 4, later more explicitly formulated in UCP 500 article 2) and has generally been considered useful in allowing branches of the same legal person to perform, alongside the head office, different roles in the same credit structure. In some situations, users preferred using the UCP rather than URDG 458 precisely because the UCP provide for the separate branch rule. This is unjustified. The UCP, the URDG or, indeed, any other set of ICC rules are but the expression of the parties’ will. Adding into a demand guarantee governed by URDG 458 a clause indicating that branches in other countries are considered to be separate entities would have entailed exactly the same result as incorporating a rule to that effect by contractual reference. Nevertheless, the market is expected to welcome the codification of the separate branch rule in new article 3(a).

3.2 Even without this rule, an issuing branch is treated distinctively in determining the governing law under article 34 and jurisdiction under article 35. Moreover, it is the situation of the issuing branch that is the determining factor for the purpose of any provision in which location is relevant, for example the place of issue in determining the place for presentation under article 14(a), the place for payment under article 20(c) or the place of an event of force majeure under article 26. This particular rule of interpretation is thus of very limited significance. It applies only for the purpose of the rules and does not enable a branch to be treated as insulated from the legal entity of which it is a constituent part for the purpose of legal liability or subjection to insolvency proceedings. Whether for that purpose a branch is to be considered a distinct legal entity is a matter that falls outside the competence of the rules and is governed by the applicable law.

Article 3(b)

Guarantee includes counter-guarantee and beneficiary includes beneficiary of counter-guarantee

3.3 Except where the context requires otherwise, a guarantee includes a counter- guarantee and a beneficiary includes a guarantor in whose favour a counter- guarantee has been issued. The purpose of this rule is to avoid tedious repetition where it is not necessary. One of the criticisms voiced (unfairly) against URDG 458 is that some of their provisions referred only to guarantees but not to counter-guarantees. This gave the impression that a number of rules only addressed the practice they purported to cover in a guarantee but not in a counter-guarantee. On 14 June 2000, the ICC Banking Commission approved Opinion 470/TA.454rev, indicating that URDG provisions referring to guarantees but not to counter-guarantees should be read, where the

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context so warrants, as also referring to counter-guarantees. The new URDG codify that opinion in a more general rule of interpretation without changing its substance and accordingly add nothing that the URDG 458 did not implicitly indicate already.

3.4 Article 3(b) applies only where the context does not require otherwise. There are many rules for which counter-guarantees require separate treatment, in particular those embodied in articles 1 (application of URDG to counter-guarantees), 5(b) (independence of guarantee from counter- guarantee), 8(e) (identification of counter-guarantee), 15(b) (requirements for demand under counter-guarantee), 16 (information about demand), 20(a) (place for payment), 21(b) (currency of payment), 23 (extend or pay), 24 (non-complying demand), 25 (termination of counter-guarantee), 26 (force majeure), 31 (indemnity for foreign laws and usages), 32 (liability for charges), 33(a) (transfer of guarantee), 34 (governing law) and 35 (jurisdiction).

3.5 Similarly, there are provisions in which the term “beneficiary” is confined to the beneficiary of a guarantee, notably articles 5(a) (independence of guarantee), 15(a) (requirements for demand), 33 (transfer of guarantee), 34 (governing law) and 35 (jurisdiction).

Article 3(c)

Electronic documents

3.6 Where the guarantee requires presentation of one or more originals or copies of an electronic document, the requirement is satisfied by the presentation of one electronic document. This is taken from article e8 of the eUCP (ICC Pub. No. 600) and reflects the fact that the concept of originality of a document and the requirement to present multiple copies are not relevant to electronic documents.

Article 3(d)

Expressions of time

3.7 Article 3(d) contains a useful interpretative rule on expressions used with a date or dates to determine the start, end or duration of any period. These are taken from UCP 600 and govern not only the interpretation of the rules themselves but, by implication, the interpretation of a guarantee issued under the rules, except in so far as the guarantee itself provides otherwise. “From”, “to”, “until”, “till” and “between” include the date or dates mentioned. Thus, in the phrase “six months from the date of issue”, the date of issue is included as the commencement of the period, while in the phrase “until 31 January 2001” that date is included as the last day of the period. On the other hand, “before” and “after” a given date exclude the date or dates in question. This reflects ordinary usage and is less necessary than defining the meaning of the word “from”, which would be ambiguous without the rule. In fact, although it only mentions “date or dates”, this interpretative rule also applies to events, because the occurrence of an event necessarily falls on a specific

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date. For example, when a guarantee provides that it will expire three days from the presentation of a work delivery certificate and this certificate is presented on 2 August 2011, the guarantee will expire three days from – and including – 2 August, which means 4 August 2011.

Article 3(e)

3.8 The term “within”, when used in connection with a period after a given date or event, excludes that date or the date of the event but includes the last date of that period. This, of course, follows from the previous rule that “after” a given date excludes that date. In other words, a requirement that documents be presented “within six months after the date hereof ”, when the date is given as 1 February 2011, means that presentation must be made between 2 February and 2 August 2011.

3.9 However, practice also shows guarantees and counter-guarantees indicating that they will expire within six days from a date or an event, such as the dispatch to the guarantor of an unqualified report of the engineer. Because, in such cases, the clause includes a reference to both “within” and “from”, one may wonder whether the date on which the report is remitted should be included in the calculation of the six days. The conjunction of both “within” and “from” is not covered in the URDG, which actually recommend that “within”, when used in connection with a period, be used together with the word “after” when referring to a given date of event. In the clause proposed in the example above, it is very likely that the word “within” is to be considered as more determinative than “from”. Accordingly, the interpretative rule in article 3(e) should prevail over the one in article 3(d)(i), i.e. “from” should be read as “after” with the result that the day when the report is dispatched is excluded from the calculation of the six days.

Article 3(f)

Expressions indicating the quality of the issuer

3.10 Under article 3(f), terms such as “first class”, “well-known”, “qualified”, “independent”, “official”, “competent” or “local” when used to describe the issuer of a document allow any issuer except the beneficiary or the applicant to issue that document. The beneficiary and the applicant are excluded for obvious reasons, as the benefit of the rule is clearly confined to an issuer that is not a party to the underlying relationship. Thus, a requirement in the guarantee for the beneficiary to present a document issued by an “independent” person is not met by a document issued by the beneficiary itself. Similarly, if the applicant is required, for the purpose of a reduction clause, to furnish a document issued by an “independent surveyor” showing part delivery of goods or part performance of works, a document issued by the applicant will not be a conforming document even if the applicant is a surveyor. It does not follow that a document issued by a beneficiary or applicant that satisfies one of the other labels, such as “a qualified engineer”, is acceptable, as this depends on whether the intention of the parties was to permit the presentation even of a document issued by the party whose

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performance is meant to be verified. As regards other parties, the above descriptions are not infrequently used to describe the issue of documents, such as a report or a certificate, by a “qualified” or “first-class” surveyor, an engineer or other expert or an agency. The effect of article 3(f) is that all such descriptions indicating the quality of the issuer are to be disregarded.

3.11 As explicitly indicated in article 3(f), the rule on the quality descriptions listed in the paragraph applies only to the description of the issuer of a document. The rule should not be extrapolated beyond this. For instance, article 3(f) directs guarantors to disregard the word “independent” only when used to describe the issuer of a document, but certainly not when applying to the legal characterisation of the guarantee that they are instructed to issue. This is the reason why the definition of “document” in article 2 does not include guarantee or counter-guarantee.

Preparatory works

UCP 600 article 3 (sixth paragraph) is drafted in terms identical to URDG article 3(f), except that where the UCP restrict the exception from the requirementto disregard the listed descriptions to the case where the presented document is issued by the beneficiary, the URDG extend that exception to the applicant as well. The reason is that, unlike documentary credits, demand guarantees sometimes require the applicant to present one or more documents, for example a statement on the advancement of the works, to reduce the amount of an advance payment guarantee proportionately to the value of the works. Where a guarantee requires that statement to be issued by an “independent engineer”, with the exception to article 3(f) restrictively drafted to cover only the beneficiary, the applicant would be able to present the statement itself if it also happens to be an engineer, with little regard to the fact that it is not “independent” because the guarantor has been precluded from asserting this discrepancy under unable article 3(f). Such a corruption of the process cannot possibly occur under the URDG, because article 3(f) excludes both the applicant and the beneficiary from the requirement to disregard the listed descriptions of the issuer of required documents.

Article 3(f) does not refer to the “instructing party”, because documents required under the guarantee are generally expected to reflect one or the other performance stages of the underlying relationship. An instructing party that is not the applicant has no business issuing such a document. This leaves the parties open to the risk that the instructing party might possibly comply with the description required of the issuer of a document, for instance if the instructing party is also a surveyor in a guarantee that requires the presentation of a survey report by an “independent surveyor”, and hence receive better treatment than the applicant. However, such cases are expected to occur very rarely and are therefore better left to the parties and the guarantor to cover in their specific guarantee.

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Cross-references within URDG 758

- Throughout the rules.

Cross-references to other ICC rules

- UCP 600 article 3.

- ISP98 rules 1.11, 2.02 and 2.03.

Cross-references to the UN Convention on Independent Guarantees andStand-by Letters of Credit

- None.

Illustration 3-1

A guarantee issued on 2 May 2011 is stated to expire “two years from the date of issue”. In computing the two-year period, the date of issue is included and the guarantee expires on 1 May 2013 (if 1 May is not a business day at the place for presentation of the demand, the expiry date is extended to the first following business day at that place – see article 25(d)). However, if the guarantee were to be stated to expire two years “after” the date of issue, that date would be excluded and the guarantee would expire on 2 May 2013.

Illustration 3-2

A demand and a supporting statement are presented on 5 September 2011. Under article 20(a), the guarantor must “within five business days following the day of presentation” examine the demand for compliance. In computing the time for examination, the date of presentation is excluded, meaning that the five-business-day period starts to run on 6 September 2011. The last date of that period is included, and the guarantor accordingly has until 10 September 2011 to complete the examination.

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URDG 758

Article 4 Issue and effectiveness

a. A guarantee is issued when it leaves the control of the guarantor.

b. A guarantee is irrevocable on issue even if it does not state this.

c. The beneficiary may present a demand from the time of issue of the guarantee or such later time or event as the guarantee provides.

URDG 458

Article 5

All Guarantees and Counter-Guarantees are irrevocable unless otherwise indicated.

Article 6

A Guarantee enters into effect as from the date of its issue unless its terms expressly provide that such entry into effect is to be at a later date or is to be subject to conditions specified in the Guarantee and determinable by the Guarantor on the basis of any documents therein specified.

Comment

Article 4 deals with the time of issue, irrevocability and availability of a guarantee.

Changes from URDG 458

- Articles 5 and 6 now combined in a single provision.

- New provision on time of issue.

- Stronger formulation of the presumption of irrevocability.

- Formulation of the “entry into effect” rule in different terms without changing the substance of the rule.

- Scope of determination of occurrence of an “event” expanded to cover, in addition to the presentation of specified documents, determinations from guarantor’s own records (article 7).

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Article 4(a)

Time of issue of guarantee; guarantee irrevocable on issue

4.1 A guarantee is issued when it leaves the control of the guarantor, irrespective of whether or when the beneficiary receives it. The guarantor’s control test is inspired by article 7(1) of the UN Convention on Independent Guarantees and Stand-by Letters of Credit. It was chosen in ISP98 rule 2.03. 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 apparent from the following example. Take the case of a guarantee that is issued and sent by a guarantor in Frankfurt on Wednesday by courier to the beneficiary in Abu Dhabi but which is only delivered to the beneficiary on Saturday. It is generally accepted that the guarantor charges the instructing party the guarantee fees and commissions and, in the case of a guarantor that is a bank, takes the guarantee amount into account in its capital adequacy ratios as from Wednesday, although the beneficiary can only present a demand as from Saturday at the earliest.

4.2 A paper-based guarantee leaves the control of the guarantor when it is dispatched or handed over, whether by the guarantor or its agent, to the beneficiary or its agent or to an independent carrier (e.g. the postal service) and the guarantor has no power to recall it. However, a guarantee remains under the control of the guarantor while it is held by the guarantor’s own agent, and this is so 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”.

4.3 The guarantor’s control test applies equally to electronic guarantees, which are deemed to have been issued when they are transmitted to the beneficiary or its agent but not when transmitted to the guarantor’s own agent, including an advising party. If a clerical error or IT failure results in the 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 it or retrieve it. 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, so 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 transmit it to the beneficiary.

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Conflict of dates – the SWIFT case

4.4 In the case of a conflict between the date typed on the guarantee as the date of issue and the date on which the guarantee actually left the control of the issuer, the latter prevails unless the guarantee specifies otherwise. This solution mirrors the rule that generally applies to English law deeds, for instance, where the date of the deed is the one on which it is delivered as a deed regardless of the date on the actual document. The issue normally does not arise in relation to 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 entered manually in field 30 and the bank clerk typing the guarantee fills in that date on day one, but the guarantee is sent through SWIFT only on day three after completion of the internal approvals, then day three is the date of issue according to URDG article 4(a) because it is on that date that the guarantee leaves the control of the guarantor, regardless of whether the SWIFT usage rules might possibly indicate a different solution.

Amendments

4.5 The above considerations apply equally to an amendment to a guarantee, since under article 3(b) a guarantee includes an amendment to a guarantee. There is, however, a difference between the issue of a guarantee and the issue of an amendment in that an amendment, though binding on the guarantor on issue, does not bind the beneficiary in the absence of prior agreement or subsequent acceptance or deemed acceptance (see paragraph 11.5), whereas the rules, while providing that the guarantor is bound as from the time of issue, are silent as to the time when the beneficiary becomes bound as the result of issue of the original guarantee. The reason is that the terms of the guarantee will almost always have been agreed between the applicant and the beneficiary in the underlying contract or other relationship, and the parties are committed to each other to procure and accept a guarantee issued on those terms, whereas this is not necessarily true of amendments. The beneficiary owes no duties of any kind to the guarantor, the presentation of documents being simply a condition of the beneficiary’s right to be paid. Accordingly, the beneficiary is entitled to reject the guarantee vis-à-vis the guarantor for any reason it chooses or, indeed, without giving reasons, but the beneficiary will be in breach of its obligations under the underlying relationship vis-à-vis the applicant if it rejects a guarantee that is fully in conformity with the terms agreed with the applicant. It is in this sense that the beneficiary is “bound” by the guarantee.

When is a counter-guarantee issued?

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

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Article 4(b)

Irrevocability

4.7 Irrevocability is of the essence in relation to demand guarantees and counter- guarantees. Guarantees and counter-guarantees are irrevocable on issue even if they do not state so. Though highly unusual, it is open to the parties to frame the guarantee as revocable, but if they do not do so it cannot be revoked once issued. The same rule applies to an amendment of 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 parties’ interests based on transparency and certainty.

No need for the beneficiary to accept or reject a guarantee

4.8 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; the beneficiary is not. 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. In that case, the effect of the rejection is that the guarantor ceases to be bound by the guarantee. The difference between the effect of issue on the guarantor or counter-guarantor and its effect on the beneficiary applies equally to amendments (on this issue, see paragraphs 11.6 et seq.).

Preparatory works

During the revision, the drafting group considered, but decided against, defining the word “irrevocable”, or substituting it with words such as “shall not be amended or cancelled”. It was felt that “irrevocable” is now widely understood, thanks largely to the UCP, which have established a presumption of irrevocability since 1993,⁶⁷and URDG 458.

Article 4(c)

When may a demand be presented?

4.9 A demand under a guarantee may be presented from the time of issue (“from” here means “on”) or such later time or event as the guarantee provides. URDG 458 referred to the time of the guarantee’s entry into effect, which was liable to be confused with the moment that the guarantee became irrevocable. The new formulation removes this ambiguity by referring expressly to the time when a demand may be presented.

4.10 In theory, it is possible for the beneficiary to make a demand under the guarantee from the moment it has been issued, unless the guarantee specifies a later time or event. However, it is necessary to bear in mind that,

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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, 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.

Cross-references within URDG 758

- Articles 11 and 33.

Cross-references to other ICC rules

- UCP 600 article 3 (on irrevocability).

Cross-reference to ISP98

- Rules 1.06 and 2.03.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- Article 7.

Illustration 4-1

Beta Bank is instructed to issue a demand guarantee in favour of Construction Enterprise Ltd. On 1 July, Beta Bank sends the requested demand guarantee to its correspondent Delta Bank with instructions to advise the guarantee to Construction Enterprise. Delta Bank dispatches the advice of the guarantee to Construction Enterprise on 3 July and it reaches that company on 5 July. For the purpose of the rules, the guarantee is issued on 3 July when it leaves the control of Beta Bank’s agent, Delta Bank. Until then Beta Bank can recall it. The date of receipt of the guarantee by the beneficiary is irrelevant.

Illustration 4-2

A guarantee that has been approved and signed in accordance with the guarantor’s internal authorisation policy is sent to the beneficiary through a SWIFT message. However, after the guarantee is sent, a clerical error or an electronic failure results in the loss of any trace of the guarantee in the system. Nevertheless, according to article 4(a), the guarantee has been “issued”.

Illustration 4-3

Ingegneria Internazionale SpA, an Italian contractor, is in dispute with the Benghazi Port Authority, the owner of a port development project in Libya, over the payment of an amount retained by the Port Authority to cover the post-delivery warranty period. Ingegneria agrees with the Port Authority that the amount will be paid by means of a 90-day bill of exchange drawn on the Port Authority and accepted by it. Ingegneria instructs its bank, Banca delle Sabbie di Libia, to issue a retention money guarantee to the Port Authority, with the express condition that the guarantee document will only be handed over to the Port Authority against the remittance by the Port Authority of the

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bill of exchange that has been duly accepted. Due to a misunderstanding, the guarantor’s branch manager in Tripoli exceeds his authority and remits the guarantee to the beneficiary without the bill of exchange first being remitted. The guarantee is issued, although Ingegneria, as the principal, may have recourse against the bank as an agent under the law applicable to the agency relationship.

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URDG 758

Article 5 Independence of guarantee and counter-guarantee

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

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

URDG 458

Article 2

a. For the purpose of these rules, a demand guarantee (hereinafter referred to as “Guarantee”) means any guarantee, bond or other payment undertaking, however named or described, by a bank, insurance company or other body or person (hereinafter called “the Guarantor”) given in writing for the payment of money on presentation in conformity with the terms of the undertaking of a written demand for payment and such other document(s) (for example, a certificate by an architect or engineer, a judgment or an arbitral award) as may be specified in the Guarantee, such undertaking being given:

i. at the request or on the instructions and under the liability of a party (hereinafter called “the Principal”); or

ii. at the request or on the instructions and under the liability of a bank, insurance company or any other body or person (hereinafter “the Instructing Party”) acting on the instructions of a Principal to another party (hereinafter the “Beneficiary”).

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b. Guarantees by their nature are separate transactions from the contract(s) or tender conditions on which they may be based, and Guarantors are in no way concerned with or bound by such contract(s), or tender conditions, despite the inclusion of a reference to them in the Guarantee. The duty of a Guarantor under a Guarantee is to pay the sum or sums therein stated on the presentation of a written demand for payment and other documents specified in the Guarantee which appear on their face to be in accordance with the terms of the Guarantee.

c. For the purpose of these rules, “Counter-Guarantee” means any guarantee, bond or other payment undertaking of the Instructing Party, however named or described, given in writing for the payment of money to the Guarantor on presentation in conformity with the terms of the undertaking of a written demand for payment and other documents specified in the Counter-Guarantee which appear on their face to be in accordance with the terms of the Counter-Guarantee. Counter- Guarantees are by their nature separate transactions from the Guarantees to which they relate and from any underlying contract(s) or tender conditions, and Instructing Parties are in no way concerned with or bound by such Guarantees, contract(s) or tender conditions, despite the inclusion of a reference to them in the Counter-Guarantee.

d. The expressions “writing” and “written” shall include an authenticated teletransmission or tested electronic data interchange (“EDI”) message equivalent thereto.

Comment

Article 5 establishes a central principle of demand guarantees, namely their independence from all relationships other than the one between the guarantor and the beneficiary. A guarantee, like a documentary credit, is an abstract payment undertaking divorced from the underlying contract or other relationship on which it is based. It is this that distinguishes a demand guarantee from a suretyship guarantee, under which the guarantor is liable only if the principal debtor defaults and to the extent of that default. Similarly, a counter-guarantee is independent of such relationships and of the guarantee. Closely allied to this concept of the autonomy of the guarantee is its documentary character as set out in articles 6 and 7.

Changes from URDG 458

- URDG 458 article 2 is now spread out over a number of articles in the revised URDG: article 2 for the definition of guarantee, guarantor, principal (now applicant) and instructing party (now counter- guarantor), article 5 for independence and articles 19 and 20 for the presentation of a complying demand and the duty to pay.

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- The reference in the guarantee to the underlying relationship not changing the independent nature of the guarantee is now restricted to a reference for the purpose of identifying the underlying relationship.

- The independence of guarantee and counter-guarantee is now also expressed vis-à-vis the application.

Article 5(a)

Independence of the guarantee from the underlying relationship

5.1 A guarantee is independent of the contractual or other relationship between the applicant and the beneficiary. The guarantor’s duty is to pay against a complying presentation of documents. It is not concerned with enquiring whether there has in fact been a breach of the underlying relationship by the applicant, nor, indeed, is it obliged or permitted to take account of external facts whose occurrence is neither indicated in a document referred to in the guarantee nor ascertainable from the guarantor’s own records. Indeed, in the absence of fraud, the guarantor must pay a complying demand even if there was no underlying contract or other relationship between the applicant and the beneficiary or if a purported contract between them was invalid. Similarly, in the case of a tender guarantee, the guarantor is not concerned with the question whether the applicant failed to hold the tender open or to enter into the contract when the tender proved successful. This independence of the guarantee from external facts and relationships is buttressed by articles 6 (guarantors deal only with documents), 7 (non-documentary conditions) and 12 (extent of guarantor’s liability).

Independence of guarantee not affected by reference to underlying relationship

5.2 The independent nature of a guarantee is not affected by the fact that it refers to the underlying relationship, as indeed it should do in order to identify the transaction to which it relates (article 8(d)). That being said, it is accepted that the reference in the guarantee or counter-guarantee to the underlying relationship should be confined to identification purposes. Specifically, a reference in the guarantee to the underlying relationship in a way that links the guarantor’s payment commitment to the actual default of the applicant in the underlying relationship or the amount of the loss generated by that default could well turn the guarantee into an accessory suretyship, notwithstanding the affirmation of independence in article 5.

5.3 An example of a reference in the guarantee to the underlying relationship that meets the requirement in article 5 can be found in the sixth field in the Form of Demand Guarantee under URDG 758 accompanying the new rules. If a different form is used, the reference could read as follows:

“In consideration of contract [ABC] between the applicant and the beneficiary, the guarantor undertakes to pay the beneficiary any amount up to [the guarantee amount] upon presentation of the beneficiary’s complying demand indicating in what respect the applicant is in breach of its obligations under the underlying relationship”.

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Conversely, words in the guarantee to the effect that the guarantor will pay the beneficiary any amount owed by the applicant under the underlying relationship are to be avoided, as they provide a strong indication that the guarantee is a suretyship guarantee, not a demand guarantee.

Independence of guarantee from application

5.4 Similarly, a guarantee is independent of the application for its issue. One effect of this is that the beneficiary making a complying demand is entitled to be paid even if the terms of the guarantee do not accord with the instructions contained in the application or if the applicant has reneged on its obligation to pay the guarantor its guarantee issuance fees or has become insolvent.

Independence of guarantee from claims or defences arising from other relationships

5.5 The guarantor’s payment obligation is likewise not subject to claims or defences arising from any relationship other than a relationship between the guarantor and the beneficiary. Thus, the fact that the guarantor has a right of set-off against the applicant is irrelevant to the beneficiary’s right to be paid.

Guarantee not necessarily independent of other relations between guarantor and beneficiary

5.6 The principle embodied in article 5 as regards the independence of the guarantee from other relationships does not apply to a relationship between the guarantee and the beneficiary that exists outside of the guarantee itself. Thus, article 5(a) does not preclude a guarantor from setting off against a claim under the guarantee a cross-claim for money due to the guarantor from the beneficiary on a separate account if the set-off is permitted by the applicable law.

Article 5(b)

Independence of counter-guarantee

5.7 Similar rules apply to a counter-guarantee, which is independent of the guarantee, the underlying relationship between the applicant and the counter-guarantor, the application for issue of the counter-guarantee and any other counter-guarantee to which the first-mentioned counter-guarantee relates. Thus, the guarantor is entitled to payment of a complying demand under the counter-guarantee even if the terms of the counter-guarantee do not conform to the instructions given to the counter-guarantor. Likewise, the counter-guarantor’s undertaking to pay is not subject to claims or defences arising under any relationship other than that existing between the counter-guarantor and the guarantor or other counter-guarantor to which the counter-guarantee was issued. Similarly, expiry of the guarantee does not result in expiry of the counter-guarantee, each of the two instruments being governed by its own terms.

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5.8 The independence of the counter-guarantee from the guarantee is worth emphasising. It is reflected in the fact that, while the law governing the guarantee is that of the place of business of the branch issuing the guarantee, the law governing the counter-guarantee is that of the place of business of the branch issuing the counter-guarantee (article 34). A similar rule applies to jurisdiction (article 35). It is sometimes said that the guarantee and the counter-guarantee are so closely linked that they should be governed by the same law. However, this would be quite inconsistent with the principle of independence of the counter-guarantee from the guarantee, a principle reinforced by the fact that, pursuant to article 15(b), the counter-guarantor has to make payment of a complying demand under the counter-guarantee even if the guarantor has not made payment to the beneficiary. Furthermore, commercial realities dictate that, unless otherwise agreed, a guarantee and a counter-guarantee that are issued by parties in different countries should be governed by different laws. In most cases, a counter-guarantor would want its own law to govern its commitment, while the guarantor and beneficiary would likewise expect the guarantee to be governed by the guarantor’s law, not by some foreign law with which neither may be familiar.

Counter-guarantee not necessarily independent of relations between counter- guarantor and party to whom counter-guarantee issued

5.9 Just as the principle of independence of a guarantee does not extend to the relationship between the guarantor and the beneficiary, so the independence of the counter-guarantee does not extend to the relationship between the counter-guarantor and the guarantor or other counter-guarantor to which the counter-guarantee is issued. Questions of set-off in respect of cross-claims fall to be determined by the applicable law, not the URDG.

Other qualifications to the principle of independence

5.10 The independence of the guarantee or counter-guarantee from the underlying relationship between the applicant and beneficiary is not unqualified. Most systems of law recognise, for example, that proof of fraud established in certain conditions defeats the beneficiary’s right to payment or, in the case of a counter-guarantee, the guarantor’s right to the same. The case law of some courts accepts that other claims or defences arising from the underlying relationship, where sufficiently grave, could be asserted by the guarantor against an otherwise complying demand of the beneficiary. Examples outside fraud include the illegality of the underlying relationship due to a breach of an exchange control regulation, economic sanctions or financial markets regulation. The URDG do not provide for any such distinction. Instead, they affirm the independent nature of the demand guarantee and the rejection of all claims and defences arising from any relationship other than a relationship between the guarantor and the beneficiary. However, a mandatory law overrides the URDG. In a jurisdiction that has adopted the 1995 UN Convention on Independent Guarantees and Stand-by Letters of Credit, article 19 of the Convention sets out the exceptions to the payment obligation.

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Cross-references within URDG 758

- No explicit references.

Cross-references to other ICC rules

- UCP 600 article 4.

- ISP98 rules 1.06 and 1.07.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- Article 3.

Illustration 5-1

G Bank issues a guarantee in favour of B Co. to support the obligations of A under a construction contract with B Co. The guarantee provides for payment to B Co. on first demand of amounts up to £2 million. A dispute arises between A and B Co. as to the quality of some of the work, which B Co. believes to be defective while this is denied by A. B Co. presents a written demand for £500,000 under the guarantee, together with a statement of breach. A seeks an injunction to restrain payment. The injunction should be refused. The guarantee is independent of the relationship between B Co. and A, and as guarantor G Bank is not concerned with the question of whether a breach has or has not been committed or with the loss resulting from that breach.

Illustration 5-2

The facts are as in Illustration 5-1, except that, after the issue of the guarantee, A has failed to honour a promise to establish a cash collateral to cover its liability under the guarantee vis-à-vis G Bank. This does not entitle G Bank to withhold payment of a complying demand even where the application – but not the guarantee – lists the cash collateral obligation as a subsequent condition that entitles the guarantor to rescind its undertaking, the guarantee being independent of the relationship between G Bank and A.

Illustration 5-3

The facts are as in Illustration 5-1, except that B Co. happens to be a customer of G Bank, to which B Co. owes £300,000 in respect of a loan that it has failed to repay. Nothing in article 5(a) precludes G Bank from setting off the amount of the loan against its liability under the guarantee where the set-off is permitted by the applicable law. Assuming B Co.’s demand is complying, G Bank would only have to pay £200,000 out of the claimed £500,000.

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Illustration 5-4

Albion SA in France has entered into a contract for the supply of services by Grundnorm GmbH in Germany. Under the contract, Albion is to procure the issue of a guarantee by a German bank in favour of Grundnorm. Crédit Supérieur, Albion’s bank in France, asks Schnellbank in Germany to issue the guarantee against a counter-guarantee by Crédit Supérieur but, due to a mistake, Crédit Supérieur’s instructions to issue the guarantee omit one of the documents specified by Albion in its application as a required document to support any demand for payment. Schnellbank pays on presentation of a demand which is a complying demand under the guarantee. Despite the mistake, Schnellbank is entitled to be paid under the counter-guarantee, which is independent of the guarantee. The fact that Crédit Supérieur may be precluded by its breach of mandate from obtaining reimbursement from Albion does not affect its liability to Schnellbank under the counter-guarantee.

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URDG 758

Article 6 Documents v. goods, services or performance

Guarantors deal with documents and not with goods, services or performance to which the documents may relate.

Comment

Article 6 embodies a specific aspect of the independence of the demand guarantee, namely its documentary character.

Changes from URDG 458

- New article.

6.1 Article 6 is a specific application of the general principle embodied in article 5 (see Illustration 5-1) and article 12. Imported directly from UCP 600 article 5, URDG article 6 emphasises a necessary corollary of the general principle of independence embodied in article 5: the guarantor is concerned only with the conformity of the documents presented to it with the terms of the guarantee and the rules, not with the question whether the goods, services or performance to which the documents relate have or have not been supplied or performed or whether that supply or performance does or does not conform to the underlying contract. The independence of guarantees could not have been expressed more effectively than by affirming their exclusively documentary character. Indeed, a guarantor, being precluded from concerning itself with the factual details of the performance of the underlying relationship, is necessarily insulated from this relationship and is therefore assured of its independent role. This commonsense rule, whichwas first formulated explicitly in UCP 400 article 4, has been the linchpin of the UCP’s success for almost 30 years. There is no doubt that it will alsosubstantially strengthen the independence of URDG demand guarantees and counter-guarantees.

Cross-references within URDG 758

- Articles 5 and 7.

Cross-references to other ICC rules

- UCP 600 article 5.

- ISP98 – no explicit references.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- Article 3(b).

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URDG 758

Article 7 Non-documentary conditions

A guarantee should not contain a condition other than a date or the lapse of a period without specifying a document to indicate compliance with that condition. If the guarantee does not specify any such document and the fulfilment of the condition cannot be determined from the guarantor’s own records or from an index specified in the guarantee, then the guarantor will deem such condition as not stated and will disregard it 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.

Comment

A corollary of the documentary character of the guarantee is that, as a general rule, non-documentary conditions are to be ignored.

Changes from URDG 458

- New article.

Guarantee should not contain non-documentary conditions

7.1 In one of the most important innovations introduced by URDG 758, article 7 provides that a guarantee should not contain a condition other than a date or the lapse of a period without specifying a document to indicate compliance with that condition. No such provision was included in URDG 458, but it was considered appropriate to follow UCP 600 in the 2010 revision. Guarantors do not wish to be concerned with the investigation of external facts, for which their operational set-up is not equipped. Non-documentary conditions eventually cause the guarantee’s operational stages to be modelled on facts relating to the performance of the underlying relationship. This would apply to a guarantee that is payable upon non-conforming delivery of services, reducible upon each instalment of supplied goods being delivered to the importer or terminable upon the 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.

7.2 The word “should” indicates that this part of article 7 is not mandatory, in line with article 8, which only makes a recommendation regarding the content of a guarantee. The rules cannot dictate what a guarantee should or should not contain, they can only state the effect of the omission or inclusion of a condition that is not recommended. Article 7 does this by providing that a non-documentary condition is to be ignored (on this issue, see paragraph 7.7).

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What is a non-documentary condition?

7.3 For the purpose of article 7, a non-documentary condition is a condition whose fulfilment is not:

(1) indicated in a document specified in the guarantee as a document to be presented to the guarantor; or

(2) able to be determined from the guarantor’s own records or from an index specified in the guarantee.

7.4 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 (e.g. 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.

7.5 An earlier draft would have permitted the production of any document evidencing fulfilment of the condition, but this was thought to be too wide and open-ended. Thus, under the final formulation of the rule, such a document does not prevent the specified condition from being a non-documentary condition unless the document is specified in the guarantee. The phrase “guarantor’s own records” is quite narrowly defined. It does not cover all the guarantor’s records 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.

7.6 A further method of showing that a condition is a documentary condition, which therefore falls outside the requirement to disregard non-documentary conditions, is where the fulfilment of the condition can be determined from an index specified in the guarantee, such as where the guarantee contains a variation clause providing for an increase or decrease according to an index such as a retail price index or a commodity index. Once again, however, only an index specified in the guarantee is admissible for this purpose.

Disregard of non-documentary conditions

7.7 The general rule is that the guarantor will deem a non-documentary condition as not stated and will disregard it. The guarantor is well advised either to draw this rule to the attention of the applicant before issuing a guarantee with a non-documentary condition or to refuse to include the condition without specifying a document to indicate compliance with it.

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Preparatory works

URDG 458 provided no rule similar to the new URDG 758 article 7, while the UCP has included a rule depriving non-documentary conditions of effect since 1993 (UCP 500 article 13(c)). This inconsistency reportedly created some confusion in the market, especially in those banks or businesses where guarantees and documentary credits are processed on the same operating platform. Accordingly, it was decided at the start of the revision of the URDG in 2007 to follow UCP 600 article 14(h). This policy decision was all the more welcome for making concrete the general rule laid down in URDG 758 article 6, thus strengthening the independence of the guarantee.

During the revision, the treatment of non-documentary conditions underwent major changes reflecting the comments received on the successive drafts of the revised URDG. Due to concerns that a rule requiring any non-documentary conditions to be disregarded could turn out to be too rigid, the first and the second drafts allowed for the presentation of any document, even one not specified in the guarantee, if it helps to determine the fulfilment of the condition. However, upon testing the result on the ground, another concern emerged, namely that the rule would encourage the presentation of self-serving documentary proofs by beneficiaries or applicants. 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 that allows the determination of 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 for a reduction of amount mechanism, which, if predicated upon the successive shipment of instalments, could be triggered by the presentation by the shipper of mere statements indicating that instalments were shipped. Such a situation could well call into question the integrity of the documentary process.

Accordingly, the third draft of the revised URDG restricted the effectiveness 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. These changes are also reflected in the definition of “expiry event” in article 2. It is true that the consequence of the more restrictive scope ultimately chosen for article 7 is that there are potentially fewer opportunities to redeem non-documentary conditions. Nonetheless, it is hoped that education and training efforts will lead to a better drafting of demand guarantees that will eliminate non-documentary conditions. This is exactly what happened in standby and documentary credit practice

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Exception

7.8 There is one exception to the rule that a non-documentary condition will be disregarded. 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 terms echo article 19(b) the last sentence of which states: “Data need not be identical to, but shall not conflict with, data in that document, any other required document or the guarantee” (emphasis added). This exception reflects ICC Banking Commission Opinion 644 (2008)⁶⁸. In essence, the Opinion states that depriving non-documentary conditions of effect is a rule adopted for the benefit of the beneficiary, with the result that there is no need for the beneficiary to 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 would have to comply with the non-documentary condition. The reason is that no guarantor can be expected to process – and approve as complying – a presentation that conflicts with an explicit term 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).

Only documents specified in the guarantee are to be examined

7.9 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 a non-documentary condition. Taking the above example, if the beneficiary were to present along 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, as the invoice, a non-required document, has to be disregarded outright (article 19(d)).

Non-documentary conditions changing the nature of guarantee

7.10 Article 7 is confined to non-documentary conditions in an undertaking that retains the fundamental characters of a demand guarantee. However, a non-documentary condition requiring default or tailoring the guarantor’s liability to the loss suffered by the beneficiary from the applicant’s breach will result in the guarantee being characterised as a suretyship guarantee in the first case or as an indemnity in the second. In both cases, the URDG would not apply at all.

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Cross-references within URDG 758

- Articles 6, 13, 19(b).

Cross-references to other ICC rules

- UCP 600 article 14(h).

- ISP98 rule 4.11.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- Article 3(b).

Illustration 7-1

A guarantee provides for expiry two years after issue. This is not a non- documentary condition covered by article 7 and is therefore a valid expiry term.

Illustration 7-2

A guarantee provides for indexation of the guarantee amount by reference to the CRB commodity price index. This is not a non-documentary condition covered by article 7 and is therefore a valid price term.

Illustration 7-3

A tender guarantee issued by G Bank provides that it is to expire on 10 May 2010 or on the issue of a performance guarantee by G Bank, following signature of the underlying contract by the beneficiary. The signature is itself a non-documentary condition, and so is the issue of the performance guarantee even if it were to be issued by G Bank, because it would not be covered by the definition of guarantor’s own records.

Illustration 7-4

A payment guarantee issued by G Bank in favour of a supplier provides that it is to expire on 10 May 2010 or upon receipt of the price amount transferred by the purchaser to the deposit account of the supplier held by G Bank, such transfer to identify the guarantee. This condition is not banned by article 7, since the receipt of the price amount is ascertainable from G Bank’s own records.

Illustration 7-5

A guarantee provides for payment of up to a maximum amount on presentation of a first written demand where the goods referred to in the underlying contract have not been shipped on or before 1 September 2011. This is a non-documentary condition within article 7 and must be ignored by the guarantor. An argument could also be made that this guarantee is not an independent guarantee and could be re-characterised as an accessory suretyship.

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Illustration 7-6

The facts are as in Illustration 7-5, except that the guarantee also requires the presentation of a bill of lading accompanying the demand. The presented bill of lading shows shipment on 15 September 2011. In this case, the bill of lading must be examined for consistency against the non-documentary condition as to shipment on or before 1 September 2011 and, since it is inconsistent with that condition, the presentation is a non-complying presentation.

Illustration 7-7

A warranty guarantee covering the seller’s obligations under a contract of sale of goods provides for payment on presentation of a first written demand and delivery to the applicant of a two-year warranty in writing covering the goods. The requirement for delivery of the warranty document is a non- documentary condition, because the document is not one that is required to be presented to the guarantor.

Illustration 7-8

A customs guarantee covering the payment of the importer’s customs duty under a temporary import contract states that it will expire upon 31 January

2012 or the presentation by the importer to the customs authority of a certificate of re-exportation of the relevant equipment, whichever is earlier. The requirement for delivery of the certificate is a non-documentary condition because that certificate is not one that is required to be presented to the guarantor and, in effect, requires the guarantor to investigate outside its own records whether it has been presented to the customs authority. Accordingly, the guarantee should be read as expiring upon the advent of the expiry date.

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URDG 758

Article 8 Content of instructions and guarantees

All instructions for the issue of guarantees and guarantees themselves should be clear and precise and should avoid excessive detail. It is recommended that all guarantees specify:

a. the applicant;

b. the beneficiary;

c. the guarantor;

d. a reference number or other information identifying the underlying relationship;

e. a reference number or other information identifying the issued guarantee or, in the case of a counter-guarantee, the issued counter-guarantee;

f. the amount or maximum amount payable and the currency in which it is payable;

g. the expiry of the guarantee;

h any terms for demanding payment;

i. whether a demand or other document shall be presented in paper and/ or electronic form;

j. the language of any document specified in the guarantee; and

k. the party liable for the payment of any charges.

URDG 458

Article 3

All instructions for the issue of Guarantees and amendments thereto and Guarantees and amendments themselves should be clear and precise and should avoid excessive detail. Accordingly, all Guarantees should stipulate:

a. the Principal;

b. the Beneficiary;

c. the Guarantor;

d. the underlying transaction requiring the issue of the Guarantee;

e. the maximum amount payable and the currency in which it is payable;

f. the Expiry Date and/or Expiry Event of the Guarantee;

g. the terms for demanding payment;

h. any provision for reduction of the Guarantee amount.

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Comment

Article 8 sets out the recommended (but not obligatory) practice as to the clarity and precision of the instructions for the issue of a guarantee and the content of the guarantee itself.

Changes from URDG 458

- Character of article 8, which was merely a recommendation, is now expressly indicated.

- Underlying relationship and guarantee or counter-guarantee to be specified by reference number or other information identifying them.

- Guarantee to indicate support of demand and other documents, language of required documents and party liable for payment of charges.

8.1 Under article 8, all instructions for the issue of the guarantee and the guarantee itself should be clear and precise. Article 8 provides a helpful check-list when drafting a demand guarantee that does not use the Form of Demand Guarantee under URDG 758 as a template (see Appendix 1). The use of the word “should” emphasises the optional character of article 8. The argument that a guarantee that does not specify the language of the required documents (article 8(j)) is void under the URDG is totally unwarranted under the rules.

Underlying relationship

8.2 The underlying relationship to be identified under paragraph (d) is the relationship between the applicant and the beneficiary on which the guarantee is based, for example a construction contract under which performance is to be secured by the guarantee. This could be identified, for example, by giving the date and any reference number of the contract. It is obviously important to include such a reference where there are two or more underlying transactions between the applicant and the beneficiary. If the underlying relationship were not identified, the guarantor would be entitled to pay a demand where the supporting statement identified one such transaction, even if it transpired that this was not the transaction that the applicant had intended to cover by the guarantee. Again, if there are two underlying transactions and separate guarantees are requested and issued for each without identifying the underlying transaction, the beneficiary will be unable to furnish the requisite demand and statement of breach because the guarantor will not be able to determine to which transaction they relate.

8.3 The inclusion of a reference to the underlying relationship in the guarantee does not make the guarantee a suretyship guarantee, as is sometimes assumed, since it remains the case that payment is to be made against documents and is not geared to the applicant’s actual default (see paragraph 1.11).

Identifier

8.4 The specification under paragraph (e) of a reference number or other information identifying the issued guarantee, though not obligatory under article 8, should always be included in order to enable a presentation to

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identify the guarantee as required by article 14(f). A presentation that does not identify the guarantee under which it is made ought not to be examined until the time of identification, with the presenter running the risk that the guarantee might expire before such identification is made.

Amount or maximum amount of guarantee

8.5 As regards paragraph (f) the guarantee will usually specify a maximum amount rather than a fixed amount, because often the parties will not know in advance how serious the consequences of a breach will be, and there may be successive breaches generating successive partial demands. The currency should, of course, be stated, and care should be taken to avoid ambiguity. Thus a guarantee providing for payment in dollars should make it clear whether the reference is to United States dollars or those of some other country using the dollar denomination, e.g. Australia, Canada, Singapore. Within the Eurozone, however, no national designation is needed, merely a statement of the amount in euro.

Expiry

8.6 The guarantee may specify expiry as an expiry date, an expiry event or the earlier of the two. The latter option is generally recommended.

Terms for demanding payment

8.7 Paragraph (h) recommends the inclusion of terms for demanding payment. Obviously, an essential term is the making of a signed demand, and in many cases this is all that is required. It is not necessary for the guarantee to require a supporting statement, as this is covered by article 15, which applies even if the guarantee is silent. Nevertheless, it is helpful to include a specific reference to the supporting statement so that the requirements for presentation are fully stated in the guarantee itself. Non-documentary conditions should not be included (article 7).

Form

8.8 Paragraph (i) refers to the form of a presentation (paper or electronic). On this issue, see articles 14(c), (d) and (e).

Language

8.9 Paragraph (j) recommends that the language of any document specified in the guarantee be stated. Article 14(g) provides that unless otherwise provided by the guarantee, 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, though documents issued by any other person may be in any language.

Party liable for the payment of charges

8.10 While it is open to the parties to indicate which party is liable for the payment of any charges, article 32(a) provides a default rule indicating that a party instructing another party to perform services in relation to a demand guarantee is liable to pay that party’s charges for carrying out its instructions.

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Furthermore, if the guarantee states that charges are for the account of the beneficiary and those charges cannot be collected, the instructing party is liable to pay those charges (article 32(b)). “Charges” has a wide scope in the definition ascribed to it in article 2 and includes any commissions, fees, costs or expenses due to any party acting under a URDG guarantee, whether it is acting as a guarantor, counter-guarantor or advising party or even as a bank transmitting the beneficiary’s demand for authentication purposes.

Other terms

8.11 The list in article 8 is not exhaustive. Where it is intended that the guarantee amount should be increased or reduced on the production of a document, the guarantee should state this and identify the document or documents to be presented. However, it is not necessary to include a provision for the reduction by reason of a payment made under the guarantee, as this is specifically covered by article 25(a)(i). Other terms will typically be those modifying the rules in some way, such as deferring the time when a demand may be presented, choosing a law different from the governing law specified in article 34 or selecting a jurisdiction different from that provided by article 35.

Cross-references within URDG 758

- Article 2 (definitions).

- Form of Demand Guarantee and Counter-Guarantee under URDG 758.

Cross-references to other ICC rules

- UCP 600 – none.

- ISP98 rule 3.01.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- None.

Illustration 8-1

Bank Kaspiiskoy Ikri, Moscow, issues a guarantee subject to URDG 758 without indicating in the guarantee any expiry terms or whether the required documents should be presented in paper or electronic form. After the issue of the guarantee, the guarantor informs the beneficiary that the guarantee is void because it is inconsistent with article 8, on the grounds that it omits the information listed in paragraphs (g) and (i) of that article. This argument should be rejected and the guarantee is valid, subject to the applicable law. Article 8 sets out a list of recommended terms to include in the guarantee. Specifically, article 25(c) supplements the guarantee in the absence of an expiry term and article 14(e) does the same where the form of the presentation is not indicated.

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URDG 758

Article 9 Application not taken up

Where, at the time of receipt of the application, the guarantor is not prepared or is unable to issue the guarantee, the guarantor should without delay so inform the party that gave the guarantor its instructions.

URDG 458

Article 7

a. Where a Guarantor has been given instructions for the issue of a Guarantee but the instructions are such that, if they were to be carried out, the Guarantor would by reason of law or regulation in the country of issue be unable to fulfil the terms of the Guarantee, the instructions shall not be executed and the Guarantor shall immediately inform the party who gave the Guarantor his instructions by telecommunication, or, if that is not possible, by other expeditious means, of the reasons for such inability and request appropriate instructions from that party.

b. Nothing in this article shall oblige the Guarantor to issue a Guarantee where the Guarantor has not agreed to do so.

Comment

Article 9 deals with cases where the guarantor is not prepared or is unable to issue the guarantee. It does not deal with the issue of an amendment, which is covered in article 11(a).

Changes from URDG 458

- Scope of new article 9 is broader than URDG 458 article 7 and covers any situation that prevents the guarantor from issuing the guarantee for which it received instructions.

- Use of “should without delay” instead of “shall immediately” under URDG 458 article 7 because the rule is a statement of best practice and not legally enforceable.

- Deletion of URDG 458 article 7(b) as unnecessary.

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9.1 A guarantor that, at the time of receipt of the application for issue of the guarantee, is not prepared to do so (e.g. because the creditworthiness of the instructing party is unacceptable to the guarantor) or is unable to do so (e.g. because of economic sanctions against the country of the beneficiary) should without delay so inform the party that gave the guarantor its instructions. “Guarantor” here means putative guarantor, since this article deals with cases where the guarantee is never issued. For that reason, article 9 refers not to “the instructing party” but to “the party that gave the guarantor its instructions”.

9.2 Article 9 is simply a recommendation for good practice. It could not have been made mandatory, because a putative guarantor that is unable or unwilling to issue the requested guarantee has no obligation to the person making the request. Indeed, the putative guarantor may have no existing or previous relationship with that person at all. However, although for that reason consideration was given to the deletion of article 9, it was ultimately retained in order to encourage prospective guarantors to communicate their decision and to do so without delay. Nothing in this article obliges the guarantor to issue a guarantee if it has not agreed to do so. That was expressly stated in URDG 458 article 7(b) but has been omitted from the present rule as superfluous. Article 9 does not apply to the issue of an amendment to a guarantee that has already been issued. The corresponding rule is to be found in article 11(a).

9.3 Another change from URDG 458 article 7 is the replacement of the word “immediately” by the phrase “without delay”. This is not intended to lower the standard of diligence expected of the guarantor. The change is not one of substance but seeks to streamline the drafting style of the new URDG and apply a uniform standard – “without delay” – that is consistent with UCP 600. The same approach is followed in article 11(a).

Cross-references within URDG 758

- Articles 1(a) and 2 (definitions).

Cross-references to other ICC rules

- UCP 600 – none.

- ISP98 – none.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- None.

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Illustration 9-1

Jamaican Blue Mountain Coffee Ltd (Jamaican) instructs its bank in Kingston, Best Bank, to issue an advance payment guarantee subject to URDG 758 in favour of a Canadian purchaser, Canadian Maple Syrup Corp. Best Bank decides not to issue the guarantee and informs the instructing party 15 days after receipt of the instructions. Jamaican contends that Best Bank should be compelled to issue the guarantee with retroactive effect because it did not comply with article 9, which directs the guarantor to inform the instructing party without delay if it does not issue the guarantee. The URDG do not support this contention. Article 9 is a statement of best practice and not a binding rule in the absence of an agreement to the contrary between the instructing party and the guarantor. Had Best Bank previously agreed to issue the guarantee, Jamaican could avail itself of the appropriate recourse under the applicable law, which in this case would supersede article 9.

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URDG 758

Article 10 Advising of guarantee or amendment

a. A guarantee may be advised to a beneficiary through an advising party. By advising a guarantee, whether directly or by utilizing the services of another party (“second advising party”), the advising party signifies to the beneficiary and, if applicable, to the second advising party, that it has satisfied itself as to the apparent authenticity of the guarantee and that the advice accurately reflects the terms and conditions of the guarantee as received by the advising party.

b. By advising a guarantee, the second advising party 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.

c. An advising party or a second advising party advises a guarantee without any additional representation or any undertaking whatsoever to the beneficiary.

d. If a party is requested to advise a guarantee or an amendment but is not prepared or is unable to do so, it should without delay so inform the party from whom it received that guarantee, amendment or advice.

e. If a party is requested to advise a guarantee, and agrees to do so, but cannot satisfy itself as to the apparent authenticity of that guarantee or advice, it shall without delay so inform the party from whom the instructions appear to have been received. If the advising party or second advising party elects nonetheless to advise that guarantee, it shall inform the beneficiary or second advising party that it has not been able to satisfy itself as to the apparent authenticity of the guarantee or the advice.

f. A guarantor using the services of an advising party or a second advising party, as well as an advising party using the services of a second advising party, to advise a guarantee should whenever possible use the same party to advise any amendment to that guarantee.

Comment

Article 10 provides for the advising of guarantees or amendments by a party other than the issuer, either directly by an advising party or indirectly through a second advising party.

Changes from URDG 458

- New article.

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The case for an article on advising guarantees

10.1 Article 10 is new to the URDG and mirrors UCP 600 article 9, but with an important difference, as noted below (paragraph 10.7). Article 10 reflects the growing practice of advising guarantees, no doubt mirroring the widespread use of the letter of credit, which is a similarly structured practice. As in the case of documentary credits, a guarantor may instruct an advising party to advise the guarantee to the beneficiary where that beneficiary, while accepting the guarantee without requiring a more costly reissue of the guarantee through a local guarantor, nonetheless insists on a warranty of the authenticity of the guarantee to be offered by an advising party that is acceptable to it. In the case of non-bank guarantors, seeking a 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, for example through SWIFT, which substantially augments the attractiveness of the guarantee to the beneficiary. However, the advising bank does not incur any payment commitment at all: the guarantee remains that of the non-bank issuer.

In this section, for the sake of brevity, the term “guarantee” also includes an amendment to a guarantee.

Article 10(a)

The guarantor’s option

10.2 It is for the guarantor to decide whether to advise the issue of a guarantee directly to the beneficiary or to use the services of a separate advising party. An advising party is the agent of the guarantor and has no relationship with the applicant.

Second advising party

10.3 The use of a second advising party results from the beneficiary’s preference to have the guarantee advised to it by a particular bank. 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 the second advising bank. Although article 3(a) only refers to branches “of a guarantor”, the same principle of separate branches can also be drafted into the guarantee in terms that allow two branches of the same bank in different countries to act as the advising party and the second advising party, mirroring a widespread letter of credit practice.

Advising party agent of guarantor

10.4 While routing the guarantee through one or more advising parties is generally indicated in the applicant’s instructions, an advising party acts as the 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

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notifies it to the beneficiary, for it is only then that the guarantee has left the control of the guarantor (see article 4(a)).

Responsibility of the advising party to the guarantor

10.5 The advising party owes the guarantor a duty to carry out its instructions promptly and according to professional standards. This duty is imposed not by the rules but by the agreement between the guarantor and the advising party and by the law governing their relationship. If the advising party is dilatory, with the result that the applicant placed in breach of the underlying relationship suffers a loss as a result and claims damages from the guarantor under the applicable law, the advising party may be required to indemnify the guarantor.

Responsibility of the advising party to the beneficiary

10.6 By advising a guarantee, whether directly or by utilising the services of another party (“second advising party”), the advising party signifies to the beneficiary and, if applicable, to the second advising party that it has satisfied itself as to the apparent authenticity of the guarantee and that the advice accurately reflects the terms and conditions of the guarantee as received by the advising party. The points set out in the following paragraphs should be noted.

Apparent authenticity

10.7 In contrast to UCP 600 article 9, an advising party that utilises the services of a second party is nevertheless considered to have warranted the apparent authenticity of the guarantee not only to the second advising party but also to the beneficiary. However, under UCP 600 article 9, the only warranty that the beneficiary receives in the context of the indirect advice of a guarantee is a warranty from the second advising party as to the apparent authenticity of the advice received by the second advising party, not the apparent authenticity of the guarantee itself. By contrast, under URDG article 10, there is a direct warranty from the advising party to the beneficiary even where the guarantee is advised through a second advising party. In keeping with the general principle that guarantors and related parties are concerned only with the apparent good order of documents (see article 19(a)), an advising party does not warrant that the guarantee is authentic, only that it appears to be authentic.

Advice accurately reflects terms of guarantee

10.8 Following the same principle, the separate warranty that the advice accurately reflects the terms and conditions of the guarantee relates only to the terms and conditions as received by the advising party. Thus, if the terms were not accurately transmitted to the advising party by the guarantor or were distorted in the course of transmission, the advising party is not responsible. In addition, the rule should not be understood as requiring the advising party to advise information that it may have received from the guarantor but that is not part of the guarantee. An example is the reimbursement instructions that the guarantor may also give to the advising party pursuant to a separate mandate to act as the place for payment according to article

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20(c) and make the payment as an agent of the guarantor. This information, which covers the bank-to-bank relationship, need not be advised to the beneficiary and can be omitted from the advised guarantee.

10.9 A breach of the two warranties laid out in article 10(a) that causes 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.

Preparatory works

During the revision, a number of comments on article 10(a) pointed out the absence of a contractual nexus between the first advising party and the beneficiary where the advising party uses a second advising party to advise the guarantee to the beneficiary. However, there was strong support for the beneficiary’s entitlement to rely on the apparent authenticity of the guarantee as signified by the advising party as opposed to merely the apparent authenticity of the received advice where a second advising party is involved. Even if the advising party and the beneficiary are not party to a direct contract, a majority of legal systems accept that a party may make a contract conferring rights on a third party (in this case, the beneficiary). Any other solution would likely result in a chain of claims where the beneficiary would have to claim against the second advising party for misrepresentation of the authenticity of the advice, while the second advising party would in turn have to claim against the advising party for misrepresentation of the authenticity of the guarantee.

Article 10(b)

Responsibility of second advising party

10.10 As stated above, 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. It follows that the second advising party gives no warranty as to the authenticity of the guarantee, only as to the apparent authenticity of the advice it has received from the advising party and whether that advice accurately reflects the terms and conditions of the guarantee as received by the second advising party.

Article 10(c)

No further representation or undertaking

10.11 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 beneficiary. Thus, an advising party or second advising party makes no representation to the effect 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

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undertaking that a complying demand under the guarantee will be paid, whether by itself or anyone else. In fact, the advising party is not required to do more in the way of advice than notifying the beneficiary of the issue of the guarantee.

Article 10(d)

Party unable or unwilling to advise

10.12 Under article 10(d), if a party that has been requested to advise a guarantee is unable or unwilling to do so it should without delay inform the party from which it 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 giving the guarantee. Article 10(d) is therefore simply a recommendation of good practice. It should be noted that article 32(c) precludes the advising party from stipulating that its advice of the guarantee or amendment is conditional upon its receipt of any charges due to it. It is open to the advising party to require the payment of its charges ahead of carrying out its mandate.

Article 10(e)

Party unable to satisfy itself as to apparent authenticity

10.13 Under article 10(e), if a party that has been requested to advise a guarantee, and has agreed to do so, finds that it is unable to satisfy itself as to the apparent authenticity of that guarantee or the advice, it must without delay inform the party from which the instructions appear to have been received. If the advising party has satisfied itself as to the apparent authenticity of the guarantee or the advice, it is not responsible if it later transpires that the instructions were sent by a different person. If it is unable to satisfy itself as to the apparent authenticity of the guarantee or the advice and decides not to advise the guarantee or advice, the party that has been requested to communicate this to the beneficiary need not inform the beneficiary that it was unable to satisfy itself as to the apparent authenticity. These provisions of article 10(e) are obligatory, and the advising party or second advising party, as the case may be, may incur a liability if it fails to perform them.

Article 10(f)

Same party to advise amendments

10.14 Under article 10(f), 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. Of course, the party advising the guarantee may no longer be in business or have a relationship with the party from which it received its instructions to advise the guarantee, but even where it is perfectly possible for the guarantor to use the same party to advise an amendment it is not obliged to do so. Article 10(f) is simply a provision concerning good practice.

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Cross-references within URDG 758

- Article 2 (definition of advising party).

- Article 11(d) (advising amendments).

- Article 32(c) (receipt of advising party’s charges).

Cross-references to other ICC rules

- UCP 600 article 9.

- ISP98 rule 2.05.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- None.

Illustration 10-1

G Bank instructs A Bank to advise B of the issue of a guarantee in B’s favour. A Bank does this but due to a slip states that the guarantee expires on 10 May, whereas the instructions transmitted by G Bank indicate that it expires on 10 March. B presents a demand and supporting statement on 2 April, but the presentation is rejected on the ground that the guarantee has expired. A Bank incurs a responsibility for giving an advice that does not accurately reflect the terms of the guarantee. This is so whether A Bank advises the guarantee to the beneficiary directly or through a second advising party.

Illustration 10-2

G Bank instructs A1 Bank to advise B of the issue of a guarantee in B’s favour. A1 Bank utilises the services of A2 Bank to advise B of the guarantee. Owing to an error in transmission by G Bank of the details of the guarantee to A1 Bank, one of the terms of the guarantee is incorrectly stated. Neither A1 Bank nor A2 Bank incurs a responsibility. G Bank itself is not liable vis-à-vis the instructing party if the conditions of articles 28 and 30 are met.

Illustration 10-3

A1 Bank receives instructions, which purport to emanate from G Bank, to advise B of the issue of a guarantee in B’s favour. It is apparent from even a cursory examination that the guarantee is not authentic. A1 Bank fails to notice this and utilises the services of A2 Bank to advise B of the purported guarantee. B later discovers that the guarantee is a forgery. A1 is responsible for failing to check the apparent authenticity of the guarantee; A2 has no responsibility, as its duty was solely to satisfy itself as to the apparent authenticity and accuracy of the advice it received, and it was under no duty to check the apparent authenticity of the guarantee.

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URDG 758

Article 11 Amendments

a. Where, at the time of receipt of instructions for the issue of an amendment to the guarantee, the guarantor for whatever reason is not prepared or is unable to issue that amendment, the guarantor shall without delay so inform the party that gave the guarantor its instructions.

b. An amendment made without the beneficiary’s agreement is not binding on the beneficiary. Nevertheless the guarantor is irrevocably bound by an amendment from the time it issues the amendment, unless and until the beneficiary rejects that amendment.

c. Except where made in accordance with the terms of the guarantee, the beneficiary may reject an amendment of the guarantee at any time until it notifies its acceptance of the amendment or makes a presentation that complies only with the guarantee as amended.

d. An advising party shall without delay inform the party from which it has received the amendment of the beneficiary’s notification of acceptance or rejection of that amendment.

e. Partial acceptance of an amendment is not allowed and will be deemed to be notification of rejection of the amendment.

f. A provision in an amendment to the effect that the amendment shall take effect unless rejected within a certain time shall be disregarded.

Comment

URDG 458 contained no provisions relating to the important subject of amendments. The new rules lay out such provisions in some detail. They distinguish sharply between the time that an amendment binds the guarantor issuing the amendment and the time it binds the beneficiary to which it is issued. In short, the beneficiary is not bound by an amendment unless: (a) it has previously agreed to the amendment and that agreement is recorded in the guarantee; or (b) the beneficiary either accepts the amendment after issue or is precluded from rejecting the amendment as a result of its subsequent conduct.

Changes from URDG 458

- New article.

Article 11(a)

Guarantor unwilling or unable to issue an amendment

11.1 A guarantor is under no obligation to accept instructions to issue an amendment unless it has previously agreed to do so. If at the time it receives its instructions

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it is unwilling or unable to issue the amendment, it must without delay so inform the party from which it received those instructions. This rule is obligatory.

Article 11(b)

Amendment binds guarantor from time of issue

11.2 An amendment to a guarantee, like a guarantee itself, binds the guarantor from the time of issue unless and until the amendment is rejected by the beneficiary. Since, under article 3(b), a guarantee includes an amendment except where the context requires otherwise, article 4, which provides that a guarantee is issued when it leaves the control of the guarantor, applies equally to an amendment.

Amendment of no effect if guarantee has expired

11.3 A guarantee comes to an end on expiry, and an amendment issued after that date has 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 of the expired one but with a new expiry date.

Preparatory works

A number of national committees expressed concern about the rule in article 11(b) according to which the guarantor is bound by an amendment it has issued unless and until the beneficiary rejects the amendment. It was argued that this rule would conflict with regulatory capital obligations requiring bank guarantors to ascribe a specific duration and amount to their commitments. For instance, if a guarantor issues an amendment changing the validity period of the guarantee and its amount, is the guarantor expected to reflect the original or the amended guarantee duration and amount in its books? The answer is the guarantor would have to 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. When issuing an amendment, the guarantor is presumed to be aware of the consequences of the rule in article 11(b) and to have cautiously obtained adequate cover by the instructing party. Any other solution would necessarily lead to a restriction of the rights of the beneficiary by either deeming an amendment as accepted if not rejected within a set period of time or, in contrast, by considering such amendment to have been rejected where they are not expressly accepted. This would run counter to the legal certainty of transactions and, as such, was considered to be unacceptable.

Amendment issued without authority

11.4 If the guarantor issues an amendment without the authority of the instructing party, the guarantor may incur a liability for breach of its mandate. However that is a matter that is internal to the relationship between the guarantor and the instructing party and does not affect the beneficiary’s right to rely on the amendment in the absence of fraud.

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Beneficiary not bound by amendment made without its agreement

11.5 An amendment made without the beneficiary’s agreement is not binding on the beneficiary. The beneficiary’s prior agreement to the amendment will usually be concluded with the applicant rather than the guarantor, and this does not constitute acceptance of the amendment as between beneficiary and guarantor unless that prior agreement is recorded as a term of the guarantee (which is the only relationship covered by article 11(b)). The beneficiary is thus not bound by an amendment unless it has previously agreed with the guarantor to accept the amendment, has agreed to accept the amendment after its issue or is precluded from rejecting it as a result of its subsequent conduct (see paragraphs 11.12 et seq.).

Guarantor bound by amendment from time of issue

11.6 The phrase “bound by an amendment” has different meanings according to whether it refers to the guarantor or the beneficiary. Where the guarantor is bound by an amendment, it has a commitment to honour the guarantee as amended against a complying presentation. By contrast, as stated above, the beneficiary owes no obligation of any kind to the guarantor; the presentation of a conforming demand is simply a condition of its right to be paid. Thus, a beneficiary that rejects an amendment previously agreed with the applicant does not breach any duty towards the guarantor but only a duty towards the applicant to accept a previously agreed amendment. Accordingly, the effect of the beneficiary becoming “bound” by an amendment is simply that thereafter it ceases to be able to make a presentation based on the original terms of the guarantee in so far as they are inconsistent with the amendment.

No obligation on beneficiary to expressly accept or reject amendment

11.7 It may at first sight appear strange that the issue of an amendment should bind the guarantor but not the beneficiary if that beneficiary has not previously agreed to it. However, this is perfectly logical. The beneficiary is in possession of the original guarantee and is entitled to invoke its terms. The rights of the beneficiary cannot be affected by the unilateral decision of the guarantor or the applicant. The beneficiary, unless previously agreeing with the guarantor to accept the amendment, therefore has a choice: to accept the amendment, to reject it and hold the guarantor to the terms of the guarantee as issued or to make no decision either way by making a presentation conforming both to the original terms of the guarantee and to the amendment (see paragraph 11.13). At no time does the beneficiary need to expressly accept or 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 it is also compliant in other respects, even if the beneficiary did not explicitly notify the guarantor that it accepts the amendment. On the subject of successive amendments, see paragraph 11.16 below.

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No exception for amendments benefiting the beneficiary

11.8 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 demonstrate the complexity of this issue:

- 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.

- 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.

Guarantor to be informed of rejection

11.9 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 to this effect carry no weight (article 11(f)).

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Article 11(c)

Beneficiary’s right to reject amendment

11.10 Except where an amendment has been made in accordance with the terms of the guarantee, the beneficiary is entitled to reject it at any time until it notifies its acceptance or makes a presentation complying only with the guarantee as amended.

Effect of beneficiary’s rejection

11.11 Where the beneficiary rejects the amendment without having lost the right to do so (see paragraph 11.12), 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.

Loss of right to reject amendment

11.12 The beneficiary need not reject an amendment at the time of receipt or, indeed, within any specified time. It may do so at any time until it has performed an act of acceptance within the meaning of article 11(c), that is, by notifying its acceptance or by making a presentation that complies only with the guarantee as amended. The word “only” is emphasised here because a presentation that conforms to the requirements of the original guarantee does not by itself signify acceptance of 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.

What a presentation signifies

11.13 It follows that, in the absence of express agreement with the guarantor to accept or reject an amendment, a presentation may signify an acceptance, a rejection or neither, as shown in the following table.

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Amendment varying the amount of the guarantee

11.14 One example is where the amendment increases the amount of the guarantee and shortens its validity period. The guarantor must honour the presentation, but the beneficiary is free to make a further presentation that is inconsistent with the original guarantee but consistent with the amendment, in which event the beneficiary is deemed to have accepted the amendment. However, if the further presentation is made at a date which is consistent with the original guarantee but not with the amended guarantee, this constitutes rejection of the amendment.

Amendment extending the validity period of the guarantee

11.15 A second example relates to an extension of the period of the guarantee. 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, which binds the guarantor from the time of issue, regardless of acceptance, unless and until the amendment is rejected by the beneficiary. Accordingly, the effect of issuing the amendment is to extend the period of the guarantee automatically without any action on the beneficiary’s part.

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Successive amendments

11.16 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.

Rejection of non-conforming demand not cured by subsequent amendment

11.17 Where a demand is properly rejected as not being a complying demand, it ceases to be operative and is not revived merely by a subsequent amendment of the guarantee that would cure the non-conformity. The demand must be re-presented.

Article 11(d)

Advising party’s duty to notify an amendment

11.18 The amendment must be advised to the beneficiary even though it is irrevocable from the time of issue. Where the guarantor does this through an advising party, that party must notify the guarantor of the beneficiary’s acceptance or rejection of the amendment. 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 its presentation whether it has accepted or rejected the amendment.

11.19 Article 32(c) requires the advising party not to stipulate that the advice of an amendment is conditional upon the receipt by that party of any charges due to it. It is open to the advising party to require the payment of its charges ahead of carrying out its mandate.

Article 11(e)

No partial acceptance

11.20 Partial acceptance of an amendment is not permitted. 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.

Article 11(f)

No acceptance by silence

11.21 A provision in an amendment to the effect that the amendment shall take effect unless rejected within a certain time is to be disregarded. 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.

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No rejection by silence

11.22 Although article 11(f) does not explicitly say so, the guarantor cannot validly stipulate that, if the beneficiary fails to accept an amendment on receiving it or within a specified time thereafter, the amendment will be revoked and cease to be available. This would go against article 4(b), which, when read in conjunction with article 3(b), leads 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 explicit acceptance or abstention is not a good practice and should be discouraged.

Amendment may not be used to effect transfer

11.23 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 requires the consent of that beneficiary. 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 transfer dealings concerning demand guarantees in isolation from the transfer of the original beneficiary’s rights and obligations under the underlying relationship.

Amendment to counter-guarantee

11.24 Article 11 and the comments above apply equally to amendments to a counter-guarantee.

Cross-references within URDG 758

- Articles 3(b), 10(d), 32(c) and 33(d)(i).

Cross-references to other ICC rules

- UCP 600 article 10.

- ISP98 rule 2.06.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- Article 8.

Illustration 11-1

Alpha contracts with Beta to supply plant and machinery and undertakes to procure the issue of a demand guarantee in favour of Beta for a maximum amount of SGD 10,000,000. A guarantee for that amount is issued by Gamma Bank. Subsequently, Alpha and Beta agree to reduce the guarantee amount to SGD 8,000,000, and Alpha instructs Gamma Bank to issue an amendment to that effect. Gamma Bank is not obliged to do so, and if it refuses to do so must inform Alpha without delay. If Gamma Bank accepts the instruction and issues the amendment, Gamma Bank is bound by it but Beta is only

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bound by the amendment when it accepts it or makes a presentation that complies only with the guarantee as amended. Beta’s prior agreement with Alpha does not bind Beta vis-à-vis Gamma Bank under the guarantee, which is a different relationship, although if Beta were to reject the amendment it might be liable towards Alpha for breach of the agreement between them.

Illustration 11-2

The facts are as in Illustration 11-1. Acting upon the applicant’s instructions, the guarantor issues an amendment that purports to shorten the expiry date of the guarantee from 15 May 2011 to 15 April 2011, all other terms and conditions remaining unchanged. The beneficiary does not indicate whether it accepts or rejects this amendment. On 10 April 2011, the beneficiary presents a demand for part of the guarantee amount. This presentation constitutes neither an acceptance nor a rejection of the amendment, and the guarantor is bound until 15 May 2011 should the beneficiary present another demand for the remaining balance.

Illustration 11-3

The facts are as in Illustration 11-1, except that the original guarantee is for a maximum of SGD 8,000,000 and the parties subsequently agree to increase it to SGD 10,000,000. Gamma Bank issues the requisite amendment, by which it is bound as from the time of issue.

- If Beta presents a demand for SGD 9,000,000, it is deemed to have accepted the amendment.

- If Beta presents a demand for SGD 8,000,000, this is neither an acceptance nor a rejection of the amendment, though any subsequent demand for a further amount would constitute an acceptance of the amendment.

- If Beta presents a demand for SGD 7,000,000, this presentation does not constitute acceptance of the amendment, since it is equally consistent with the unamended terms of the guarantee, so that Beta still has SGD 3,000,000 of the guarantee available. If Beta were to make a further demand for SGD 2,000,000 before the expiry of the guarantee, that would constitute an implicit acceptance of the amendment, as it would be inconsistent with the unamended terms of the guarantee.

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Illustration 11-4

Alpha contracts with Beta to supply a plant and machinery, and its obligations are to be covered by a guarantee expiring on 1 March 2011. Gamma Bank issues the guarantee accordingly. Subsequently, the guarantee is extended to 1 February 2012. Beta does not indicate acceptance but later presents a demand on 5 August 2011. This constitutes an implicit acceptance of the amendment and, if otherwise complying with the guarantee and the rules, is a valid presentation even though it was made after the expiry of the guarantee according to its original terms, because the issue of the amendment automatically extends the period of the guarantee without the need for any action on the beneficiary’s part.

Illustration 11-5

Alpha contracts with Beta to supply a plant and machinery, and its obligations are to be covered by a guarantee expiring on 1 March 2011. Gamma Bank issues the guarantee accordingly. Subsequently, Gamma Bank is instructed to issue an amendment that extends the validity period of the guarantee to 1 February 2012 and decrease its amount by 50% to €1,000,000. Gamma Bank issues the amendment. Beta intimates acceptance of the extension of the validity period but says nothing about the amendment concerning the decrease of amount. The entire amendment must be treated as having been rejected as there can be no partial acceptance of an amendment.

Illustration 11-6

The facts are as in Illustration 11-5, except that the beneficiary, Beta, indicates neither acceptance nor rejection of the amendment.

- If Beta presents a demand for €1,000,000 on 5 August 2011, it is deemed to have accepted the amendment.

- If Beta presents a demand for €2,000,000 on 5 August 2011, the demand complies neither with the original unamended guarantee nor with the amendment. It should therefore be rejected even if it otherwise complies with the terms of the guarantee and the rules.

Illustration 11-7

Gamma Bank issues a performance guarantee requiring the presentation of a surveyor’s report indicating the non-conforming delivery of the goods and a customs certificate indicating that the goods were cleared. Beta, the beneficiary, presents a demand for payment accompanied by the surveyor’s report but not the customs certificate. Gamma Bank examines the demand, identifies that it is incomplete and accordingly rejects it. Subsequently, the instructing party, Alpha, instructs Gamma Bank to issue an amendment to the guarantee deleting the requirement for the customs certificate. This does not revive the demand, which, having been rejected, is no longer operative, and Beta must present a fresh demand.

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URDG 758

Article 12 Extent of guarantor’s liability under guarantee

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

URDG 458

Article 16

A Guarantor is liable to the Beneficiary only in accordance with the terms specified in the Guarantee and any amendment(s) thereto and in these rules, and up to an amount not exceeding that stated in the Guarantee and any amendment(s)

Comment

Article 12 spells out the “four-corner” rule, which is an essential attribute of the independence of guarantees and counter-guarantees. It directs the parties to look at the guarantee itself to determine the conditions and amount of the guarantor’s liability. Because the rules are part of the guarantee, they can be used to determine the guarantor’s liability in so far as it is consistent with the guarantee terms.

Changes from URDG 458

- Drafting changes reflecting the drafting style and rules of interpretation of URDG 758.

- No substantive change from URDG 458.

Guarantor’s liability determined by the terms of the guarantee and the rules

12.1 Article 12 closely follows its equivalent in URDG 458. It makes it clear that, in order to determine the conditions and amount of the guarantor’s liability, it is first necessary to look at the terms and conditions of the guarantee, which specify the circumstances in which a demand must be paid and the amount or maximum amount for which the guarantor is liable. For this purpose, “guarantee” includes any amendments (see article 3(b)). The rules are to be applied only in so far as consistent with the terms and conditions of the guarantee as amended. Hence the reference in international guarantee practice to the “four-corner” rule, meaning everything indicated within the four corners of the guarantee document. This rule is an essential corollary to article 5 on the independence of guarantees and counter-guarantees, since a self-contained undertaking requiring no determination from an agreement

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other than its own terms and conditions is surely the best attribute of the independence of that commitment. There is an exception to this rule. Under article 15, unless excluded by the parties, a demand must be supported by a statement of breach, whether or not it is among the documents specified in the guarantee.

International standard demand guarantee practice

12.2 Although not explicitly referred to in article 12, international standard demand guarantee practice is necessarily part of the standards for the determination of the conditions and amount of the guarantor’s liability under the guarantee, to the extent that this determination involves a presentation. As indicated in the definition of a complying presentation, guarantors should refer to international standard demand guarantee practice where needed in the absence of a relevant provision in the guarantee or the URDG.

The right to payment

12.3 In order to be entitled to payment under the guarantee, the beneficiary must present a complying demand, supported by a statement of breach and such other documents as may be specified in the guarantee, on or before the expiry of the guarantee and in accordance with any other requirements of the guarantee and – in so far as they are consistent – the rules, including requirements as to the place, mode and time of presentation (see articles 14, 15, 17 and 19), as well as international standard demand guarantee practice on any point not covered by the terms of the guarantee or the rules. Furthermore, though a demand may be made for less than the full amount available (article 17(a)), it cannot be made for more, since a demand that exceeds the amount available is a non-complying demand not merely with regard to the excess but in its entirety (article 17(e)).

12.4 In the absence of vitiating factors such as fraud, the beneficiary is entitled to be paid against a complying presentation even if the applicant is not in breach. Moreover, the amount to which the beneficiary is entitled is the undrawn amount for which the guarantee was issued, regardless of whether the beneficiary suffered a loss as the result of the applicant’s breach and of the amount of such loss. If a complying demand is paid for an amount exceeding the beneficiary’s loss, the applicant’s remedy is to bring proceedings against the beneficiary before the competent court of the underlying relationship for recovery of the excess, if so permitted by the applicable law.

Guarantee includes amendments

12.5 If the guarantor issues an amendment without the authority of the instructing party or the counter-guarantor, it may incur liability for breach of its mandate. However, that is a matter internal to the relationship between the guarantor and the instructing party or counter-guarantor. Absent a vitiating factor such as fraud, it does not affect the beneficiary’s right to rely on the amendment, though the beneficiary may later have to account to the applicant for any

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benefit exceeding what it was entitled to receive under the underlying relationship.

Mandatory rules of the applicable law

12.6 Like other provisions of the rules, article 12 is subject to any overriding mandatory provisions of the applicable law, such as mandatory provisions extending the period of the guarantee or providing for that it remains in force until the return of the original guarantee document to the guarantor.

Cross-references within URDG 758

- Articles 11, 13 and 14.

Cross-references to other ICC rules

- UCP 600 – none.

- ISP 98 – none.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- None.

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URDG 758

Article 13 Variation of amount of guarantee

A guarantee may provide for the reduction or the increase of its amount on specified dates or on the occurrence of a specified event which under the terms of the guarantee results in the variation of its amount, and for this purpose the event is deemed to have occurred only:

a. when a document specified in the guarantee as indicating the occurrence of the event is presented to the guarantor, or

b. if no such document is specified in the guarantee, when the occurrence of the event becomes determinable from the guarantor’s own records or from an index specified in the guarantee.

URDG 458

Article 8

A Guarantee may contain express provision for reduction by a specified or determinable amount or amounts on a specified date or dates or upon presentation to the Guarantor of the document(s) specified for this purpose in the Guarantee.

Comment

Article 13 provides for the reduction or increase of the amount of a guarantee on specified dates or on the occurrence of a specified event as indicated in a specified document or determinable from the guarantor’s own records.

Changes from URDG 458

- Reference to variation by increase of amount.

- Determination of occurrence of variation of amount event upon presentation of a specified document, from the guarantor’s own records or from an index specified in the guarantee.

13.1 Article 13 mirrors the rules on expiry that were discussed earlier (see paragraphs 2.34 et seq.). A guarantee may provide for the variation of its amount in one of two ways: by specifying the date or dates when the variation is to take place or by specifying the event the occurrence of which is meant to trigger the variation. However, in the latter case, in conformity with the general principle that guarantors are concerned only with documents, not with external facts, the event is deemed to have occurred only: (a) when a document specified in the guarantee as indicating the occurrence of the event is presented to the guarantor; or (b) if no such document is specified,

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when the occurrence of the event becomes determinable from the guarantor’s own records, as defined in article 2 or from an index specified in the guarantee.

Reduction of amount

13.2 Reduction mechanisms are important features in demand guarantees that are keenly fought for by experienced applicants. Because the guarantee is independent of the underlying relationship (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 decreased by 10% upon each delivery, even if the delivery is not contested. Such a guarantee would remain available for the full amount of €1,000,000 until its expiry. 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.

Reduction clause

13.3 A common form of reduction clause is one that is designed to reduce the amount of the guarantee as each stage of performance is completed. However, the reduction clause must be in the guarantee itself: it does not suffice that it is contained in the underlying contract. Furthermore, unless the completion of the relevant stage is determinable from the guarantor’s own records, the guarantee must specify the document that is to indicate such completion. This could, for example, be the certificate of an architect or engineer, although such a certificate would not suffice if it is not specified in the guarantee as the relevant document. Another way of triggering a reduction is by reference to a published index specified in the guarantee, for example a commodity price index or a published bank interest rate. The guarantor’s own records may show the occurrence of the event, as where the beneficiary has made a previous drawing under the guarantee that is reflected in a debit to the guarantor’s account.

13.4 It is not necessary for the variation clause to provide for a reduction through a payment under the guarantee, since this is covered in the rules themselves under article 25(a)(i).

13.5 A model reduction clause appears among the optional clauses to be inserted in the Form of Demand Guarantee under URDG 758 (see Appendix 1).

Event triggering reduction

13.6 A clause that automatically triggers the reduction of the amount upon the advent of a date or the expiry of a time period raises no issue. Where the reduction clause chooses an event rather than a date, such as the delivery of the works, the event must be determined by the presentation of a document specified in the guarantee, such as the certificate of an architect, engineer or

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surveyor. Only a document specified in the guarantee will be examined by the guarantor to determine the occurrence of the relevant event. As indicated in article 19(d), no other document will be examined even if it shows the occurrence of the specified event.

13.7 However, an event that does not require the presentation of a document can still lead to the reduction of the guarantee if its occurrence can be determined from the guarantor’s own records, as where the beneficiary has made a previous drawing under the guarantee (see article 25(a)(i)) or, in the case of a guarantee covering the reimbursement of a loan, the applicant has reimbursed a corresponding instalment of the loan into the beneficiary’s account maintained with the guarantor.

13.8 Another way of triggering a reduction is by reference to an index specified in the guarantee, for example a commodity price index or a published bank interest rate. There is no need for concern regarding the identification of the index, 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 the index and determine the occurrence of the event in relation to it.

Increase of amount clause

13.9 Increase of amount clauses serve as important a function as reduction of amount clauses. An example is where an advance payment guarantee provides for the increase of its amount to cover new advance payments made by the owner under a construction contract before the contractor has delivered the corresponding portions of the works. Turnkey contracts involving additional works to be performed at the discretion of the buyer are another example. In such situations, there is little economic purpose in the applicant instructing 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, as those payments may never be made or the option to order additional works may never be exercised. Indeed, the applicant would burden its credit lines and pay the guarantor the issuance charges 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 could vary the amount to match the increased value of the contract should this option be exercised.

13.10 If it has difficulty reaching agreement on an increase of amount clause with the beneficiary, the applicant could consider resorting to the option offered by article 4(c) instead. 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

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made or the optional works to be undertaken. However, the part of the amount corresponding to those payments or works would only be available for a 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. However, the instructing party should expect to have to pay the guarantor’s charges upfront for the full amount of the issued guarantee, including for the tranches that may be optionally increased in the future.

13.11 The increase of amount clause must conform to the same drafting principles as the reduction clause. Article 13 applies to both, and the description of the reduction mechanism in paragraph 13.2 above applies equally to the increase of amount clause. A model variation of amount clause is provided among the optional clauses to be inserted in the Form of Demand Guarantee under URDG 758 in Appendix 1 to this Guide.

Counter-guarantees

13.12 As indicated in the general rule of interpretation in article 3(b), article 13 applies equally to counter-guarantees.

Cross-references within URDG 758

- Articles 7 and 25(a).

Cross-references to other ICC rules

- UCP 600 – none.

- ISP98 rule 2.06.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- None.

Illustration 13-1

A guarantee given to support the applicant’s obligations under a construction contract provides for a reduction of the guarantee amount as each of four specified stages of construction is completed. This is not a valid reduction clause under articles 13 and 7, as no document is specified as indicating completion of any stage and such completion cannot be determined from the guarantor’s own records or from an index specified in the guarantee.

Illustration 13-2

The facts are as in Illustration 13-1, except that when referring to the completion of each stage the guarantee adds “as certified in writing by the engineer of the construction project”. This is a valid reduction clause that takes effect upon each presentation of the engineer’s certificate.

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Illustration 13-3

De Tulp van Keukenhof BV agreed to sell black tulip bulbs to Cornelius Van Baerle College, Oxford, for an amount of £50,000, to be delivered in 10 monthly instalments valued at £5,000 each, between 1 February and 1 November 2011. It was agreed that each instalment would be paid one month before the delivery date. Cornelius Van Baerle College requested that an advance payment guarantee be issued in its favour for an amount of £50,000. In return, De Tulp van Keukenhof BV offered to procure a guarantee to be issued by De Vrolijke Bloemisten Bank in favour of Cornelius Van Baerle College for an amount of £5,000 to be increased by the value of each advance payment made by Cornelius Van Baerle College to De Tulp van Keukenhof BV’s account with De Vrolijke Bloemisten Bank. This increase of amount mechanism complies with article 13. Article 13 also offers De Tulp van Keukenhof BV the possibility of combining the increase of amount mechanism with a reduction of amount mechanism that could be triggered, for example, upon the presentation of a certificate signed by the Pro-Vice- Chancellor for University Tulip Collections, confirming the conforming delivery of each instalment. This would also effectively offset the risk of a demand being presented for an amount that exceeds the amount paid in advance for the next expected shipment.

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URDG 758

Article 14 Presentation

a. A presentation shall be made to the guarantor:

i. at the place of issue, or such other place as is specified in the guarantee, and

ii. on or before expiry.

b. A presentation has to be complete unless it indicates that it is to be completed later. In that case, it shall be completed on or before expiry.

c. Where the guarantee indicates that a presentation is to be made in electronic form, the guarantee should specify the format, the system for data delivery and the electronic address for that presentation. If the guarantee does not so specify, a document may be presented in any electronic format that allows it to be authenticated or in paper form. An electronic document that cannot be authenticated is deemed not to have been presented.

d. Where the guarantee indicates that a presentation is to be made in paper form through a particular mode of delivery but does not expressly exclude the use of another mode, the use of another mode of delivery by the presenter shall be effective if the presentation is received at the place and by the time indicated in paragraph (a) of this article.

e. Where the guarantee does not indicate whether a presentation is to be made in electronic or paper form, any presentation shall be made in paper form.

f. Each presentation shall identify the guarantee under which it is made, such as by stating the guarantor’s reference number for the guarantee. If it does not, the time for examination indicated in article 20 shall start on the date of identification. Nothing in this paragraph shall result in an extension of the guarantee or limit the requirement in article 15(a) or (b) for any separately presented documents also to identify the demand to which they relate.

g. Except where the guarantee otherwise provides, 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.

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URDG 458

Article 19

A demand shall be made in accordance with the terms of the Guarantee before its expiry, that is, on or before its Expiry Date and before any Expiry Event as defined in article 22. In particular, all documents specified in the Guarantee for the purpose of the demand, and any statement required by article 20, shall be presented to the Guarantor before its expiry at its place of issue; otherwise the demand shall be refused by the Guarantor.

Comment

This article deals with the requirements for the presentation of documents under a guarantee, including place and time, completeness, format, mode of delivery, the linkage of presentation to the relevant guarantee as well as the language of documents. The guarantor has a duty to examine every presentation that is made in a timely manner to see if it is a complying presentation and, if it consists of a demand, to pay the demand if it is a complying demand or give notice of rejection in due time if it is not.

Changes from URDG 458

- URDG 758 article 14 expands URDG 458 article 19 by offering a detailed set of rules covering the presentation process, including for presentations that are not demands, whether made by the beneficiary, the applicant or an agent acting on behalf of either.

Presentation

14.1 “Presentation” is defined as the delivery of a document under a guarantee to the guarantor or the document so delivered (article 2). The guarantor has a duty to accept and examine every presentation made before the expiry of the guarantee to see if it is a complying demand and, if the presentation is a demand, to pay the demand if it is compliant or give notice of rejection in due time if it is not. As to the doctrine of strict compliance, see paragraphs 19.5 et seq.

14.2 Article 14 is to be distinguished from its counterpart in URDG 458 in two respects. First, it is more detailed and covers all forms of presentation, whether of a demand, a document for reduction or increase of the amount of the guarantee, a document indicating the occurrence of an expiry event or otherwise. Second, it covers a presentation made by the beneficiary itself, the applicant or the bank or other agent or proxy acting on behalf of the beneficiary or applicant, including, for this purpose, a third party furnishing a document required by the guarantee on behalf of the beneficiary or applicant, for example an insurer presenting an insurance certificate specified in the guarantee directly to the guarantor. A presentation made by anyone else is not a complying presentation (see the definition of presenter in article 2).

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Applicant as presenter

14.3 The reference in article 14 to the applicant reflects the fact that the parties to the underlying relationship could 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. In order to be effective, any such agreement should of course be recorded in the guarantee terms. Where the presentation that the applicant is expected to make under the guarantee consists of documents issued by a neutral third party, such as a customs office or a surveyor, the beneficiary is in a better position to control the risk of manipulation of documents by the applicant.

No interchangeability of applicant and beneficiary as presenter

14.4 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. Any suggestion to the contrary would not only risk corrupting the process by depriving a party of a prerogative 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)).

Presentation to guarantor only

14.5 A presentation made to the advising party or the second advising party, to a branch of the guarantor other than the branch specified in the guarantee as the place for presentation or, absent a specification, to 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 the 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.

Presenter other than beneficiary or applicant

14.6 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 are matter that falls outside the scope of the guarantee and are governed by the law applicable to that representation relationship.

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Article 14(a)

Place for presentation

14.7 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 for presentation, the documents must be presented to branch A and not to any other branch of the guarantor, whether in London or elsewhere.

Time of presentation

14.8 A presentation must be made “on or before expiry”. This means that the documents must be delivered on or before expiry; the mere dispatch of the presentation does not suffice unless the guarantee provides otherwise. 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. However, where that date is not a business day at the place for presentation, the expiry date is extended to the first following business day at that place (article 25(d)). The rules say nothing about business hours, and if the guarantee makes no reference to them the beneficiary has until the end of the day constituting the expiry date (see paragraph 2.18) to make its presentation. Where the guarantee states that expiry is to result from a specific event, the beneficiary must present its demand before the document specified in the guarantee as indicating the occurrence of that event is presented or, if no such document is specified, before the time of occurrence of the event becomes determinable from the guarantor’s own records. If the guarantee specifies a specific expiry event then, unless the guarantee provides for expiry at some time after the event, the presentation of the document indicating the occurrence of that event brings the guarantee to an end immediately, meaning that a demand presented thereafter comes too late, even if it is made on the same day. This is one of the features that distinguishes an expiry event from an expiry date. However, the guarantee itself may provide for expiry to be deferred, for example for a period of two months following the event, in which case the guarantee is to be treated as expiring two months after the 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 occurrence of the event becomes determinable from the guarantor’s own records.

Article 14(b)

Incomplete presentation

14.9 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

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ensuing liability for 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 which case the guarantor cannot reject the presentation. The two fundamental consequences of this tolerance are particularly obvious where the presentation is a demand. In particular:

- 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.

Incomplete demand

14.10 An incomplete presentation that does not indicate that it is to be completed later may be rejected as a non-complying presentation. This applies to a demand presented without a supporting statement as well as to other incomplete presentations (see paragraph 15.11). True, article 15(a) and (b) contemplate the possibility of presenting a supporting statement separately from and subsequently to the demand itself. 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 rejected for non-compliance.

14.11 Rejection of an incomplete presentation does not preclude the beneficiary from subsequently making a new and complying presentation on or before the expiry of the guarantee (articles 17(d) and 18(a)).

Preparatory works

No notice of completion required. During the revision, the drafting group examined, but decided against, the possibility of requiring a presenter that indicates that its presentation is incomplete to indicate in subsequent supplements that the presentation is now complete. Requiring the presentation of a notice of completion similar to the situation under eUCP article e5(c) could arguably enhance the certainty of the process, especially where, in a presentation under which documents are presented piecemeal at intervals, one of the parcels does not indicate that it is to be completed later. Nonetheless, any such requirement would burden the examination process with an extra formality that might make the process more onerous. 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 the presentation to be rejected as a non-complying presentation. This is so even if this incomplete presentation complements an earlier incomplete presentation that indicated that it was to be completed at a later stage.

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Article 14(c)

Guarantee requiring electronic presentation

14.12 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.

Format

14.13 “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). “Format” is to be distinguished from “form”. The electronic format dictates the way in which the data are organised and read, that is, the system language in which the electronic record is encoded. By contrast “form” concerns the medium for presentation of the document, that is, whether it is to be a paper or an electronic presentation. If the format is not one recognised by the addressee’s 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, for example MT799, satisfies the requirement of specifying the format.

Format not specified

14.14 Nevertheless, article 14(c) is not obligatory. If the format is not specified in the guarantee, the document may be presented in any electronic format that allows it to be authenticated or in paper form.

Authenticate does not mean read

14.15 The fact that a message cannot be read does not mean that it cannot be authenticated. 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 “read” a presentation whose electronic format the guarantor did not specify in the first place. On the other hand, if the document cannot even be authenticated, it is deemed not to have been presented. However, the beneficiary has the option of presenting the document in paper form.

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System for data delivery and electronic address

14.16 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 a reference to presentation by means of a SWIFT message, a hyperlink to a website where the documents are 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 systems for electronic delivery, such as tested telex.

Article 14(d)

Paper presentation where mode of delivery specified

14.17 Article 14(d) deals with cases where the guarantee indicates the mode of delivery of documents. “Mode of delivery” refers not to the form of the documents (i.e. paper or electronic) but to the manner in which they are to be conveyed to the guarantor. A 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 delivered at the address of the issuing branch of the guarantor, or by indicating that it is not to be sent by post or that it is to be delivered only by one of the specified modes. 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 of presentation, the presentation will be a complying presentation if it is received at the requisite place (see paragraph 14.7) 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. In effect, article 14(d) looks to the purpose of the rule, which is to avoid evidential problems as to the time of delivery, and 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. In other words, the terms regarding the mode of delivery can be disregarded. However, it should be noted that a presentation delivered by an alternative mode 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).

Article 14(e)

Form of presentation not specified

14.18 Where the 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.

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Article 14(f)

Guarantee to be identified

14.19 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 to the beneficiary suffices. Thus, 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. Indeed, if the guarantee in question is the only one that has been issued to the beneficiary by the guarantor, the mere statement that the demand is made “under the guarantee issued to us” suffices.

14.20 If a presentation does not identify the guarantee under which it is made, the time for examination under article 20 does not commence until the guarantee is identified. However, this does not result in an extension of the guarantee or limit the requirement under article 15(a) or (b) that any separately presented documents must also identify the demand to which they relate. Thus, if the guarantee expires before such an identification is made, any subsequent identification comes too late. 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 has agreed to an extension or amendment. The rule is similar to the one that appears in eUCP article e5(d). When drafting this rule, the drafting group benefited from the debate on the linkage of documents during the revision of UCP 500 that eventually led to UCP 600 article 14(h).

Whose duty is it to identify the guarantee?

14.21 Article 14(f) only indicates 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 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.

Article 14(g)

Language of documents presented

14.22 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. However, documents

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issued by any other person, for example an engineer’s or surveyor’s certificate, may be in any language. This is because the applicant and the beneficiary have no control over such documents. 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.

Article 14 also applicable to counter-guarantees

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

Cross-references within URDG 758

- Articles 2 (definitions of authenticated, presentation, complying presentation and presenter) and 19(a).

Cross-references to other ICC rules

- UCP 600 articles 6(d)(ii) and 14(h).

- eUCP articles e3, e4 and e5.

- ISP98 rule 3.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- None.

Illustration 14-1

A guarantee issued by a London bank on 12 March 2009 states that it is to expire two years after issue. A demand and supporting statement are presented on 14 March 2011. The presentation is a complying presentation because expiry of the guarantee falls on a Saturday, which in England is a non-business day, the next business day being Monday 14 March. If the guarantee had been issued on 11 March instead of 12 March 2009, the presentation would have to have been made on or before 11 March 2011 in order to be in time.

Illustration 14-2

A guarantee issued by a London bank on 12 March 2009 states that it is to expire upon shipment of the goods covered by the underlying contract, as indicated in a copy of the bill of lading relating to the shipment. The goods are shipped on 14 September and the applicant presents a copy of the bill of lading to the bank on 26 September. The guarantee expires on 26 September, so that a presentation made on or before that date is on time.

Illustration 14-3

A payment guarantee is issued by the London branch of a Lebanese bank in favour of a company whose place of business is in Cairo, Egypt. The guarantee requires any demand to be made in paper form and indicates no specific place for presentation. The beneficiary decides to make a demand under the

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guarantee on the day before the expiry date. Available courier services indicate that it takes 48 hours minimum to deliver the demand to the London branch of the guarantor but only eight hours to deliver it to the guarantor’s head office in Beirut. Under the first option, the demand would be received by the guarantor after the expiry date. Accordingly, the beneficiary presents the demand to the guarantor’s head office in Beirut. The demand therefore does not comply with article 14(a)(i) and should be rejected regardless of the circumstances that prompted the beneficiary to disregard the rule on the place for presentation.

Illustration 14-4

BelleSoc SA enters into a contract with Compagnia Arcina for the supply and installation of a computer system, which is to be installed and fully operational by 4 January 2010. Pursuant to the contract, BelleSoc instructs G Bank to issue a guarantee in favour of Arcina that is stated to expire on 10 April 2010. The guarantee provides for payment on the presentation of a written demand and statement of breach, together with a certificate issued after 4 January 2010 and signed by a certified computer systems expert to the effect that the installed system is not fully operational. Arcina presents a demand and statement of breach on 31 March but not the required certificate. The presentation does not indicate that it is to be completed later. G Bank may therefore reject it as a non-complying presentation, with the result that a new presentation must be made on or before 10 April 2010. Had the presentation indicated that it was incomplete, G Bank could not have rejected it and Arcina could have completed it by presenting the required certificate by that date.

Illustration 14-5

A guarantee provides that presentation must be made “by post by special delivery”, that is, delivery which the postal service guarantees will be effected no later than noon on the following day. The beneficiary sends an otherwise complying presentation by ordinary post and it arrives three days later but prior to the expiry of the guarantee. The presentation is a complying presentation.

Illustration 14-6

The facts are as in Illustration 14-5, except that the guarantee indicates that presentation must be made “only by post by special delivery”. If the presenter sends an otherwise complying presentation by ordinary post, this will lead to its rejection as a non-complying presentation.

Illustration 14-7

A guarantee is issued. It specifies the documents necessary to accompany a demand but does not indicate whether the presentation is to be made in paper or in electronic form. The beneficiary makes the presentation electronically. The guarantor is entitled to reject the presentation as non- complying because in the absence of specification in the guarantee the documents have to be presented in paper form.

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URDG 758

Article 15 Requirements for demand

a. A demand under the guarantee shall be supported by such other documents as the guarantee specifies, and in any event by a statement, by the beneficiary, indicating in what respect the applicant is in breach of its obligations under the underlying relationship. This statement may be in the demand or in a separate signed document accompanying or identifying the demand.

b. A demand under the counter-guarantee shall in any event be supported by a statement, by the party to whom the counter-guarantee was issued, indicating that such party has received a complying demand under the guarantee or counter-guarantee issued by that party. This statement may be in the demand or in a separate signed document accompanying or identifying the demand.

c. The requirement for a supporting statement in paragraph (a) or (b) of this article applies except to the extent that the guarantee or counter- guarantee expressly excludes this requirement. Exclusion terms such as “The supporting statement under article 15[(a)] [(b)] is excluded” satisfy the requirement of this paragraph.

d. Neither the demand nor the supporting statement may be dated before the date when the beneficiary is entitled to present a demand. Any other document may be dated before that date. Neither the demand, nor the supporting statement, nor any other document may be dated later than the date of its presentation.

URDG 458

Article 20

a. Any demand for payment under the Guarantee shall be in writing and shall (in addition to such other documents as may be specified in the Guarantee) be supported by a written statement (whether in the demand itself or in a separate document or documents accompanying the demand and referred to in it) stating:

i. that the Principal is in breach of his obligation(s) under the underlying contract(s) or, in the case of a tender guarantee, the tender conditions; and

ii. the respect in which the Principal is in breach.

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b. Any demand under the Counter-Guarantee shall be supported by a written statement that the Guarantor has received a demand for payment under the Guarantee in accordance with its terms and with this article.

c. Paragraph (a) of this article applies except to the extent that it is expressly excluded by the terms of the Guarantee. Paragraph (b) of this article applies except to the extent that it is expressly excluded by the terms of the Counter-Guarantee.

d. Nothing in this article affects the application of articles 2(b) and 2(c), 9 and 11.

Comment

Article 15 provides that a demand shall be supported by a statement of breach, unless this requirement is expressly excluded by the guarantee. If presented under a counter-guarantee, the demand shall be supported by a statement of receipt of a complying demand under the guarantee, unless this requirement is expressly excluded by the counter-guarantee. Article 15 also deals with the dating of the demand and supporting statement and with a demand under the counter-guarantee.

Changes from URDG 458

- Streamlines the content of the statements required in paragraphs (a) and (b) without changing their substance.

- Indicates explicitly that a statement can be presented separately from the demand and need not accompany the demand so long as it identifies the demand.

- Proposes sample exclusion terms for paragraphs (a) and (b).

- Covers the issue of pre-dating or post-dating of the demand.

Article 15(a)

Demand

15.1 “Demand” means a signed document from the beneficiary demanding payment under a guarantee (article 2, which also defines “signed”). A guarantee that provides for payment without the presentation of a demand does not fall under the definition of a “demand guarantee” or “guarantee” and thus falls outside the scope of the URDG. However, it is not necessary for the guarantee itself to require that the demand be signed; this is simply a requirement built into the definition. The time-honoured phrase “upon first written demand” can thus continue to be used even though the rules no longer refer to writing and the word “written” also covers an unsigned document. Indeed, it is not even necessary for the guarantee to state that the demand must be embodied in a document. Incorporation of the URDG into the guarantee signifies that the parties intend the definition of demand to

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apply, unless it is expressly excluded. Article 15(a) applies to a demand under the guarantee, article 15(b) applies to a demand under the counter-guarantee and the remaining paragraphs apply to both. In this section, paragraphs 15.2-15.12 deal with demands under a guarantee, and paragraphs 15.13-15.16 with demands under a counter-guarantee.

Hold for value

15.2 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. This is an attempted halfway house whereby the beneficiary seeks to ensure that its presentation is made before the expiry of the guarantee but does not want to be paid until a future date. This may 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. A hold for value demand is not, for that reason alone, 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.

Supporting documents

15.3 The demand must be supported by such other documents as may be specified in the guarantee, for example an engineer’s certificate stating that the contract works have not been carried out or that they are defective or a document embodying a final court decision or arbitral award 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 each one just like any other document and determine, as directed by article 19(a), whether it 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.

Statement of breach (supporting statement)

15.4 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 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 they are consistent with the guarantee. This important provision was first introduced in URDG 458 in order to balance the competing interests of the beneficiary and the applicant. The beneficiary needs to be able, in the event of the applicant’s default, to have rapid recourse to the guarantee based only on documents, while the applicant needs some kind of safeguard against unfair calling. It is true that the statement of breach is to be furnished by the beneficiary itself, not by a third party, which may prompt the argument that the protection conferred by this article is limited. This is a deliberate policy

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to avoid undermining the key benefit of the guarantee to the beneficiary. Nevertheless, when examined in practical terms, article 15 does provide a brake on unfair calling, in the sense that a beneficiary that would be prepared to make a demand for payment under the guarantee even if it knew that there was no justification for doing so might hesitate to commit itself to signing an intentionally false statement of breach. It is open to the parties to reinforce the safeguard offered by the statement of breach requirement by requiring the beneficiary to present further documents in order to corroborate the breach, without this turning into a requirement for proof of breach.

15.5 The requirement for a statement of breach gradually gained support in the market to the point where it prompted a shift. The vast majority of demands are now presented along with an indication of the beneficiary’s breach, even where the guarantee is not governed by the URDG. During the revision process, there was overwhelming support for the requirement to be retained.

15.6 The effect of article 15(a) is to impose a documentary requirement 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 the demand be supported by the statement of breach outlined in article 15(a). The reason is that, as part of the URDG, this article is a core term of the guarantee and just as binding as the express terms of the guarantee. This is why the inclusion of the words “and in any event” in article 15(a), meaning whether or not explicitly specified in the guarantee. If the parties in a particular case are concerned that the beneficiary may thereby be taken by surprise, they can explicitly include the requirement for a statement of breach in the guarantee, as in the Form of Demand Guarantee under URDG 758 (see Appendix 1). In fact, the Model Forms for Issuing Demand Guarantees under URDG 458 (ICC Pub. No. 503), the 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 World Bank) all 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), the inclusion of the requirement for a statement in the guarantee can be acknowledged as a best practice standard. This is reflected in the URDG themselves, where article 8 recommends that guarantees should state all the operational terms, including, in paragraph (h), any terms for demanding payment, which also implies 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 regarded as having waived this requirement. If the statement requirement is to be excluded, the procedure outlined in article 15(c) should be followed.

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Only a general statement of the nature of the breach is required

15.7 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, for example that the contract was not completed by the due date, that there was a shortfall in the quantity of goods shipped under the contract, that the contract works were defective or that (in the case of a tender guarantee) the applicant failed to execute the contract or failed to procure the issue of the performance guarantee that was to be given in exchange for the tender guarantee. More examples are given in the optional clauses to be inserted in the Form of Demand Guarantees under URDG 758 in Appendix 1 to this Guide.

A streamlined drafting of the statement of breach compared to URDG 458

15.8 Article 15 both clarifies the 1992 text and introduces greater flexibility. Article 15(a) makes it clear that, if the supporting statement indicates the respect in which there has been a breach, it is not necessary to state expressly that there has been a breach, since this obviously follows from the statement of the nature of the breach. Thus, 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. The statement may be in the demand itself or in a separate signed document accompanying or identifying the demand.

15.9 The new functional formulation of the statement requirement answers a concern raised by some URDG users faced with the guarantors’ expectation under URDG 458 that any demand should not only indicate the respect in which the applicant is in breach but also literally 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 formulation of the indication of breach does not convey that a breach has actually occurred (e.g. “the goods 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, which would indicate in their demands the respect in which there had 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, widespread support was expressed for this functional approach, which achieves the purpose of making the beneficiary specify the precise breach that has led it to present its demand.

Statement can be presented separately from demand

15.10 A separate statement no longer needs to accompany the demand; it may also follow subsequently (but see also paragraph 15.11 as to incomplete presentations).

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Incomplete demand and subsequent statement

15.11 Under article 14(b), a presentation where only the demand is presented but not the supporting statement is an incomplete presentation and, as such, may be rejected unless the presentation indicates that it is to be completed later. The beneficiary cannot argue that, in the case of a demand, the indication that it will be completed later is necessarily implied, because article 15(a) and (b) explicitly allow 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. Following such rejection, however, there is nothing to preclude the beneficiary from presenting a new and complying demand if it can do so on or before expiry. A statement that is presented subsequently must identify the demand to which it relates, thereby providing the necessary linkage between the two documents. Thus, if a supporting statement is presented separately from the demand and does not refer to the demand but to the guarantee, this statement is to be regarded as not having been presented until the guarantor is able to link it to the demand in question. This rule is particularly important in the case of multiple partial demands where separate statements showing amounts different from those in the various demands each need to be linked to a specific demand (see article 17(e)(ii)).

Need for signature

15.12 Where the statement is presented separately from the demand, it must be signed regardless of whether it accompanies the demand or follows later.

Article 15(b)

Demand under counter-guarantee

15.13 A demand under the counter-guarantee must in any event (i.e. whether or not the counter-guarantee so requires) be supported by a statement by the party to which the counter-guarantee was issued indicating that it has received a complying demand under the guarantee or counter-guarantee issued by that party. 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 cover cases of chain counter- guarantees 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 this section refers to the beneficiary of a counter-guarantee.

15.14 In contrast to the beneficiary of a guarantee, the beneficiary of a counter- guarantee is not required to furnish a statement of breach of the applicant’s obligations under the underlying relationship, as there is no relevant underlying relationship between a counter-guarantor and the beneficiary, meaning that the question of a breach does not arise. Instead, the statement

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must indicate that the beneficiary of the counter-guarantee has received a complying demand under the guarantee or counter-guarantee issued by that party. Unless the counter-guarantee provides for “reimbursement” of the guarantor, or words to that effect, it is not necessary that this demand shall have been paid; the beneficiary of the counter-guarantee is entitled to payment under the counter-guarantee as soon as it has received a complying demand under its own guarantee and has stated this fact in its demand under the counter-guarantee. Moreover, the party issuing the counter-guarantee to that beneficiary is not entitled to defer payment of a demand under the counter- guarantee in order to verify that the demand made by the beneficiary was in fact a complying demand. However, if there is clear evidence that, to the knowledge of that beneficiary, the statement that it had received a complying demand was false, this may attract the fraud exception to payment under the applicable law. However, that is not a matter dealt with by the rules.

15.15 As in the case of a guarantee, the statement that a complying demand has been made may be presented in the demand under the counter-guarantee or in a separate signed statement accompanying or identifying the demand (see paragraph 15.11).

15.16 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 (transmission of copies of complying demand). Nevertheless, if additional documents are specified, for example a copy of the beneficiary’s demand or a certificate stating that the beneficiary has been paid, these too must be presented.

Article 15(c)

Exclusion of the requirement for a supporting statement

15.17 The guarantee or counter-guarantee may expressly exclude the requirement for a supporting statement, but the mere fact that there is no reference to such a requirement in the guarantee or counter-guarantee is not sufficient to exclude it. The exclusion must be explicit. If the mere omission of a requirement for a supporting statement were sufficient to constitute an implied exclusion under article 1(a), article 15(a) would never be effective at all as regards the supporting statement. Article 15(c) provides an example of an effective exclusion term, such as: “The supporting statement under article 15[(a)] [(b)] is excluded”.

Preparatory works

When an example of the exclusion clause was first introduced in the third draft of the revised rules released on 6 January 2009, concern was expressed that article 15(c) may encourage the exclusion of article 15(a) or (b) and thus

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destabilise the fair balance between the parties’ interests on which the URDG are built. After consultation, consensus was reached that the benefits of the sample exclusion terms in article 15(c) outweighed the possible disadvantages. Indeed, as article 1(a) provides, the parties are free to modify or exclude any rule of the URDG. However, cases were reported of parties that sought to exclude the statement requirement in URDG 458 article 20 but had failed to achieve the expected result by using insufficiently clear terms. This applied, for instance, to guarantee provisions stressing 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”. Provisions of this type are not sufficient to exclude the statement requirement and have sometimes led to costly disputes. Because certainty is a cornerstone of the new URDG, the sample terms now provided in article 15(c) compel the parties to address the exclusion of statement question explicitly and to express their agreement to this effect in the unambiguous terms proposed in article 15(c) or similar terms. Certainty and transparency are two key objectives of the new URDG 758.

Exclusion of supporting statement does not constitute exclusion of demand or other specified documents

15.18 If the exclusion, instead of being limited to the supporting statement, were to state that it excludes article 15(a) in its entirety, it would not dispense with the need to present the demand and any other documents specified in the guarantee. The reference to such documents 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 by the guarantee.

Modification of requirement for a supporting statement

15.19 The requirement for a supporting statement need not be excluded in its entirety. For example, a guarantee could specify that a statement that a breach has been committed need not indicate the nature of the breach, while a counter-guarantee, in requiring a statement that the guarantor had received a demand, could expressly dispense with the need for the statement to say that the demand was a complying demand. In both of these examples, the specific wording 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, the default wording of the supporting statement specified in article 15(a) and (b) should prevail, as indicated in article 15(a) and (b).

Waiver of requirement for a supporting statement

15.20 A demand presented without a supporting statement is an incomplete demand and may be rejected if it does not indicate that the supporting statement is to follow or, more generally, that the presentation is to be

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completed (article 14(b)). However, the guarantor is not bound to reject the demand; it may instead approach the instructing party or, in the case of a counter-guarantee, the counter-guarantor to see if the instructing party or counter-guarantor is prepared to waive the requirement of a supporting statement (article 24(a)). Even if that proves to be the case, the guarantor is not obliged to act on the waiver and may reject the demand (article 24(c)). If the guarantor does decide to act on the waiver, it simply pays the demand.

Consistency

15.21 It is necessary to bear in mind the requirement under article 19(b) that data in a document required by the guarantee must not conflict with (other) data in that document, any other required document or the guarantee (see further paragraph 19.8 et seq.).

Article 15(d)

Dating of demand

15.22 Article 15(d) promotes integrity and best practices 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)). 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. It 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 occurred before the date when the beneficiary is entitled to present a demand, as long as the demand and the statement are dated after that date.

15.23 Because documents other than the demand and the supporting statement (e.g. shipping documents) are issued by a party other than the beneficiary, the dating rule does not apply to them.

15.24 The second limb of article 15(d), which bans the post-dating of a demand, a supporting statement or any other document, seeks to spare the guarantor from the untenable position of being in possession of a document that, on its face, contains data (the date printed on the document) that the guarantor knows to be different from the reality (the date of presentation of the document). The post-dating of demands 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 could be tempted to make a presentation immediately after the breach but dated five weeks later to avoid breaching the terms of the underlying relationship. Of course, an agreement between the applicant and the beneficiary outside the guarantee

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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.

15.25 A presentation that includes pre-dated or post-dated documents is not a complying presentation.

Cross-references within URDG 758

- Article 20.

Cross-references to other ICC rules

- UCP 600 article 14(i).

- ISP98 rule 4.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- Article 15.

Illustration 15-1

A guarantee that provides for payment “on first written demand” is issued without specifying any other documents. The beneficiary presents a written demand without a statement of breach. This is not a complying presentation because it does not conform to the requirements of article 15(a). Moreover, since it does not indicate that it is to be completed later, the guarantor may reject it.

Illustration 15-2

CG Bank instructs G-TOR Bank to issue a guarantee in favour of B against a counter-guarantee issued by CG Bank. The counter-guarantee provides for payment “on first written demand”. In due course, G-TOR Bank presents a signed demand under the counter-guarantee, but nothing further, and does not indicate in its demand that it is to be completed later. CG Bank is entitled to refuse payment until G-TOR Bank has made a new presentation with a supporting statement under article 15(b) indicating that G-TOR Bank has received a complying demand under the guarantee.

Illustration 15-3

The facts are as in Illustration 5-2, except that G-TOR Bank furnishes a statement that it has received a complying demand under the guarantee. This statement was made honestly but was nevertheless erroneous, because the demand received by G-TOR Bank did not comply with the guarantee. Unaware of the discrepancy at the time of payment, CG Bank is entitled to rely on the statement made by G-TOR Bank and to pay under the counter- guarantee.

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Illustration 15-4

A guarantee is issued providing for payment on first demand. No other documents are specified. The beneficiary presents a signed demand in accordance with the guarantee. The bank rejects the presentation as a non- complying presentation on the ground that there is neither a statement of breach as required by article 15(a) nor an indication that the presentation is to be completed later. The beneficiary contends that since the guarantee made no reference to a statement of breach, the statement requirement under article 15(a) was excluded by implication under article 1(a). This contention must be rejected. The requirement for a statement of breach can be excluded, but the exclusion must be explicit (article 15(c)). The example of an effective exclusion term given by article 15(c) is: “The supporting statement required under article 15(a) is excluded”.

Illustration 15-5

An advance payment guarantee is issued on 15 January 2011 according to the following terms:

- no demand can be presented before an advance payment of a specified amount is credited to the applicant’s account held with the bank guarantor;

- a demand shall be accompanied by a surveyor’s certificate indicating that the delivered goods were defective;

- the expiry date is 1 June 2011.

The advance payment is made by the beneficiary and is effectively credited to the applicant’s account on 25 January 2011. On 26 January 2011, the beneficiary presents a demand dated 20 January 2011, accompanied by a supporting statement and a specified surveyor’s certificate both dated 25 January 2011. The demand is not a complying demand because it pre-dates the effective credit date of the advance payment to the applicant’s account.

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URDG 758

Article 16 Information about demand

The guarantor shall without delay inform the instructing party or, where applicable, the counter-guarantor of any demand under the guarantee and of any request, as an alternative, to extend the expiry of the guarantee. The counter-guarantor shall without delay inform the instructing party of any demand under the counter-guarantee and of any request, as an alternative, to extend the expiry of the counter-guarantee.

URDG 458

Article 17

Without prejudice to the terms of article 10, in the event of a demand the Guarantor shall without delay so inform the Principal or, where applicable, his Instructing party, and in that case the Instructing party shall so inform the Principal.

Comment

Article 16 requires the guarantor or counter-guarantor to give information to the instructing party or, where applicable, the counter-guarantor about any demand, including an extend or pay demand. There is no requirement in article 16 that such information be provided before the demand is paid or rejected.

Changes from URDG 458

- Drafting clarification but no substantive change to URDG 458 article 17;

- Adds to article 16 an information duty as regards extend or pay demands, formerly part of URDG 458 article 26.

Duty of information about demand

16.1 The guarantor must without delay inform the instructing party or, where applicable, the counter-guarantor, of any demand under the guarantee and of any request, as an alternative, to extend the expiry of the guarantee. “Without delay” means promptly. Given that the duty to inform is imposed without regard to whether the demand is or is not a complying demand, the information may have to be given before the time allowed for examination of the presentation has expired.

16.2 The information must be given to the instructing party, not the applicant as such. Thus, for example, if the instructing party is the parent of the applicant, the information must be given to that party. It is logical that the guarantor

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should give the information to the party from which it received its instructions and by which it is entitled to be indemnified, rather than to the applicant, as a party to the underlying relationship, since the guarantor may not have any relationship with the applicant.

16.3 Where the guarantor receives an extend or pay demand, it must inform the instructing party both of the demand for payment and of the request, as an alternative, to extend the guarantee. Similarly, a counter-guarantor must without delay inform the instructing party of any demand under the counter- guarantee and of any request, as an alternative, to extend the counter- guarantee.

Information duty applies to all demands

16.4 The duty of information under article 16 is not confined to complying demands but covers all demands, including extend or pay demands. However, in the case of extend or pay demands that are complying demands, more detailed information requirements are contained in article 23, and compliance with these requirements also satisfies the requirements of the present article (see paragraphs 23.15 et seq.).

No information duty concerning demand before payment or rejection

16.5 The URDG do not require the guarantor to inform the instructing party of a demand before making payment (if the demand is a complying demand) or rejecting it (if the demand 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 should they choose to do so. 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.

16.6 A mandatory duty to inform the instructing party of a demand before payment or rejection could divert the rule from its intended function, namely that of informing the instructing party that its account will be debited by the guarantor when the guarantee is paid69. 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 the instructing party to open 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 obviously be so 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 one witnessed by the unbalanced Uniform Rules for Contract Guarantees (ICC Pub. No. 325). Furthermore, it could lead to disaffection towards 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. Finally,

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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 to seek an injunction and does not reject a discrepant demand within five business days 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.

Interaction of information and payment/rejection of demand– without delay

16.7 Article 16 should be seen pragmatically. Where a demand consists of the presentation of a sole document demanding payment and stating the breach, the whole examination process, 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 provided in article 20(a). If the 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 more than three business days after the day of receipt does not constitute acting “without delay”.

Information duty and waiver process

16.8 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) goes on to indicate 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 16.1, the information duty under article 16 is not predicated upon the demand first being examined for conformity, as it has to be carried out 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 without infringing 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 to inform the instructing party of the demand in compliance with article 16 and the second to avail itself of the waiver option. A waiver sought from the instructing party without delay after the demand is received should be deemed as including, and effectively dispensing with, the duty to inform the instructing party of the demand.

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Information of demand under articles 16 and 23

16.9 Where the demand is an extend or pay demand and the guarantor is able to complete the examination in time to promptly provide information that meets both the obligation under article 16 and the requirements of article 23, the provision of the information under article 23 also satisfies the requirements of article 16, meaning that it is not necessary to give information about the demand twice.

Sanction for absence of information

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

Preparatory works

The debate on article 16 during the revision revealed a split between the two ICC commissions that sponsored the new rules. On the one hand, the drafting group (consisting of representatives of the Banking Commission and the Commission on Commercial Law and Practice) and the Banking Commission supported expanding the information duty in URDG 458 article 17 to indicate that no such information needs to be provided before making payment against a complying demand or rejecting a non-complying demand (see revised article 18 in the first draft dated 19 February 2008 and revised article 17 in the second draft dated 6 August 2008). On the other hand, the Commission on Commercial Law and Practice expressed concern that the proposed addition could be read as indicating that the guarantor must not inform the instructing party before the payment or rejection of demand. This was presented as potentially depriving the instructing party/applicant of the opportunity to agree with the beneficiary on a potential withdrawal of the demand or its conversion into an extension of the validity period of the guarantee. The debate continued after the release of the third revised draft on 6 January 2009, with numerous avenues being explored by a joint delegation of officers from the two sponsoring commissions, including the possibility of subjecting the proposed additional wording to a mandatory provision of the applicable law that would require the information to be provided before payment. During the discussion of the third draft, the national committees were also asked to cast their vote on whether to add the proposed supplementary paragraph to article 16. While a majority of votes (27 to 4) favoured the additional wording in the interests of clarity, an open discussion between delegates of both sponsoring commissions that took place first in Dubai on 10-11 March 2009 and subsequently in Helsinki on 28

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May 2009 allowed a consensus to emerge in favour of the current drafting of new article 16. As can be seen, it essentially preserves the substance of URDG 458 article 17, which has stood the test of time, undoubtedly because it achieves a reasonable balance between the interests of the guarantor, which expects a recognition of its duty to make payment upon the presentation of a complying demand, and the interests of the instructing party, which expects to be informed without delay of the receipt of a demand. This consensus was fostered by the acknowledgement of the exporters (representing instructing parties) that the decision to pay on presentation of a complying demand or to reject in the case of a non-complying demand is that of the guarantor alone.

Cross-references within URDG 758

- Articles 2 and 23.

Cross-references to other ICC rules

- UCP 600 – none.

- ISP98 – none.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- None.

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URDG 758

Article 17 Partial demand and multiple demands; amount of demands

a. A demand may be made for less than the full amount available (“partial demand”).

b. More than one demand (“multiple demands”) may be made.

c. The expression “multiple demands prohibited” or a similar expression means that only one demand covering all or part of the amount available may be made.

d. Where the guarantee provides that only one demand may be made, and that demand is rejected, another demand can be made on or before expiry of the guarantee.

e. A demand is a non-complying demand if:

i. it is for more than the amount available under the guarantee, or

ii. any supporting statement or other documents required by the guarantee indicate amounts that in total are less than the amount demanded.

Conversely, any supporting statement or other document indicating an amount that is more than the amount demanded does not make the demand a non-complying demand.

Comment

Article 17 deals with the amount and number of demands.

Changes from URDG 458

- New article.

Article 17(a) and (b)

Partial demand and multiple demands

17.1 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 two or more demands. This reflects the fact that where there is a series of breaches by the applicant, each supported by a statement of breach, it may be necessary to make successive demands under the guarantee. Partial and multiple demands are expressly authorised by article 17(a) and (b).

Article 17(c)

Multiple demands

17.2 A guarantee may prohibit multiple demands, in which case only one demand may be made. Where multiple demands are prohibited, which is more

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common in relation to documentary credits than in relation to demand guarantees,⁷⁰the beneficiary should seek to ensure that it knows about all the breaches of the underlying relationship before making the demand because once the demand has been made – unless it is rejected (see paragraph 17.3) or withdrawn or deemed to have been withdrawn (see paragraph 23.19) – the beneficiary cannot make an additional demand when further breaches occur or are discovered. The applicant and beneficiary should not agree to exclude multiple demands where performance is to be carried out in instalments, because this would be likely to induce the beneficiary to make a demand for the full amount available, given that only one complying demand would be allowed.

Article 17(d)

Rejection of demand

17.3 The rejection of a demand nullifies the demand. 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 demands, also applies to the withdrawal or deemed withdrawal of a demand under articles 18(a) and 23(d) (see paragraphs 18.1 and 23.19). The effect of the rule is to preclude the honouring of more than one demand. A demand that has been rejected 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 aimed at curing the discrepancy for which it was rejected does not revive the demand. Instead, a fresh presentation is necessary.

Article 17(e)

Excessive demand

17.4 A demand is a non-complying demand if it is for more than the amount available under the guarantee. The amount available is not necessarily the amount specified in the guarantee, as payments in response to previous demands may have reduced the amount available (article 25(a)(i)).

17.5 In addition to the requirement in article 17(e)(i) that the amount of the demand should be examined against the amount available under the guarantee, the amount of the demand should also be examined against amounts indicated in the supporting statement or other documents required in the guarantee. The reference to the supporting statement or other documents is to a statement or documents showing an amount of loss resulting from a claimed breach that is less than the amount of the demand. If the amount demanded exceeds the amount indicated in the supporting statement or other required documents, the demand is non-complying and should be rejected in accordance with article 17(e)(ii). Take, for example, a guarantee issued and available for an amount of €100,000. A demand is presented for €70,000 and is accompanied by a supporting statement indicating a breach with a value of €50,000 or (assuming they are required by the guarantee) an arbitral award or a surveyor’s report indicating a breach

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with a value of €50,000. The demand is non-complying and should be rejected even if it complies with the guarantee in all other respects.

17.6 Although the reference in article 17(e)(ii) to “amounts” is unqualified, it was drafted and should be read as being linked to the stated value of the breach motivating the demand, not to any figure that may be indicated on the face of a required document. Take, for example, a guarantee available for an amount of €100,000 covering the applicant’s payment obligations towards the supplier- beneficiary in respect of the supply to the applicant of 1,000 metres of fabric and requiring that a demand be accompanied by a copy of the transport document and a copy of an unpaid invoice. Assume that the beneficiary presents a demand for the full available amount of €100,000 and a supporting statement indicating that the applicant has not paid the sum of €100,000. However, both the unpaid invoice and the transport document refer to an amount of €120,000, which represents the value of 1,200 metres of fabric. While there may be grounds for challenging the conformity of the presentation under article 19(b) (“Data need not be identical to, but shall not conflict with, data in [a required and presented] document, any other required document or the guarantee”), article 17(e)(ii) cannot be relied upon in order to reject the demand. The reason is that the reference to a different quantity and value of the shipped goods is unrelated to the assessment of the breach motivating the demand. In the above example, if the demand had merely mentioned “fabric”, there would not be a problem at all.

17.7 It is important to note that an excessive demand is non-compliant in its entirety, not merely as to the excess, meaning 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 demand that does not exceed the amount available. 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 of less than what appears to be due.

Demand sufficient if amount ascertainable

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

17.9 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 it has expired or because the presentation of the demand does not conform to the requirements of article 14.

Preparatory works

During the revision, an argument was made against article 17(e)(i) on the grounds that it could result in too harsh a consequence if the amount by which the demand exceeds the amount available under the guarantee is minimal. Extreme examples were given where the excess consisted of only a few euro as a result of rounding up sums in the contract. The precedent set by UCP 600 article

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18(b) was also cited. The majority view, however, was that attempting to set a fixed threshold above which the amount of the demand in excess of the amount available would be rejected was entirely arbitrary. Why should an excess of 5% be acceptable but not an excess of 6%? More importantly, it was felt that it would be wrong to make the guarantor responsible in effect for redrafting the terms of the demand in order to reduce the excess amount and redeem it from rejection. This is the responsibility of the beneficiary and not of any one else. The case is very different from the one covered in UCP 600 article 18(b), where the tolerated excess is in the commercial invoice rather than the demand, which is the operative instrument in the beneficiary’s expression of its desire to claim payment.

Cross-references within URDG 758

- Articles 18(a), 23(d) and 25(a)(i).

Cross-references to other ICC rules

- UCP 600 articles 18(b) and 31(a).

- ISP98 rule 3.08.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- None.

Illustration 17-1

A guarantee is issued for a maximum of $50 million. Following a series of breaches, the beneficiary presents successive demands for $20 million, $10 million and $5 million, which are determined to be complying demands and paid. A final demand is presented for $20 million. This brings the total to $55 million, which exceeds the amount available under the guarantee by $5 million. The final demand is a non-complying demand not only as to $5 million but in its entirety. However, the beneficiary may present a fresh final demand for $15 million so long as the presentation is made on or before expiry.

Illustration 17-2

A guarantee is issued that prohibits multiple demands. The beneficiary presents a demand that is properly rejected as a non-complying demand. The beneficiary makes a fresh and complying demand before expiry. This does not breach the prohibition against multiple demands because the first demand, having been rejected, no longer exists with the result that there is only one effective demand.

Illustration 17-3

The facts are as in Illustration 17-2, except that on presentation of the first demand the guarantor does not reject it but instead approaches the instructing party for a waiver, as allowed under article 24(a). The instructing party grants the waiver, and the guarantor may now choose whether to pay or reject the demand.

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URDG 758

Article 18 Separateness of each demand

a. Making a demand that is not a complying demand or withdrawing a demand does not waive or otherwise prejudice the right to make another timely demand, whether or not the guarantee prohibits partial or multiple demands.

b. Payment of a demand that is not a complying demand does not waive the requirement for other demands to be complying demands.

Comment

Each demand is to be treated as separate from any other demand, whether or not that other demand is a complying demand. A beneficiary is entitled to present a subsequent demand, and the guarantor is entitled to require that any demand be a complying demand, notwithstanding the fact that one or more non-complying demands may have already been presented or paid, whether as a result of a waiver or erroneously.

Changes from URDG 458

- New article.

Article 18(a)

Presentation of non-complying demand; withdrawal of demand

18.1 The presentation of a non-complying demand and the withdrawal of a demand do 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 earlier point that a demand that is rejected or withdrawn is nullified, so that it is as if the demand had never been presented, and a subsequent demand is to be treated as the only demand (see paragraph 17.3). As regards the effect of rejection, article 18(a) essentially reiterates what is said in article 17(d).

Article 18(b)

Payment of non-complying demand

18.2 The payment of a non-complying demand does not waive the requirement for other demands to be complying demands. This is so even if the discrepancy in a 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 jeopardise its right to indemnification if it did. However, this is a matter for the instructing party/guarantor relationship and falls outside the scope of the URDG. Nevertheless, discrepancies are not

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infrequently waived (more on the waiver process in article 24(a)). But the fact that an instructing party has agreed to waive a discrepancy in one demand does not mean that it will be prepared to waive discrepancies in future demands. Each demand must be treated separately. Thus, if the guarantor, having paid a discrepant demand, receives a subsequent demand that is also discrepant, it should 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)).

18.3 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 has paid, the beneficiary cannot assert a 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.

Cross-references within URDG 758

- Articles 17(d) and 24(a) and (c).

Cross-references to other ICC rules

- UCP 600 – none.

- ISP98 rule 3.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- None.

Illustration 18-1

A guarantee is issued to a beneficiary for an amount not exceeding €500,000. Upon a breach by the applicant, the beneficiary presents a demand that the guarantor determines to be a non-complying demand. The guarantor decides to approach the instructing party for a waiver of the discrepancies, which is given, and the demand is paid. Subsequently, the beneficiary presents a new demand that would be a complying demand but for the same discrepancies as contained in the previous demand. The guarantor is entitled to reject the demand, since the previous waiver relates only to the presentation in respect of which it was given. The guarantor is not entitled to pay the demand without first obtaining a waiver from the instructing party.

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URDG 758

Article 19 Examination

a. The guarantor shall determine, on the basis of a presentation alone, whether it appears on its face to be a complying presentation.

b. Data in a document required by the guarantee shall be examined in context with that document, the guarantee and these rules. Data need not be identical to, but shall not conflict with, data in that document, any other required document or the guarantee.

c. If the guarantee requires 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, then:

i. 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

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

d. If a document that is not required by the guarantee or referred to in these rules is presented, it will be disregarded and may be returned to the presenter.

e. The guarantor need not re-calculate a beneficiary’s calculations under a formula stated or referenced in a guarantee.

f. The guarantor shall consider a requirement for a document to be legalised, visaed, certified or similar as satisfied by any signature, mark, stamp or label on the document which appears to satisfy that requirement.

URDG 458

Article 9

All documents specified and presented under a Guarantee, including the demand, shall be examined by the Guarantor with reasonable care to ascertain whether or not they appear on their face to conform with the terms of the Guarantee. Where such documents do not appear so to conform or appear on their face to be inconsistent with one another, they shall be refused.

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Comment

Article 19 lays down the rules for the examination of documents. They are more detailed and precise than those contained in URDG 458 article 9. The time for examination is dealt with in article 20.

Changes from URDG 458

- Examination process of presentations now covered in more detail.

- Elimination of the standard of reasonable care.

- Reinforcement of the rule that guarantors deal only with documents.

- Inconsistency of documents regarded as a discrepancy.

- Data in required documents to be checked against guarantee terms, including non-documentary conditions.

- Non-required documents to be disregarded.

Article 19(a)

Examination of presentation for apparent compliance

19.1 It is a central principle of demand guarantee practice, as well as documentary credit practice, that a guarantor is concerned only with the apparent good order and conformity of the documents presented to it, not their actual conformity. Thus, article 19(a) provides that the guarantor shall determine, on the basis of the presentation alone, whether it appears on its face to be a complying presentation. This article should be read in conjunction with articles 5 (independence of guarantee), 6 (guarantors deal only with documents), 7 (non-documentary conditions) and 27 (no responsibility for form, sufficiency, accuracy, genuineness and so forth of any signature or document presented to the guarantor).

19.2 Article 19(a) has three elements:

- First, the examination is to be carried out 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 may have been advised to the beneficiary by an advising party, but it is the guarantor, not the advising party, that will examine the documents for compliance.

- Secondly, the guarantor must carry out its examination “on the basis of a presentation alone”. The guarantor is accordingly not concerned with the investigation of external facts, such as whether a statement of breach is well-motivated or whether a non-documentary condition could be redeemed by a determination other than from the guarantor’s own records, nor need it go beyond an examination of the documents presented to it. Furthermore, under article 19(d), a document not required by the guarantee or referred to in the rules (notably a supporting statement) is to be disregarded.

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- Thirdly, the guarantor must determine whether the presentation “appears on its face” to be a complying presentation. “On its face” is not intended to distinguish the front page of a document from the back page. It is simply another way of emphasising that the presentation must appear, from an examination of the documents in accordance with the rules and expected professional standards (see paragraph 19.4), to be a complying presentation. Provided the examination has been conducted according to the required standards, the guarantor is not responsible if it transpires that a document was forged or issued without authority, a point made specifically in article 27(a).

Exceptions to the “presentation only” rule

19.3 There are two exceptions to the rule that the guarantor is concerned only with the documents presented to it. Both exceptions relate to the guarantor’s own records. They are as follows:

- Where the guarantee does not specify a document as indicating the occurrence of an expiry event, the event is deemed to have occurred when the occurrence of the event becomes determinable from the guarantor’s own records (see the definition of “expiry event” and paragraph 2.39 above).

- Where the fulfilment of a non-documentary condition cannot be determined from a document specified in the guarantee, it may, under article 7, be determined from the guarantor’s own records or an index specified in the guarantee (see paragraphs 7.3 et seq.).

In these two cases, the guarantor thus looks to its own records rather than to the documents presented to it.

Standard of care of examination

19.4 URDG 458 and UCP 500 both 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 that 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. Following the same approach, both UCP 600 and URDG 758 avoid the phrase “reasonable time” and substitute a fixed period. However, it remains the case that guarantors must examine a presentation with due diligence 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.

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The principle of strict compliance

19.5 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 a non-complying presentation even if the 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 if the cargo is delivered on time and the delay in the shipment ultimately proved to have no commercial consequences.

19.6 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) provides good guidance. For instance, it provides 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 not affecting the meaning of a word does not constitute a discrepancy.

Article 19(b)

Examination of data in context

19.7 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. As under 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 and in the light of the purpose of the guarantee 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, so as to give them a meaning different from their ordinary meaning. In such cases, the data must be interpreted in the light of their definition in the document when testing for consistency (on the issue of consistency, see the next paragraph).

Consistency of data with other documents

19.8 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 UCP 600 article 14(d). Issues of consistency are much more likely to arise in relation to documentary credits than in relation to demand guarantees, where the required documentation often amounts to no more than the demand itself and the supporting statement, except where the guarantee is a payment guarantee. The broad effect of article 19(b) is that, if the data in the two documents are the same, except for the fact that one document contains more details than the other, there is no inconsistency. For example, where one document refers to a report issued by a qualified engineer and another simply to an engineer’s report, the two

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documents are to be regarded as being consistent with each other as provided in article 3(f).

19.9 ISP98 promote a different standard. ISP98 rule 4.03 provides that documents shall be examined for inconsistency with each other only to the extent provided in the standby letter of credit. The rationale of this rule, as indicated in the official commentary on 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 transactions. Because the examination of interdocumentary consistency requires an additional effort from the issuer or nominated person, standby practice seems to require a specific request in the instructions for that purpose and allows parties to charge for it. The URDG follow the UCP in taking an opposite stand, leaving it to the parties to decide whether to release the guarantor from examining documents for inconsistency with each other. This can be achieved by modifying article 19(b), for example by deleting the phrase “any other required document”.

19.10 When testing for inconsistency, the guarantor can ignore any document presented by the beneficiary that is not required by the guarantee (see article 19(d) and paragraph 19.13).

Consistency of data with non-documentary conditions

19.11 Although non-documentary conditions may generally be ignored, they remain relevant to the question of consistency. Thus, 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 example, 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 is expressly provided for in article 7 in order to avoid the ambiguity that arose under UCP 600, which was only resolved by an Opinion of the Banking Commission (Opinion TA644rev) (more on this in the comment under article 7). However, any situation in which a non-documentary condition is inconsistent with data in a document presented under but not required by the guarantee is irrelevant and does not constitute a ground for rejecting the presentation, because article 19(d) directs the guarantor to disregard any non-required document.

Article 19(c)

Guarantee not containing stipulations as to signature or data content

19.12 Inspired in part by UCP 600 article 14(f), article 19(c) provides that if the guarantee requires 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, then:

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(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.

Thus, if the guarantee does not state that a specified document has to be signed, an unsigned document will be accepted. 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. Finally, 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.

Article 19(d)

Disregarding documents not specified in the guarantee

19.13 If a document that is neither required by the guarantee nor referred to in the rules (e.g. a supporting statement) is presented, it will be disregarded and returned to the sender. There is therefore no duty to examine such a document, which is to be ignored even if it contains data that are inconsistent with the guarantee or with documents specified in the guarantee. The guarantor has the option to 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 under the guarantee or counter-guarantee, is required under article 15.

Article 19(e)

Guarantor not required to recalculate beneficiary’s calculations

19.14 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 article 19(e) indicates, it is open to the guarantor, if it 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 to recalculate its calculations and, as a result, finding an error leading to the rejection of the presentation. Similarly, the instructing party – or, in the case of an indirect guarantee, the counter- guarantor – cannot blame the guarantor for not having recalculated the beneficiary’s calculations and, as a result, considering a presentation to be compliant when it actually contained a calculation error. Any suggestion to the contrary turns the option granted to the guarantor in article 19(e) into an obligation to systematically recalculate the beneficiary’s calculations, which is certainly not what the article says.

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Article 19(f)

Requirement for a document to be legalised, visaed, certified or similar

19.15 A guarantee may require a specified document to be legalised, visaed, certified or similar. The guarantor will regard this requirement as having been satisfied by any signature, mark, stamp or label on the document that appears to satisfy the requirement, without needing to check the authenticity of the relevant action or the status of the person affixing the mark, stamp or label.

19.16 This rule also relieves the guarantor of responsibility 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 either of them (article 14(g)). However, where the whole stamp is in a foreign language that the guarantor is unable to read, 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 in order to examine 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.

Cross-references within URDG 758

- Article 7.

Cross-references to other ICC rules

- UCP 600 articles 3 (fourth paragraph) and 14.

- ISP98 rule 4.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- Article 16.

Illustration 19-1

A guarantee provides for payment on the presentation of a signed demand. The beneficiary presents a signed demand together with a supporting statement under article 15(a) and an engineer’s report certifying the failure to pass tests on completion. The guarantor is not required to examine the engineer’s report, since it is not a document required by the guarantee. For the same reason, the fact that the engineer’s report may indicate an amount less than the amount of the demand is irrelevant for the purpose of article 17(e)(ii) and is to be ignored by the guarantor.

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Illustration 19-2

A guarantee provides for payment on the presentation of a signed demand, a supporting statement and a bill of lading showing shipment by a stated date. The subsequent presentation of the demand includes what appears on reasonable examination to be a bill of lading showing shipment by the date specified in the guarantee. The guarantor pays the demand. Later it transpires that the bill of lading was forged. The guarantor’s right to be reimbursed by the instructing party is not imperilled, since it is only concerned with whether the presentation appears on its face to be compliant. Moreover, the guarantor has no responsibility for the genuineness of the bill of lading (article 27(a)).

Illustration 19-3

A payment guarantee covering the applicant’s obligation to pay for goods purchased under the underlying contract of sale contains details of the goods and provides that payment is to be made on first demand, on the presentation of a clean bill of lading showing shipment on or before 15

September 2011 and following delivery to the applicant of a written two-year warranty of the goods. The beneficiary presents a demand and supporting statement, a clean bill of lading showing that the goods were shipped on 2 September 2011 and a commercial invoice providing a description of the goods consistent with that given in the bill of lading but different from the description contained in the guarantee, but no letter confirming that the warranty has been given to the applicant. The commercial invoice, though inconsistent with the guarantee, is to be disregarded since it is not a document required by the guarantee. The stipulation as to the supply of a warranty to the applicant is a non-documentary condition (because the warranty is to be delivered to the applicant, not presented to the guarantor) and is therefore also to be disregarded. The presentation is accordingly a complying presentation and the guarantor must pay. Even if a letter confirming the delivery of the warranty had been presented, it would still have had to be disregarded as irrelevant, since it was not a document required by the guarantee.

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URDG 758

Article 20 Time for examination of demand; payment

a. If a presentation of a demand does not indicate that it is to be completed later, the guarantor shall, within five business days following the day of presentation, examine that demand and determine if it is a complying demand. This period is not shortened or otherwise affected by the expiry of the guarantee on or after the date of presentation. However, if the presentation indicates that it is to be completed later, it need not be examined until it is completed.

b. When the guarantor determines that a demand is complying, it shall pay.

c. Payment is to be made at the branch or office of the guarantor or counter- guarantor that issued the guarantee or counter-guarantee or such other place as may be indicated in that guarantee or counter-guarantee (“place for payment”).

URDG 458

Article 10

a. A Guarantor shall have a reasonable time within which to examine a demand under a Guarantee and to decide whether to pay or to refuse the demand.

b. If the Guarantor decides to refuse a demand, he shall immediately give notice thereof to the Beneficiary by teletransmission, or, if that is not possible, by other expeditious means. Any documents presented under the Guarantee shall be held at the disposal of the Beneficiary.

Comment

Article 20 lays down the time for examination of a document and the time and place for payment.

Changes from URDG 458

- Replacement of reasonable time with five business days following the day of presentation;

- A demand indicating that it will be completed later need not be examined until it is completed;

- Designation of place for payment by means of a default rule.

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Article 20(a)

Time for examination

20.1 URDG 458 article 10(a) prescribed “a reasonable time” for examining documents presented under a demand guarantee. It mirrored UCP 400 article 16(c), 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 for 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. Notice given within three business days is deemed to be not unreasonable and beyond seven business days is deemed to be unreasonable.” Following 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 maximum 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)).

Business day

20.2 “Business day” is defined in article 2 (see paragraphs 2.13-2.18). 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, a demand presented on a Monday must be examined by the end of the following Monday.

No extension of validity period

20.3 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 the 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.

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Preparatory works

Why five business days?

The second draft of the revised URDG released on 6 August 2008 offered the national committees a choice between three business days and five business days to determine the examination period in article 20(a). Twenty-three committees voted for five business days and eight for three business days. Accordingly, a period of five business days was selected.

One national committee expressed concern that such a period could prove to be detrimental to the beneficiary’s interest, given that the majority of demands under guarantees consist only of a demand for payment and a supporting statement, with the guarantors expected to complete examination within a period shorter than five business days. There was consensus, however, that fixing the period for examination at five business days maximum would not negatively impact the rights of the beneficiary for at least four reasons:

- First, while a few banks polled for the purpose of this revision have reported a typical examination period of less than five business days (many having committed to one business day to be eligible for an international quality norm), many banks have reported period of seven to ten business days for processing demands. Accordingly, the new period in article 20(a) is not expected to lengthen, to the detriment of the beneficiary, the payment processing period generally observed today.

- Second, five business days is a maximum period during which the guarantor can safely examine the demand regardless of its complexity. It is the guarantor’s choice to complete the examination in a period shorter than the full five business days granted to it by article 20(a) and it incurs no liability for doing so.

- Third, even in the matter of guarantees not governed by URDG 758, a guarantor that has completed its examination in less than five business days often takes a number of extra days to make actual payment. By contrast, the new URDG require the guarantor to make payment when it has determined that the demand is complying (article 20(b)).

- Finally, the non-respect of the five-business-day period is sanctioned by the preclusion sanction in article 24(f). This sanction, which cannot be found in URDG 458, substantially reinforces the right of the beneficiary to be paid.

Deferment of running of time for examination

20.4 There are two cases in which the commencement of the time for examination is deferred. The first is where the demand does not identify the guarantee under which it is made. In such cases, the time for examination does not begin to run until the guarantee has been identified (article 14(f)). The second is where the presentation of a demand indicates that it is to be

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completed later, 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, it should be rejected in order to avoid the preclusion rule in article 24(f).

Suspension of running of time for examination

20.5 Where the examination of a presentation made under a guarantee or counter- guarantee before an event of force majeure is prevented by that event, the running of time is suspended until the resumption of the business of the guarantor or counter-guarantor (article 26(b)(ii), 26(c)(ii)).

Article 20(b)

Complying demand to be paid

20.6 When the guarantor 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. A guarantor that improperly rejects a complying demand can be required to pay it, subject to any defences and rights of set-off available under the applicable law.

Time for payment

20.7 The absence of an indication in the rule that the guarantor has to make payment “immediately” should not be read as condoning the deliberate delay of a payment by the guarantor for any reason other than force majeure (see article 26). Article 20 clearly expects the guarantor to start the payment process as soon as 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 (e.g. sending the payment order to a correspondent bank for clearing purposes if it involves payment in a foreign currency) or its internal procedure for the determination of compliance (e.g. a determination of compliance by a first examiner is not necessarily conclusive if the guarantor’s internal procedures require two or more successive examinations). Where the guarantor has delayed payment for a reason other than an event beyond its control, this is a breach of article 20(b).

20.8 What constitutes payment is a matter for the governing law, which may or may not take into account factors such as industry standards, thus making it difficult to cover in the URDG. An example of this is value dates, whereby 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. It is difficult to determine with certainty whether the guarantee has been paid during this period.

20.9 Article 20(b) is qualified by article 23 in that where the guarantor determines that an extend or pay demand is 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

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Article 20(c)

Place for payment

20.10 Payment is to be made at the branch or office of the guarantor or counter- guarantor that issued the guarantee or counter-guarantee or such other place as may be indicated in that guarantee or counter-guarantee. Thus, the guarantor or counter-guarantor is neither entitled nor obliged to pay at any other branch or office. This is the case even where force majeure under article 26 prevents payment at the particular place for payment but not elsewhere.

Payment other than at place for payment

20.11 The beneficiary is entitled to be paid at the place for payment specified in the guarantee even if this is different from the place agreed with the applicant in the underlying relationship or the place designated by the instructing party in the application. This does not stop the guarantor from possibly agreeing to the beneficiary’s request to receive payment of a complying demand at a place other than the one indicated in the guarantee or the rules. Changing the place where payment materially occurs ought not to affect the right of the guarantor to be reimbursed by the instructing party, although none of the consequences of such a change of place are to 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 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 by the guarantor to the beneficiary outside the URDG for which the guarantor cannot avail itself of articles 31 and 32.

Cross-references within URDG 758

- Articles 14(b), 15 and 24(a), (b) and (c).

Cross-references to other ICC rules

- UCP 600 articles 14 and 15.

- ISP98 rule 5.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- Article 17.

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Illustration 20-1

Austrian company Guglhupf GmbH wins a procurement contract with the Ministry of Health in Abu Dhabi and arranges, as required in the contract, for Halwa Bank in Dubai to issue a guarantee in favour of the Ministry under the counter-guarantee of Feingebäck Bank in Austria. Following a dispute about the quality of the delivered goods, the Ministry presents a demand on Monday 3 May 2010. Halwa Bank has until 10 May 2010 to reject the demand if it is found to be non-complying (Friday 7 and Saturday 8 not being business days in Dubai). On 6 May 2010, after determining that the demand under its guarantee is a complying demand, Halwa Bank presents a demand to Feingebäck Bank under the counter-guarantee. Feingebäck Bank has until 14 May 2010 to reject the demand if it is found to be non-complying under the counter-guarantee (Saturday 8, Sunday 9 and Thursday 13 May 2010 (Christi Himmelfahrt) not being business days in Austria).

Illustration 20-2

The facts are as in Illustration 20-1, except that on 3 May 2010 the Ministry presents an incomplete demand, because no supporting statement is provided, and indicates in the demand that it will be completed later. On 6 May, the supporting statement is presented. However, the countdown of the five-business-day period for Halwa Bank only starts on 9 May (Friday 7 and Saturday 8 May 2010 not being business days in Dubai).

Illustration 20-3

A complying demand under a guarantee is presented two days before expiry. The guarantor does not complete its examination until two days after expiry and determines at the end of the examination that the demand is a complying demand. The guarantor must pay. Once a complying demand has been presented, the time of expiry of the guarantee becomes irrelevant.

Illustration 20-4

A demand is presented under a guarantee two days before its expiry but without the requisite supporting statement or any indication that the presentation is to be completed later. The supporting statement is supplied the day after expiry. The guarantor is entitled to reject the presentation as incomplete. The beneficiary is not entitled either to complete the demand or to present a fresh complying demand, because the guarantee has expired.

Illustration 20-5

The facts are as in Illustration 20-4, except that the demand was presented 10 business days before expiry, and the guarantor gave the presenter notice of rejection one business day before expiry. The rejection is too late. Since the presentation did not indicate that it was to be completed later, the five business days allowed for examination began to run from the time of presentation and expired before the notice of rejection was issued. The guarantor is precluded from claiming that the demand is not a complying demand and must therefore pay.

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URDG 758

Article 21 Currency of payment

a. The guarantor shall pay a complying demand in the currency specified in the guarantee.

b. If, on any date on which a payment is to be made under the guarantee:

i. the guarantor is unable to make payment in the currency specified in the guarantee due to an impediment beyond its control; or

ii. it is illegal under the law of the place for payment to make payment in the specified currency,

the guarantor shall 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. The instructing party or, in the case of a counter-guarantee, the counter-guarantor, shall be bound by a payment made in such currency. The guarantor or counter-guarantor may elect to be reimbursed either in the currency in which payment was made or in the currency specified in the guarantee or, as the case may be, the counter-guarantee.

c. Payment or reimbursement in the currency of the place for payment under paragraph (b) is to be made according to the applicable rate of exchange prevailing there when payment or reimbursement is due. However, if the guarantor has not paid at the time when payment is due, the beneficiary may require payment according to the applicable rate of exchange prevailing either when payment was due or at the time of actual payment.

Comment

Article 21 deals with the currency in which payment or reimbursement is to be made. It offers a much-needed solution for the case where payment in the currency specified in the guarantee cannot be made due to a reason outside the control of the guarantor. ,⁷¹

Changes from URDG 458

- New article.

A genuine problem not covered yet in ICC rules

21.1 The currency of an international guarantee or, indeed, any other payment undertaking involving cross-border monetary flows can sometimes turn out to be a non-convertible currency, that is, a currency that cannot be exchanged against foreign currencies on the foreign exchange market, which results in its use only in domestic transactions. The currency may have already been

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non-convertible at the time when the guarantee was issued or subsequently had its convertibility suspended by the legislating State because of serious economic problems, leading that State to declare foreign monetary obligations payable in the domestic currency. Other subsequent uncertainty could occur where the currency specified in the undertaking has become extinct by the time payment is due, possibly as a result of a change in the political sovereignty of the state whose currency is involved. The second half of the twentieth century abounds with relevant examples. They include the Federal Republic of Germany and the German Democratic Republic discontinuing the use of the reichsmark and both introducing separate currencies in June 1948, the former republics of the Soviet Union attaining independence in December 1991 and creating new currencies, the disintegration of the Federal Republic of Yugoslavia between June 1991 and April 1992 and the creation of a number of newly independent States, each with a separate monetary system, and the division of Czechoslovakia into two separate States in January 1993, with each one adopting its own currency.

21.2 How then is a guarantor to pay in a currency that no longer exists or is not convertible where it is operating outside the country where that currency is traded? Can the beneficiary and the guarantor agree for payment to be made in a different, convertible currency? Would such a payment be binding on the instructing party when made in a currency other than the one specified in the instructions? Which exchange rate should be considered to convert the currency specified in the guarantee into the chosen new currency and, once payment is made, which rate should apply to the reimbursement claim from the instructing party? Neither URDG 458 nor any other set of ICC rules have addressed the problem of the non-availability of currency at the place for payment. At a time when financial crises could prompt governments to suspend the convertibility of their currency at any time, ICC had to propose a solution that would favour certainty and avoid unnecessary litigation.

21.3 The availability of the currency of payment problem is well illustrated in the following case, which was litigated before the French courts for 11 years and led to four Supreme Court judgments and countless lower court decisions⁷². A French company, Technique Electrique de l’Oise (Télécoise), was awarded a contract with a Libyan municipality to build a highway and build and operate a related large-scale electricity network. As required by the terms of the procurement, Télécoise instructed its bank, Union méditerranéenne de banque (UMB), to issue an advance payment and a performance counter-guarantee to its correspondent in Libya, Wahda Bank, which, in turn, issued an advance payment and a performance guarantee in favour of the municipality. Guarantees and counter-guarantees were issued in Libyan dinars, and none were subject to the URDG. Following various disputes in relation to the contract, the beneficiary presented a partial demand for payment under the advance payment guarantee. Having paid the claimed payment, the guarantor presented a demand under the corresponding counter-guarantee on 30 October 1984. That demand was labelled with the counter-value in US dollars of the relevant amount in Libyan

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dinars. The applicant requested a court injunction against the payment of that counter-guarantee. In support of its motion, the applicant contended that the demand was not a complying demand because it was made in US dollars rather than Libyan dinars, which was the currency specified in the counter-guarantee. Neither party disputed that the US dollar amount of the demand corresponded to the Libyan dinar counter-value of what the guarantor would be entitled to claim under the counter-guarantee. Therefore, the legal question focused on whether the principle of strict compliance should lead to the rejection of an otherwise complying demand made in a currency other than the currency specified in the guarantee where the currency of the guarantee is non-convertible and cannot be procured at the place for payment.

21.4 The judge granted the injunction, but this decision was reversed on appeal. The counter-guarantor then paid the guarantor the claimed amount in US dollars and debited the account of the applicant. The Supreme Court vacated the Court of Appeal’s decision and sent the case to another Court of Appeal for decision. The second Court of Appeal likewise decided that there was no case for granting an injunction, but its decision was again quashed by the Supreme Court. The applicant then petitioned the court to rule that payments made under the counter-guarantee and guarantee should be reversed and, as a consequence, that its account should be credited. In a decision dated 4 July 1995, the Supreme Court noted that the payment of the counter-guarantee took place in New York and that this place for payment was not excluded in the counter-guarantee. It accordingly decided that payment in US dollars was a proper payment given that the counter-guarantor was unable to procure payment in Libyan dinars in New York, as this currency was a non-convertible currency outside Libya.

21.5 This outcome – 11 years after the guarantor presented a demand under the counter-guarantee – could be regarded as a pragmatic solution, but, in effect, it amounts to the court’s redrafting the terms of the counter-guarantee by changing the currency of payment and binding the instructing party to the result of this change without first obtaining its agreement. Is it reasonable to suggest that a French exporter instructing its bank in France to issue a guarantee in Libyan dinars in favour of a Libyan beneficiary should expect at the time of issue that the guarantee could end up being paid in US dollars, on account of the fact that payment in US dollars is not expressly excluded, and be bound by such payment? Indulging in such a divination exercise seems to be as far as one can get from legal certainty, which is key in international financial transactions. It is to control this very genuine risk that the new URDG address the question – for the first time in any set of ICC rules – and offer a new solution in the form of article 21 – Currency of payment.

Article 21(a)

Scope of article 21

21.6 Article 21 is concerned only with the currency of payment and impediments to payment in that currency. The rule does not deal with cases where payment is precluded altogether, for example due to a war prompting the

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interruption of the guarantor’s guarantee-related business. Such cases are governed by article 26 (force majeure). Nor does article 21 deal with the currency of account, that is, the currency by reference to which the guarantor’s payment obligation is to be measured. Normally, the currency of payment and the currency of account will be the same, but one could envisage circumstances in which they are different, as where there is a devaluation of the currency of payment specified in the guarantee, with the result that the value of the payment to the beneficiary is diminished. The measure of the beneficiary’s rights in such cases is a matter for the parties’ agreement or the governing law, not the URDG.

Primary rule: payment to be made in agreed currency

21.7 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 demand in whatever currency is specified in the guarantee. This applies even if the guarantee does not state that payment is to be made only in the designated currency. In some jurisdictions, the law allows the debtor the alternative of paying in the currency of the place where payment is to be made, but under URDG 758 this is permissible only in cases that fall under article 21(b). This primary rule thus avoids problems that would arise if the currency of the place for payment were not freely convertible. If, contrary to the position under article 21(a), the debtor were to be allowed the option of paying in the currency of the place in which payment is to be made, it would be necessary to limit the option to cases where the currency in question was freely convertible, as in the case of article 6.1.9(1) of the UNIDROIT Principles of International Commercial Contracts (2010 edition).

Article 21(b)

Exceptions to the primary rule

21.8 There are two exceptions to the primary rule. The first, embodied in article 21(b)(i), is 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, greater expense or other hardship in making the payment in the specified currency is not sufficient to engage article 21(b)(i). The guarantor must actually be unable to make the payment. This could be, for example, because: (a) the specified currency has collapsed to the point where it is virtually valueless; (b) the specified currency

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has been replaced by a new currency either by the state of issue⁷³or because the state issuing the currency concerned has been divided into different states or has merged with another state to become a new state with a new currency; or (c) because the specified currency is unobtainable in the quantity required in the place for payment, for example because of restrictions imposed by the state of issue on the export of its currency. The second exception is 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 requires payment in local currency.

21.9 Where either one of the exceptions to the primary rule 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. The word “only” therefore adds nothing to the payment obligation. “Place for payment” refers to the place where payment is due, which is not necessarily the same as the place where payment is actually made. However, the actual place for payment is relevant to the right of reimbursement.

21.10 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 this currency. However, the guarantor or counter-guarantor, as the case may be, can claim reimbursement either in the currency in which payment was made or in the currency specified in the guarantee or, as the case may be, the counter-guarantee. This rule is designed to ensure that the guarantor or counter-guarantor can be fully indemnified against its payment, with the option to be paid in the currency specified in the guarantee or counter- guarantee.

Article 21(c)

Rate of exchange

21.11 Under article 21(c), which is derived from article 7.108 of the Principles of European Contract Law, 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 there when payment or reimbursement is due. “Rate of exchange” refers to the rate prevailing in the place for

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payment at which the currency of the (different) place specified in the guarantee can be exchanged for the currency of the place for payment.

21.12 However, if the guarantor has not paid at the time when payment is due, the beneficiary may 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 made. In this way, the guarantor bears the loss caused by its own default.

Cross-references within URDG 758

- Article 20.

Cross-references to other ICC rules

- UCP 600 – none.

- ISP98 rule 2.01(e) – obligation to pay in the currency designated in the standby letter of credit. There is no specific rule for cases where payment in the designated currency cannot be made.

Cross-references to the UN Convention on Independent Guarantees and

Stand-by Letters of Credit

- None.

Cross-references to other international texts:

UNIDROIT Principles of International Commercial Contracts (2010)

Article 6.1.9 – Currency of payment

(1) If a monetary obligation is expressed in a currency other than that of the place for payment, it may be paid by the obligor in the currency of the place for payment unless:

(a) that currency is not freely convertible; or

(b) the parties have agreed that payment should be made only in the currency in which the monetary obligation is expressed.

(2) If it is impossible for the obligor to make payment in the currency in which the monetary obligation is expressed, the obligee may require payment in the currency of the place for payment, even in the case referred to in paragraph (1)(b).

(3) Payment in the currency of the place for payment is to be made according to the applicable rate of exchange prevailing there when payment is due.

(4) However, if the obligor has not paid at the time when payment is due, the obligee may require payment according to the applicable rate of exchange prevailing either when payment is due or at the time of actual payment.

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Article 6.1.10 – Currency not expressed

Where a monetary obligation is not expressed in a particular currency, payment must be made in the currency of the place where payment is to be made.

The Principles of European Contract Law (2000)

Article 7:108 – Currency of Payment

(1) The parties may agree that payment shall be made only in a specified currency.

(2) In the absence of such agreement, a sum of money expressed in a currency other than that of the place where payment is due may be paid in the currency of that place according to the rate of exchange prevailing there at the time when payment is due.

(3) If, in a case falling within the preceding paragraph, the debtor has not paid at the time when payment is due, the creditor may require payment in the currency of the place where payment is due according to the rate of exchange prevailing there either at the time when payment is due or at the time of actual payment.

Illustration 21-1

A guarantee issued in France provides for payment on demand in Swiss francs. An otherwise complying demand is presented asking for payment of the equivalent amount in euro, this being the currency of the place for payment. The demand is a non-complying demand even if the euro amount requested in the demand is the exact counter-value of the guarantee amount in Swiss francs.

Illustration 21-2

A guarantee issued at a branch of the guarantor in Urbania provides for payment at the branch in Ruritanian dinars. A demand is made under the guarantee for payment in that currency, which by that time has ceased to be convertible. The guarantor has the duty to pay the equivalent value in Urbanian currency.

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URDG 758

Article 22 Transmission of copies of complying demand

The guarantor shall without delay transmit a copy of the complying demand and of any related documents to the instructing party or, where applicable, to the counter-guarantor for transmission to the instructing party. However, neither the counter-guarantor nor the instructing party, as the case may be, may withhold payment or reimbursement pending such transmission.

URDG 458

Article 21

The Guarantor shall without delay transmit the Beneficiary’s demand and any related documents to the Principal or, where applicable, to the Instructing Party for transmission to the Principal.

Comment

Where, upon examination, a demand is determined to be a complying demand, article 22 requires the guarantor to transmit a copy of the demand and of any related documents to the party from which it received its instructions.

Changes from URDG 458

- Duty to transmit demands and documents changed to duty to transmit copies of complying demands and documents.

- Clarification that no payment can be withheld pending transmission unless counter-guarantee or application require transmission as a condition for payment.

The duty of transmission

22.1 The guarantor to which a complying demand is presented must without delay transmit a copy of the demand and of any related documents to the instructing party or, where applicable, the counter-guarantor. This is a departure from URDG 458 article 21, which required the transmission of the original demand. The new rule reflects the consideration that the demand provides the legal basis for the guarantor’s payment and that the guarantor should therefore be entitled to retain it. Where the instructing party wishes to receive the original demand and related documents, it can simply include this as a requirement in its instructions to the guarantor. This is not a matter for the beneficiary and, accordingly, need not be stipulated in the guarantee. Of course, the guarantor must first determine that the demand is a complying

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demand. For this purpose, it has up to five business days following the presentation within which to examine the presentation. “Related documents” are all the documents forming part of the presentation, including the supporting statement but excluding documents not required by the guarantee, which the guarantor will disregard and which it may either retain or return to the presenter (article 19(d)). If the demand is not a complying demand, the guarantor has no duty to transmit copies, though it does have a duty to inform (see paragraph 16.4). Under article 24, however, the guarantor has the discretion to approach the instructing party or counter- guarantor, as the case may be, for a waiver of the discrepancies, in which case the guarantor retains the documents pending a decision.

Counter-guarantor’s transmission duty

22.2 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 of any related documents. The counter-guarantor, in turn, has a 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? Pursuant to article 3(b), article 22 applies equally to a demand made by the guarantor under the counter-guarantee. Where the counter-guarantor determines that this demand is a complying demand, it is required to transmit without delay a copy of the demand and of any related documents to the party from which it received its instructions. This means that the counter-guarantor may end up transmitting to the party from which it received its instructions copies of two separate – but related – 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.

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

22.3 Article 16 requires the guarantor to inform the instructing party or the counter-guarantor of any demand received, whether or not it is a complying demand.

22.4 The rules do not expressly provide for the guarantor to inform the instructing party or the counter-guarantor that it has made payment. In the case of a counter-guarantee, the guarantor is entitled to be paid whether or not it has made payment under the guarantee and to obtain reimbursement from the counter-guarantor. In the case of a direct guarantee, the guarantor is entitled to reimbursement from the instructing party after payment, which means that the guarantor will inform the instructing party of the payment as a matter of course. If the guarantor has paid the guarantee, the instructing party or the counter-guarantor will be informed of this payment as a matter

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of course, either by their receipt of the reimbursement claim from the guarantor or by the transmission of copies of the complying demand and any related documents, whichever happens first. No further information duty is then required under the URDG.

Mode of transmission

22.5 Article 22 makes no provision as to the mode of transmission of the documents. Any expeditious and commercially reasonable mode suffices.

Risk of loss or delay in transmission

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

Non-complying demands

22.7 Article 22 is confined to complying demands. Where a demand is not a complying demand and the guarantor rejects the demand, it may return to the presenter any documents presented in paper form and dispose of the electronic records as it sees fit (article 24(g)). This discretion to return or not return the documents stands in contrast to URDG 458 article 10(b), which required the documents to be held at the disposal of the beneficiary. On the other hand, where the guarantor decides to approach the instructing party or, as the case may be, the counter-guarantor for a waiver of the discrepancies, it retains the documents pending a decision by the instructing party or the counter-guarantor as to the waiver and the guarantor’s own decision whether to reject the demand even if the waiver is given.

Payment or reimbursement not to be withheld pending transmission

22.8 Neither the counter-guarantor nor the instructing party, as the case may be, may withhold payment or reimbursement pending transmission. Because this provision did not appear 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 even less so under URDG 758. It is open to a counter-guarantor to require in the counter-guarantee – and to the instructing party to stipulate in the application or elsewhere – that the guarantor’s demand should be accompanied by a copy (or even the original copy) of the beneficiary’s demand and any related documents. This would be a very legitimate payment condition and would be binding on the guarantor. Any other solution would be a trap that the URDG do not condone. However, if the counter-guarantor or the instructing party, as the case may be, happens to receive copies of the demand and any related documents before making payment and finds that the demand is not a complying demand, it may withhold payment.

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Cross-references within URDG 758

- Article 15.

Cross-references to other ICC rules

- UCP 600 – none.

- ISP98 – none.

Cross-references to the UN Convention on Independent Guarantees and

Stand-by Letters of Credit

- None.

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URDG 758

Article 23 Extend or pay

a. Where a complying demand includes, as an alternative, a request to extend the expiry, the guarantor may suspend payment for a period not exceeding 30 calendar days following its receipt of the demand.

b. Where, following such suspension, the guarantor makes a complying demand under the counter-guarantee that includes, as an alternative, a request to extend the expiry, the counter-guarantor may suspend payment for a period not exceeding four calendar days less than the period during which payment of the demand under the guarantee was suspended.

c. The guarantor shall without delay inform the instructing party or, in the case of a counter-guarantee, the counter-guarantor, of the period of suspension of payment under the guarantee. The counter-guarantor shall then inform the instructing party of such suspension and of any suspension of payment under the counter-guarantee. Complying with this article satisfies the information duty under article 16.

d. The demand for payment is deemed to be withdrawn if the period of extension requested in that demand or otherwise agreed by the party making that demand is granted within the time provided under paragraph (a) or (b) of this article. If no such period of extension is granted, the complying demand shall be paid without the need to present any further demand.

e. The guarantor or counter-guarantor may refuse to grant any extension even if instructed to do so and shall then pay.

f. The guarantor or counter-guarantor shall without delay inform the party from whom it has received its instructions of its decision to extend under paragraph (d) or to pay.

g. The guarantor and the counter-guarantor assume no liability for any payment suspended in accordance with this article.

URDG 458

Article 26

If the Beneficiary requests an extension of the validity of the Guarantee as an alternative to a demand for payment submitted in accordance with the terms and conditions of the Guarantee and these rules, the Guarantor shall without delay so inform the party who gave the Guarantor his instructions. The Guarantor shall then suspend payment of the demand for such time as is

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reasonable to permit the Principal and the Beneficiary to reach agreement on the granting of such extension and for the Principal to arrange for such extension to be issued.

Unless an extension is granted within the time provided by the preceding paragraph, the Guarantor is obliged to pay the Beneficiary’s conforming demand without requiring any further action on the Beneficiary’s part. The Guarantor shall incur no liability (for interest or otherwise) should any payment to the Beneficiary be delayed as a result of the above-mentioned procedure.

Even if the Principal agrees to or requests such extension, it shall not be granted unless the Guarantor and the Instructing Party or Parties also agree thereto.

Comment

In a detailed, step-by-step approach, article 23 deals comprehensively with the consequences of the receipt by the guarantor or counter-guarantor of an extend or pay demand and outlines the responsibilities of each party involved in the process.

Changes from URDG 458

- Suspension of payment period for both guarantee and counter- guarantee now fixed in terms of a maximum number of days instead of a reasonable period.

- Detailed, step-by-step approach to dealing with extend or pay demands under both guarantees and counter-guarantees.

- Comprehensive information duty in favour of the instructing party or the counter-guarantor.

Extend or pay demands generally

23.1 Research in the guarantee departments of a number of banks shows that the majority of demands – up to 90%⁷⁴– presented under demand guarantees require the guarantor either to extend the period of the guarantee or to pay the demand forthwith. Such a demand is not necessarily improper, for an event may have occurred that entitles the beneficiary (or leads the beneficiary to believe that it is entitled) to present a demand for payment, and the alternative of an extension is designed to preserve the beneficiary’s relationship with the applicant and give the applicant an opportunity to remedy the breach. 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

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guaranteed obligation (5 to 8%) shows the wisdom behind the beneficiary’s choice to offer the applicant a chance to redeem the breach.

23.2 Occasionally, the guarantee itself provides that the beneficiary may present an extend or pay demand, in which case article 23 has to be treated as modified and must be applied in a manner consistent with the terms of the guarantee. Of course, such a demand would be abusive if the beneficiary knew that the applicant had not committed any breach entitling the beneficiary to demand payment.

Pay or extend

23.3 The order of the two alternatives may be reversed. The beneficiary may present a demand for payment coupled with a request for extension if payment is not made. This too is covered by article 23. Alternatively the beneficiary may simply request an extension, coupled with an intimation that if it is not granted a demand for payment will follow. This last alternative falls outside the scope of article 23.

Summary of the procedure in the case of a direct guarantee

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

(1) The guarantor receives an extend or pay demand.

(2) The guarantor without delay so informs the instructing party, either under article 16 prior to examination or under article 23 when deciding to suspend (see (5) below).

(3) The guarantor examines the demand and determines that it is a complying demand. It must then without delay transmit a copy of the complying demand and of any related documents to the instructing party under article 22.

(4) Where the extend or pay demand is found to be complying, the guarantor has the option of making payment forthwith.

(5) If the guarantor decides to suspend payment:

(a) it must without delay inform the instructing party;

(b) the applicant and the beneficiary seek to negotiate an extension; (c) if the applicant and the beneficiary agree to an extension, the instructing party instructs the guarantor to grant the extension and the guarantor either issues an amendment extending the guarantee, if it is willing to do so, or pays the demand – in either case the guarantor informs the instructing party;

(d) if the applicant and the beneficiary do not agree to an extension, the guarantor, on being so advised, and in any event on expiry of the suspension period, pays and so informs the instructing party.

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Summary of the procedure in the case of an indirect guarantee

23.5 In the case of an indirect guarantee the sequence is as follows: (1) The guarantor receives an extend or pay demand.

(2) The guarantor without delay so informs the counter-guarantor, either under article 16 prior to examination or under article 23 when deciding to suspend (see (5) below).

(3) The guarantor examines the demand and determines that it is a complying demand. It must then without delay transmit a copy of the complying demand and of any related documents to the counter- guarantor under article 22 for transmission to the instructing party.

(4) Where the extend or pay demand is found to be complying, the guarantor has the option of making payment forthwith and may itself make a demand for payment under the counter-guarantee.

(5) If the guarantor decides to suspend payment:

(a) it must without delay inform its counter-guarantor and may present a complying extend or pay demand under the counter- guarantee;

(b) the counter-guarantor must inform the instructing party of this suspension and of any payment the counter-guarantor makes or any suspension of payment it chooses to grant under the counter- guarantee, being for a period no more than four calendar days shorter than the period of suspension under the guarantee;

(c) the applicant and the beneficiary seek to negotiate an extension;

(d) if the applicant and the beneficiary agree to an extension, the instructing party instructs the counter-guarantor to grant the extension and the counter-guarantor either issues an amendment extending the counter-guarantee, if it is willing to do so, or pays the demand – in either case the counter-guarantor so informs the party from which it received its instructions. The guarantor then has the option of either extending its guarantee or paying thereunder forthwith in which case it has to present a complying demand for payment under the counter-guarantee;

(e) if the applicant and the beneficiary do not agree an extension, the counter-guarantor, on being so advised, and in any event on or before expiry of the suspension period, pays and so informs the party from which it received its instructions.

Article 23(a)

Demand must be a complying demand

23.6 Article 23 is confined to a complying demand. In particular, the demand must conform to the requirements of the guarantee and articles 14 and 15. If the demand is neither a complying demand nor an incomplete demand

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indicating that it is to be completed later, the guarantor must take one of the courses of action specified in article 24. 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.

Guarantor’s options where the demand is complying

23.7 Under URDG 458, a guarantor that was presented with a complying extend or pay demand was obliged to inform the party from which it had received its instructions and to suspend payment for such time as was reasonable to enable the applicant and the beneficiary to reach agreement on the extension. Under article 23 of the present rules, “shall” has been replaced by “may”. In other words, the guarantor has a choice between suspending payment or paying forthwith. There are three reasons why this much discussed change was adopted. First, if the beneficiary chooses to make a demand coupled with a request for an extension, it cannot complain if the guarantor pays the demand. Secondly, an extend or pay demand tends to be made in circumstances where the applicant’s financial position is or has become weak. The guarantor may therefore wish to pay and obtain reimbursement while the applicant is still able to effect reimbursement. Thirdly, even if there were to be a suspension, the granting of an extension is ultimately a decision for the guarantor alone. If the guarantor were to decide right at the outset that it was unwilling to grant the extension, it would be pointless, and indeed misleading, to involve the parties in negotiations for an extension that would not be granted by the guarantor in any event. Again, nothing in the rules precludes the guarantor from making payment before informing the instructing party. However, it will usually do so and in some cases may even be obliged to do so, if required by the mandatory rules of the applicable law.

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

23.8 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 argument based on 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, in the light of 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 representing to the instructing party that it is willing to extend the guarantee where instructed to do so.

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Guarantor’s decision to suspend

23.9 The guarantor, instead of paying the demand, may suspend payment for a period not exceeding 30 calendar days following its receipt of the demand. As pointed out earlier, the rules specify business days for short periods and calendar days for longer periods. When calculating the 30-day (calendar) period, the date of receipt of the demand is excluded. Within the 30-day time frame, the period of suspension is at the discretion of the guarantor. This stands in contrast to the rule in URDG 458 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. Article 23(a) of the present rules leaves the guarantor free to decide what suspension, if any, to grant within the maximum period allowed, without regard to the negotiations between the beneficiary and the applicant. Indeed, article 23 makes no reference to such negotiations.

23.10 The guarantor must without delay inform the instructing party or the counter-guarantor, as the case may be, of the period of suspension (see paragraphs 23.15 et seq.), as well as transmitting a copy of the demand and of any related documents under article 22.

Suspension distinguished from extension

23.11 It is important not to confuse a suspension of payment with an extension of the period of the guarantee. A guarantor that suspends is merely exercising its option not to make payment at that stage. Suspension does not extend the period of the guarantee. However, the fact that the guarantee may expire during the suspension of the guarantee period does not affect the beneficiary, because it suffices that the demand has been presented before expiry. For the same reason, the expiry of the guarantee does not preclude the guarantor from subsequently extending the guarantee if so instructed. Of course, the guarantor is not entitled to extend the guarantee without the agreement of the party from which it received its instructions, though if the guarantor were to do so the beneficiary would be entitled to rely on the extension unless it knew that it had been granted without authority. A guarantor that grants an extension that has not been authorised by the party from which it received its instructions risks being unable to claim reimbursement for any payment subsequently made during the extension period (see paragraph 23.22).

Article 23(b)

Extend or pay demand under counter-guarantee

23.12 In the case of an indirect guarantee, a guarantor that suspends payment following an extend or pay demand may itself make a complying extend or pay demand under the counter-guarantee. In that case, the counter-guarantor must without delay transmit a copy of the complying demand and of any related documents to the instructing party (article 22). The counter- guarantor may suspend payment for a period that is no longer than four calendar days less than the period during which payment of the demand

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under the guarantee was suspended. This four-day reduction is designed to ensure that the guarantor does not have to pay the beneficiary before it has received payment from the counter-guarantor or at least to know the counter-guarantor’s decision. Again, it is for the counter-guarantor to decide whether to suspend or to pay and, in the former case, for how long to suspend payment within the above-mentioned time frame. If the counter- guarantor decides to suspend payment, it must so advise the party from which it received its instructions. If the counter-guarantor pays the demand, it is entitled to reimbursement from the party from which it received its instructions, that is, the instructing party or an earlier counter-guarantor.

23.13 The guarantor cannot properly submit an extend or pay demand to the counter-guarantor unless it has itself received a complying extend or pay demand from the beneficiary. This means that the guarantor’s demand should be accompanied by the supporting statement required under article 15(b) indicating that the guarantor has received a complying demand. This assumes that, in the case of an indirect guarantee, both the guarantee and counter-guarantee are governed by URDG either pursuant to article 1(a) or (b). The reason is that article 23(b) applies only as a consequence of the application of article 23(a) which, itself, is predicated on the demand presented to the guarantor pursuant to article 23(a) being a complying demand as defined in the URDG. In other terms, if no complying extend or pay demand as defined in the URDG is presented under the guarantee, no extend or pay demand, or any demand whatsoever, can be presented under the counter-guarantee. Of course, the parties to an indirect guarantee that is not governed by URDG are free to follow the same steps as those outlined in article 23, but they would have to agree on that separately.

Decisions under guarantee and counter-guarantee may be different

23.14 A consequence of the independence of the counter-guarantee from the guarantee is that the counter-guarantor and the guarantor are free to take decisions independently of each other as to whether to extend or pay. For example, the fact that the guarantor issues an amendment to the beneficiary extending the guarantee does not mean that the counter-guarantor, on receiving an extend or pay demand from the guarantor, has to extend the counter-guarantee; it may insist on paying the guarantor. Usually, however, the position will be that the guarantor and the counter-guarantor either both pay or both extend.

Article 23(c)

Duty to inform instructing party or counter-guarantor where guarantor suspends payment

23.15 Where the guarantor decides to suspend payment, it must without delay inform the instructing party or, in the case of a counter-guarantee, the counter-guarantor of the period of suspension. The counter-guarantor, if there is one, must then inform the instructing party of the suspension of payment under the guarantee and of any suspension under the counter-

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guarantee. The instructing party is entitled to know within what time it needs to conclude its negotiations for an extension. Compliance with the requirement of article 23(c) fulfils the duty of information under article 16. The point here is that article 16 imposes a duty to give information of any demand, whether or not it is a complying demand. This duty may therefore arise before the expiry of the time allowed for examination of the demand.

If the demand is a complying demand then the provision of information under article 23 also satisfies the information requirement under article 16. The problem for the guarantor is that until it has examined the demand, it will not know if it is a complying demand. Accordingly, unless the examination can be completed promptly, so as to enable information to be given under article 23 within the time period provided by article 16, the guarantor’s only safe course of action is to give information under article 16. If the guarantor waits until after the examination and the demand is found to be a non- complying demand, the guarantor may be in breach of its obligation under article 16. Where information as to an extend or pay demand is given under article 16 prior to examination and the demand is later found to be a complying demand, the more detailed information requirements of article 23(c) must also be complied with, and 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).

No duty to inform beneficiary of decision to suspend

23.16 Article 23 does not require the guarantor to inform the beneficiary of the decision to suspend payment. By presenting the extend or pay demand, the beneficiary implicitly accepts that the guarantor may elect to suspend payment for up to 30 days. Accordingly, the fact that the guarantor does not notify the beneficiary of its decision to suspend does not imply that it has elected to make payment or attract any commitment to do so. Only if the extension, or any other agreed extension, is not granted within the suspension period will the guarantor become liable to make payment (see paragraph 23.18).

Duty to inform where guarantor decides to pay

23.17 Where the guarantor decides not to suspend but to pay the demand, it has a duty under article 23(f) to inform the instructing party accordingly and a separate duty under article 22 to transmit a copy of the complying demand and of any related documents to the instructing party.

Position of parties during suspension period

23.18 The purpose of the suspension period is to allow the applicant and the beneficiary an opportunity to discuss the beneficiary’s request for extension with a view to reaching agreement. It is not incumbent on them to do so. However, even if the applicant or other instructing party decides from the outset that it will not agree to the extension, the guarantor is bound by the suspension it has granted and cannot pay until the suspension period

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expires. Similarly, the beneficiary, having granted the guarantor the option to extend and thereby led it to suspend payment, cannot demand payment until the expiry of the suspension period. If the suspension period expires without the requested extension or any other agreed extension being granted, the guarantor must pay.

Article 23(d)

Deemed withdrawal of demand

23.19 If, within the period of suspension, the guarantor or counter-guarantor, as the case may be, grants the extension requested in the demand or otherwise agreed by the party making the demand, the demand is deemed to have been withdrawn. The mere fact that the applicant has agreed with the beneficiary to extend the guarantee is not sufficient to bring article 23(d) into play. Two further conditions must be satisfied. The guarantor itself must have granted the extension, and it must have done so before the period of suspension has expired. This is because, if the suspension period expires and the extension has not been granted, the guarantor or counter-guarantor comes under an immediate duty to pay the demand without the need for any further demand.

Article 23(e)

Guarantor’s right to refuse extension

23.20 The guarantor or counter-guarantor is not obliged to grant a requested extension. If it has satisfied itself that the demand is a complying demand, it may make payment forthwith. Alternatively, it may grant a suspension, but this does not bind it to grant the requested extension or any other extension, even if it has been agreed between the beneficiary and the applicant and even if the guarantor has been instructed by the instructing party to grant the extension. The reason why the present rules, like URDG 458, give the guarantor the right to refuse to grant an extension is that this prolongs the period during which it is at risk beyond the period agreed by the parties when the guarantee was issued. A unilateral extension of the guarantee period would run counter to the general principle underpinning the rules that the terms of the guarantee are paramount and that only a variation agreed by the parties can be given effect.

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

23.21 On receipt of the guarantor extend or pay demand the counter-guarantor may extend the counter-guarantee and instruct the guarantor to extend the guarantee. 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 granted. The second sentence of article 23(d), which indicates

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that the complying demand shall be paid without the need to present any further demand, only applies if no extension is granted by the counter- guarantor. Of course, there is no risk that the guarantor’s new demand for payment will be rejected as untimely, because the present hypothesis is based on the assumption that the requested extension of the counter- guarantee has already been granted by the counter-guarantor.

Effect of unauthorised extension

23.22 The guarantor acts in breach of its mandate if it grants the requested extension or any other extension without the authority of the instructing party or if it grants an extension for a period that is longer or shorter than permitted by its instructions. Acting in this way may preclude the guarantor from claiming reimbursement of any payment made. However, in its relations with the beneficiary, the guarantor is bound by the extension. This is not expressly stated in the rules but follows from the fact that an amendment to the guarantee binds the guarantor from the time of its issue (article 11(b)) and that the guarantee and any amendment to it are independent of the relationship between the guarantor and the instructing party (article 5(a)). Experience shows that it is only in extreme cases that a guarantor may be amenable to granting an extension absent the prior authorisation of the instructing party. An example is where the instructing party becomes insolvent, thus making the guarantor’s post-payment reimbursement claim pointless. In that case, and particularly where the 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.

Extension for a period other than that requested or agreed

23.23 In most cases where the instructing party and the beneficiary are unable to agree on the period of extension, the result will be that the guarantor pays. The instructing party might authorise the guarantor to grant an extension for a period shorter than that requested by the beneficiary. In that case, the beneficiary would have the option of accepting the amendment to the guarantee or rejecting it and obtaining payment.

Article 23(f)

Information as to the decision to extend or pay

23.24 The guarantor or counter-guarantor must without delay inform the party from which it received its instructions of its decision to extend under paragraph (d) or pay. Article 23(f) refers to “party from whom it has received its instructions” rather than “instructing party” in order to cover cases involving chain 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).

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Article 23(g)

No liability for suspension

23.25 The guarantor and the counter-guarantor assume no liability for any payment suspended in accordance with article 23. The beneficiary therefore cannot 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 procedure beginning with the suspension. Thus, the beneficiary is not entitled to interest for the period of delay unless this is provided for in the guarantee.

Demand under counter-guarantee

23.26 This is discussed in paragraphs 23.12 and 23.13.

Other possible outcomes

23.27 Article 23 deals with only two situations, namely the guarantor’s decision to grant or refuse the extension. However, there are also other possible outcomes. For example, the beneficiary may agree to withdraw the demand

– a procedure expressly covered by article 18(a) – and if it does so the demand becomes ineffective, leaving the beneficiary free to present a subsequent demand.

Cross-references within URDG 758

- Articles 15, 16 and 20.

Cross-references to other ICC rules

- UCP 600 – none.

- ISP98 rule 3.09.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- None.

Illustration 23-1

G Bank, on the instructions of IP, issues a guarantee in favour of B that provides for payment on demand and is stated to expire on 13 November 2011. On 10 October 2011, B presents a complying demand coupled with a request to extend the guarantee until 30 June 2012 as an alternative to payment. G Bank examines the demand and determines that it is a complying demand. However, because it is less confident in the strategy of IP’s new management, which took over the company after the guarantee was issued, G Bank has terminated the credit lines of IP and, as a result, is unwilling to extend the guarantee regardless of what IP may instruct it to do. G Bank has an obligation to pay B the amount requested in the payment part of the extend or pay demand, which cannot exceed the amount available under the guarantee. Other than informing IP under article 16 that it has received a demand, G Bank owes no information duty to IP about its intention to pay.

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Illustration 23-2

The case is as in Illustration 23-1, except that G Bank is willing to envisage a possible extension of its guarantee if IP increases the collateral it transferred to G Bank as security for its reimbursement claim when it initially instructed it to issue the guarantee. Pending IP’s compliance with G Bank’s request to increase the security, G Bank has decided to suspend payment until 9 November 2011, which is 30 days after G Bank’s receipt of B’s complying demand. G Bank informs IP of the period of suspension and requests instructions. If IP instructs G Bank by 9 November 2011, at the latest, to extend the guarantee until 30 June 2012 as requested by B, G Bank has the discretion to either accept or refuse the extension regardless of whether it has reached an agreement with IP as to securing its reimbursement claim. If G Bank does not extend the guarantee, it must pay B and inform IP as required by article 23(f).

Illustration 23-3

The case is as in Illustration 23-1, and G Bank has decided to suspend payment until 9 November 2011, but IP only sends its instructions to G Bank to extend the guarantee for the period requested by B on 10 November 2011. G Bank is entitled to make payment when the suspension period expires, that is, on 10 November 2011, and incurs no liability for not having informed IP of its intention to pay before making this payment. If G Bank has not yet made payment to B by the time IP’s instructions for extension are received on 10 November 2011, G Bank is bound by article 23(d) (second sentence) to pay unless B withdraws the payment option and accepts the extension.

Illustration 23-4

The case is as in Illustration 23-1, and G Bank has decided to suspend payment until 9 November 2011, but IP instructs G Bank before the expiry of the suspension period to extend the guarantee for the period requested in the demand. G Bank agrees to the extension and issues the requisite amendment to the guarantee. Following this, B’s demand is deemed to have been withdrawn. G Bank has to inform IP of its decision to extend the guarantee even though that extension constitutes a strict execution of IP’s instructions.

Illustration 23-5

G Bank, on the instructions of IP, issues a guarantee in favour of B that provides for payment on demand and is stated to expire on 13 November

2011. On 11 November 2011, B presents a complying demand coupled with a request to extend the guarantee until 30 June 2012 as an alternative to payment. G Bank examines the demand, determines that it is a complying demand, suspends payment until 11 December 2011, which is 30 days after G Bank’s receipt of B’s complying demand, and informs IP accordingly. The following two alternative scenarios now present themselves:

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- On 11 December 2011, IP indicates to G Bank that it is unwilling to grant the extension and that no payment should be made because the guarantee expired on 13 November 2011. IP has no right to do this. G Bank needs to pay the demand without the need for any further act from B, as indicated in article 23(d).

- On 11 December 2011, IP indicates to G Bank that it agrees to grant the requested extension, and G Bank grants the extension. Although the guarantee was due to expire on 13 November 2011, an extension granted on 11 December 2011 validly amends the expiry date of the guarantee, which is accordingly extended until 30 June 2012. This does not involve resurrecting a lapsed guarantee. When B presented its complying demand on 11 November 2011, B crystallised its right to either payment or extension until 30 June 2012 at the discretion of G Bank. This crystallisation results in a freeze of the expiry date throughout the suspension period. When G Bank grants the extension, the new expiry date of 30 June 2012 applies retroactively and simply replaces the initial expiry date of 13 November 2011.

Illustration 23-6

G Bank, against a counter-guarantee given by CG Bank on the instructions of IP, issues a guarantee in favour of B that provides for payment on demand and is stated to expire on 13 November 2011. B presents a complying demand coupled with a request to extend the guarantee until 30 June 2012 as an alternative to payment. G Bank may refuse the extension request, pay immediately and present a demand under the counter-guarantee. G Bank’s demand under the counter-guarantee can only be a demand for payment and not an extend or pay demand, because G Bank has not suspended payment under its own guarantee, thus failing to satisfy the prerequisite of article 23(b).

Illustration 23-7

The facts are as in Illustration 23-6, except that G Bank suspends payment for 20 days, informs CG Bank of the demand and the period of suspension of payment and presents an extend or pay demand to CG Bank. CG Bank determines G Bank’s extend or pay demand to be a complying demand and, in turn, suspends payment under the counter-guarantee for 16 days and informs IP of the suspension of payment under the guarantee and counter- guarantee. If, by the end of the 16-day suspension period, at the latest, IP (with or without discussion with B) instructs CG Bank to grant the extension under the counter-guarantee, CG Bank may either refuse to extend and pay G Bank immediately or grant the extension by amending the expiry date of the counter-guarantee. The two following alternative scenarios now present themselves:

- If CG Bank pays the amount claimed by G Bank, CG Bank is entitled to reimbursement by IP and cannot be blamed for not having mitigated IP’s losses by not choosing to extend the counter-guarantee instead.

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- If CG Bank extends its counter-guarantee, it may by the end of the 16-day suspension period, at the latest, instruct G Bank to grant the requested extension under the guarantee. In such a case, G Bank may either:

• extend its guarantee as instructed; or

• refuse to extend, in which case G Bank must pay B. To obtain payment under the counter-guarantee, G Bank must present a new demand for payment, because the payment part of its initial extend or pay demand lapsed when CG Bank granted the requested extension.

If CG Bank extends its counter-guarantee and G Bank its guarantee and the two undertakings are amended accordingly, the payment part of the extend or pay demands under the counter-guarantee and the guarantee is deemed to have been withdrawn.

URDG 758

Article 24 Non-complying demand, waiver and notice

a. When the guarantor determines that a demand under the guarantee is not a complying demand, it may reject that demand or, in its sole judgement, approach the instructing party, or in the case of a counter- guarantee, the counter-guarantor, for a waiver of the discrepancies.

b. 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.

c. Nothing in paragraphs (a) or (b) of this article shall extend the period mentioned in article 20 or dispense with the requirements of article 16. Obtaining the waiver of the counter-guarantor or of the instructing party does not oblige the guarantor or the counter-guarantor to waive any discrepancy.

d. When the guarantor rejects a demand, it shall give a single notice to that effect to the presenter of the demand. The notice shall state:

i. that the guarantor is rejecting the demand, and

ii. each discrepancy for which the guarantor rejects the demand.

e. The notice required by paragraph (d) of this article shall be sent without delay but not later than the close of the fifth business day following the day of presentation.

f. A guarantor failing to act in accordance with paragraphs (d) or (e) of this article shall be precluded from claiming that the demand and any related documents do not constitute a complying demand.

g. The guarantor may at any time, after providing the notice required in paragraph (d) of this article, return any documents presented in paper form to the presenter and dispose of the electronic records in any manner that it considers appropriate without incurring any responsibility.

h. For the purpose of paragraphs (d), (f) and (g) of this article, guarantor includes counter-guarantor.

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URDG 458

Article 9

All documents specified and presented under a Guarantee, including the demand, shall be examined by the Guarantor with reasonable care to ascertain whether or not they appear on their face to conform with the terms of the Guarantee. Where such documents do not appear so to conform or appear on their face to be inconsistent with one another, they shall be refused.

Article 10

a. A Guarantor shall have a reasonable time within which to examine a demand under a guarantee and to decide whether to pay or to refuse the demand.

b. If the Guarantor decides to refuse a demand, he shall immediately give notice thereof to the Beneficiary by teletransmission, or, if that is not possible, by other expeditious means. Any documents presented under the Guarantee shall be held at the disposal of the Beneficiary.

Comment

Article 24 applies to demands but not to presentations that are not demands. It lays down detailed rules for dealing with a non-complying demand, substantially modifying article 9 and expanding on article 10(b) of URDG 458, as well as introducing a preclusion rule for grounds of rejection that are not stated.

Changes from URDG 458

- Guarantor can approach the instructing party for a waiver of discrepancies without prolonging the five-business-day examination period.

- Guarantor is free to decide whether or not to carry out waiver instructions.

- Rejection is to be notified by a single notice listing all the discrepancies.

- A preclusion sanction is introduced.

- Guarantor may return paper documents to the presenter and dispose of electronic records.

Article 24(a)

Determination that a demand under a guarantee is non-complying

24.1 Where the guarantor determines that a demand under the guarantee is not a complying demand, it has a choice. It may reject the demand or, in its sole judgement, approach the instructing party or, in the case of a counter-

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guarantee, the counter-guarantor for a waiver of the discrepancies, though even if a waiver is granted the guarantor is not bound to apply it (see paragraph 24.2). If the guarantor agrees to the waiver, it pays the demand. No amendment of the guarantee is necessary or appropriate because the guarantor is bound by the preclusion rule if it does not reject the demand in time. On this issue, see paragraph 24.18.

24.2 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 demand⁷⁵. If the guarantor agrees to the waiver, it pays notwithstanding the discrepancies which, as a result of the waiver, can no longer be raised.

Preparatory works

The possibility offered in the URDG 758 for the guarantor to approach the instructing party for a waiver gave rise to considerable debate during the revision. It was rightly pointed out that the rationale for the waiver in documentary credit practice is less compelling when considered in the light of demand guarantee practice. Indeed, when approached for a waiver, an applicant under a documentary credit is more likely to grant such a waiver because the consignment has often already been shipped and the applicant, usually the importer, knows that granting the waiver is the only way for it to obtain the documents necessary to take delivery of the consignment. Furthermore, in the case of demand guarantees, it was pointed out that a demand for payment necessarily subsumes the notion of a breach of the applicant’s obligations under the underlying relationships. It was argued that few applicants are expected to cooperate heartily by granting the waiver to make the demand easier to pay. In contrast to the above, it was generally admitted that guarantors frequently approach their instructing party with an indication of the discrepancies identified in the demand and a request for instructions in this respect. It was also reported that applicants do in fact waive the discrepancies either because the payment of the guarantee is part of a larger settlement with the beneficiary or to avoid harming their business relationship with the beneficiary in cases where that relationship encompasses more than the underlying contract that has given rise to the guarantee whose payment is sought. This practice is now reflected in the new URDG, which place no obligation on the guarantor to approach the instructing party for a waiver, the instructing party to grant such a waiver or the guarantor to act thereupon.

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Waiver or amendment?

24.3 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.

24.4 A rejected demand can no longer 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 is either cured of the discrepancies or covered by an amendment to the guarantee.

24.5 In practice, if the guarantor is still in possession of the documents constituting the rejected presentation, it can agree with the beneficiary that only the cured document in which the discrepancy has been identified be re-submitted, without the need for the beneficiary to re-submit other documents. 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.

No payment under reserve or indemnity

24.6 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. This practice was covered in earlier versions of the UCP (No. 290 of 1974, No. 400 of 1983 and No. 500 of 1993). Payment was 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. Payment under reserve or indemnity is no longer possible since the latest revision of the UCP (600) and is not possible either 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.

Article 24(b)

Determination that a demand under a counter-guarantee is non-complying

24.7 Similarly, 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. The formulation of the rule is not strictly accurate, in that “instructing party” has to be read as “the party from which the counter- guarantor received its instructions”, in order to cover the case of chain counter-guarantees where the counter-guarantor will approach its own counter-guarantor (see Diagram 12).

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Article 24(c)

No extension of time for examination or dispensation from article 16

24.8 The approach for a waiver does not extend the guarantor’s time for examination under article 20(a) or suspend the running of time for such an examination, nor does it dispense with the requirements of 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 the demand.

The guarantor’s decision to waive or reject

24.9 More important is the second part of article 24(c), which makes it clear that, even if the counter-guarantor or instructing party agrees to a waiver of the discrepancies, the guarantor or counter-guarantor, as the case may be, is not obliged to do so and may reject the demand.

Article 24(d)

Notice of rejection

24.10 Where the guarantor rejects a demand it must give – that is, send (see article 24(e)) – a single notice to that effect to the presenter of the demand stating that it is rejecting the demand and specifying each discrepancy for which the demand is rejected. The effect of this rule is that the guarantor is allowed only one bite of the cherry. 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 a subsequent demand that is otherwise a complying demand. This is a particular aspect of the preclusion rule in article 24(f).

24.11 The list of discrepancies must not only be complete, but must also be specific as to the reason why each discrepancy is regarded as such. A general indication such as “certificate not compliant 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 purpose of the notice is 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 take longer in the absence of a specific indication of those discrepancies.

Why the strict rule for the notice of rejection?

24.12 The source of inspiration for article 24(d), UCP 600 article 16(c), 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.

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24.13 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 that the conduct of the guarantor, however questionable, cannot make good a defective demand. Nonetheless, failing to advise the beneficiary of discrepancies of which the guarantor is aware 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 the UCP to include a preclusion rule since the revision of 1974, UCP 290. It has been a hallmark of the UCP ever since.

To whom should the notice be given?

24.14 Like UCP 600 article 16(c), URDG article 24(d) requires the guarantor to give the notice of rejection to the presenter of the demand. 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, that presenter is in a better position to rapidly cure the discrepancy and make a fresh presentation before expiry.

Departure from UCP 600

24.15 The URDG only require the notice of rejection to indicate that the guarantor is rejecting 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 – (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 involves no breach of the URDG and does not lead to the application of the preclusion sanction, although it may give rise to a separate claim for damages outside the URDG if the failure to return the documents to the presenter, hold them at its disposal or dispose of electronic records is carried out in circumstances that prejudice the beneficiary.

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Each demand is separate

24.16 The rejection of a non-complying demand does not preclude the presentation of a subsequent demand on or before expiry. Moreover, such a presentation does not infringe a prohibition in the guarantee against multiple demands, because the effect of rejection of the first demand is that it becomes inoperative. This is clarified in article 17(d).

Article 24(e)

Time within which the notice of rejection is to be sent

24.17 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 (see 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. “Sent” means dispatched. The guarantor is not responsible if the notice fails to arrive. Under article 20(a), the guarantor has five business days following the day of presentation to examine a demand and determine whether it is a complying demand. Accordingly, “without delay” in article 24(e) does not refer to the period after presentation but means as soon as practicable after the guarantor has decided to reject the demand following examination.

Article 24(f)

The preclusion rule

24.18 A guarantor that fails to act in accordance with article 24(d) or (e) is precluded from claiming that the demand and any related documents do not constitute a complying demand. The preclusion rule comes into play if the guarantor fails to give notice of rejection within the five business days following the day of presentation. However, where there is a non-complying presentation and the guarantee expires before the end of the time allowed to the guarantor for giving notice of rejection, the guarantee automatically ceases to have effect and the preclusion rule does not operate. Where it is operative, the preclusion rule not only sets a time limit for the notice of rejection but also bars the guarantor that properly rejects a demand for one discrepancy from rejecting a subsequent presentation for a different discrepancy that appeared in the original presentation but was not mentioned in the notice rejecting that presentation.

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Article 24(g)

Return of documents

24.19 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. The power of disposal is mentioned only in relation to electronic records. The implication is that paper documents should not be destroyed but should either be returned or retained and surrendered to the presenter on request. Where the beneficiary intends and is able to cure the discrepancies listed in the notice of rejection, the most sensible course is for the parties to agree that the guarantor shall keep the non-discrepant part of the presentation and, once supplemented with the cured documents, 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 represented in their original form once the amendment is issued. In that case, the best course is for the parties to agree that the guarantor shall keep the documents and treat them as a new presentation after the amendment.

Article 24(h)

Guarantor includes counter-guarantor

24.20 Article 24(h) provides that, for the purpose of paragraphs (d), (f) and (g), the term 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).

Cross-references within URDG 758

- Articles 17(d), 18(a) and 20(a).

Cross-references to other ICC rules

- UCP 600 article 16.

- ISP98 rule 5.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- None.

Illustration 24-1

A guarantee is issued by a bank in Milan on 16 September 2009 to expire in two years’ time. A demand is presented on 12 September 2011, and the guarantor rightly determines that it is not a complying demand. Nevertheless, the guarantor does not reject the demand, but on 13 September 2011

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approaches the instructing party to see if it is willing to waive the discrepancies. On 20 September 2011, the instructing party informs the guarantor that it is not prepared to give a waiver, and that same day the guarantor gives the beneficiary notice of rejection. The rejection is too late. The waiver procedure does not extend the time for rejection, which is no later than the close of the fifth business day following the presentation, that is, on or before 19 September 2011, as Saturday and Sunday are not business days in Milan. The guarantor is accordingly precluded from claiming that the demand is a non-complying demand and must therefore pay the demand.

Illustration 24-2

Under a guarantee that is due to expire on 21 May 2010, a demand is presented to the guarantor on 17 May 2010. The guarantor examines the demand and determines that it is a non-complying demand because there is no statement of breach and no surveyor’s certificate, as required by the guarantee, and because the presentation does not indicate that it is to be completed later. On 19 May 2010, the guarantor gives a notice of rejection, specifying only the lack of the statement of breach as a discrepancy. On 20 May 2011, the beneficiary makes a fresh presentation that now includes the required statement of breach but not the surveyor’s certificate. The guarantor is precluded from rejecting the presentation on this ground, since the lack of a surveyor’s certificate was not stated as a discrepancy in the earlier notice of rejection.

Illustration 24-3

The facts are as in Illustration 24-2 except that the guarantor sends the incomplete notice of rejection on 24 May 2010, which is the fifth business day following the day of presentation on 17 May 2010. Because the guarantee has meanwhile expired, the beneficiary cannot assert preclusion because it would not have been able to make a new presentation anyway, whether or not all the discrepancies had been listed in the notice of rejection. In effect, preclusion becomes inoperative after the expiry of the guarantee.

Illustration 24-4

A guarantee is stipulated to be payable on demand and to expire on 28 May 2010. The beneficiary presents its demand on 17 May 2010, accompanied by a statement indicating only that the applicant is in breach. On 19 May 2010, the guarantor sends a notice to the beneficiary indicating that the statement is discrepant because it does not indicate in what respect the applicant is in breach of its obligations under the underlying relationship. The beneficiary does not react to this notice. On 24 May 2010, the guarantor realises that it did not indicate in its notice of rejection that it is rejecting the demand. A new notice of rejection is hastily drafted but, due to the absence of an authorised signatory, is sent on the opening of the business day of 25 May 2010. The notice is too late, since it has been sent to the presenter later than the fifth business day following the day of presentation. The guarantor is precluded from asserting the discrepancies in the demand and has to pay.

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URDG 758

Article 25 Reduction and termination

a. The amount payable under the guarantee shall be reduced by any amount:

i. paid under the guarantee;

ii. resulting from the application of article 13; or

iii. indicated in the beneficiary’s signed partial release from liability under the guarantee.

b. Whether or not the guarantee document is returned to the guarantor, the guarantee shall terminate:

i. on expiry;

ii. when no amount remains payable under it; or

iii. on presentation to the guarantor of the beneficiary’s signed release from liability under the guarantee.

c. If the guarantee or the counter-guarantee states neither an expiry date nor an expiry event, 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.

d. If the expiry date of a guarantee falls on a day that is not a business day at the place for presentation of the demand, the expiry date is extended to the first following business day at that place.

e. Where, to the knowledge of the guarantor, the guarantee terminates as a result of any of the reasons indicated in paragraph (b) above, but other than because of the advent of the expiry date, the guarantor shall without delay so inform the instructing party or, where applicable, the counter- guarantor and, in that case, the counter-guarantor shall so inform the instructing party.

URDG 458

Article 18

The amount payable under a Guarantee shall be reduced by the amount of any payment made by the Guarantor in satisfaction of a demand in respect thereof and, where the maximum amount payable under a Guarantee has been satisfied by payment and/or reduction, the Guarantee shall thereupon terminate whether or not the Guarantee and any amendment(s) thereto are returned.

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Article 23

Irrespective of any expiry provision contained therein, a Guarantee shall be cancelled on presentation to the Guarantor of the Guarantee itself or the Beneficiary’s written statement of release from liability under the Guarantee, whether or not, in the latter case, the Guarantee or any amendments thereto are returned.

Article 24

Where a Guarantee has terminated by payment, expiry, cancellation or otherwise, retention of the Guarantee or of any amendments thereto shall not preserve any rights of the Beneficiary under the Guarantee.

Article 25

Where to the knowledge of the Guarantor the Guarantee has terminated by payment, expiry, cancellation or otherwise, or there has been a reduction of the total amount payable thereunder, the Guarantor shall without delay so notify the Principal or, where applicable, the Instructing Party and, in that case, the Instructing Party shall so notify the Principal.

Comment

Article 25 brings together previously scattered provisions dealing with the reduction of the guarantee amount and the termination of a guarantee. It also provides one of the most innovative rules in URDG 758: the expiry of a guarantee three years after its issue where the guarantee states neither an expiry date nor an expiry event.

Changes from URDG 458

- A new rule ending guarantees that provide neither an expiry date nor an expiry event three years after their issue.

- An automatic extension of guarantees whose expiry date falls on a day that is not a business day to the first following business day.

- Expiry upon advent of expiry date removed from the information duty on expiry.

Article 25(a)

Reduction of guarantee amount

25.1 Within URDG 758, article 25(a) has a broader scope than article 13. While article 13 deals with the mechanism for the reduction or increase of the amount pursuant to a clause included in the guarantee to this effect, article 25(a) exhaustively lists the cases where the amount payable under a guarantee can be reduced, including as a result of the reduction mechanism covered in article 13. Article 25(a) specifies three cases in which the guarantee amount that is payable upon presentation of a complying demand is reduced:

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(1) Any payment made under the guarantee following the presentation of a partial demand reduces the guarantee amount proportionately.

(2) Any reduction of amount resulting from the advent of a date or the occurrence of an event stipulated in the guarantee for that purpose according to article 13 decreases the amount payable under the guarantee proportionately.

(3) Any amount indicated in the beneficiary’s signed partial release from liability under the guarantee decreases the amount payable under the guarantee proportionately. To be effective, the release must be signed in original. The term “signed” is defined in article 2.

To these cases can be added reduction as a result of an amendment to the guarantee pursuant to article 11.

The cases listed above also apply to counter-guarantees.

Article 25(b)

Termination of guarantee

25.2 A guarantee terminates on expiry, when no amount remains payable under it or on presentation to the guarantor of the beneficiary’s signed release from liability under the guarantee. In all these cases, the guarantee comes to an end whether or not the guarantee document is returned to the guarantor. In contrast to URDG 458, however, the mere return of the guarantee document without any indication of an intention to release the guarantor does not terminate the guarantee. This rule was changed to reflect the fact that a guarantee document may be returned because of a clerical error or otherwise without the authority of the beneficiary. Moreover, the document itself has no intrinsic value. As stated above its return is not a prerequisite for termination and its accidental destruction or mutilation does not affect the guarantor’s right to payment. There is one further case, not mentioned in article 25(b), in which a guarantee comes to an end, namely where it is rejected by the beneficiary.

25.3 Article 25(b) does not necessarily provide an exhaustive list of the grounds for termination, since others may arise under the applicable law. For example, the applicable law may provide that deliberate destruction of a guarantee document with the intention of extinguishing the guarantee has this effect.

25.4 The time of expiry is discussed in paragraph 14.8. 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 date specified in the guarantee.

Article 25(c)

No open-ended guarantees

25.5 URDG 758 are designed to avoid open-ended guarantees. Under article 8(g), every guarantee should specify the expiry of the guarantee, either as an

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expiry date or as an expiry event. However, this is not mandatory, and article 25(c) accordingly 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, while the counter-guarantee will terminate 30 days after the guarantee terminates.⁷⁶When 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)). However, this period is extended when the expiry date falls on a day that is not a business day (see paragraph 25.7).

25.6 A case that is comparable to the case where a guarantee fails to specify either an expiry date or an expiry event is one where a guarantee fails to specify an expiry date but specifies an expiry event that, in practice, is a non-documentary condition whose occurrence cannot be determined from the guarantor’s own records. In such cases, the expiry event is deemed to have not been stated, as directed by article 7. The guarantee in question is accordingly regarded as not specifying an expiry provision, with the result 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 expiry of the guarantee).

Preparatory works

From the outset, putting an end to open-ended guarantees was a key objective of the revision. The drafting group derived comfort from the breakthrough achieved by UN in the Convention on Independent Guarantees and Standby Letters of Credit, which, in article 12(c), provides 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. In fact, a new article mirroring UN’s article 12(c) appeared in the very first draft of the revised URDG released on 19 February 2008. While, in contrast to ICC, UN could count on the legislative nature of its Convention to secure the efficiency of the six- year expiry period, the URDG drafting group felt that the same result could be achieved with the URDG 758, despite the fact that they are only contractual in nature. This is because the default expiry period laid down in the URDG, which applies in the absence of an expiry provision in the guarantee, should be regarded as the functional equivalent of an expiry date that the guarantee would have explicitly stipulated. For a national statute to override the expiry period indicated in article 25(c) of the URDG, it would also have to override an expiry date or event explicitly indicated in the guarantee, as the URDG are but the expression of the parties’ will and have the same authority and binding effect as any provision extensively drafted in the guarantee. Over the course of the revision, the principle of providing an expiry period in the rules absent an expiry provision in the guarantee gained increasing support, as expressed by a

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majority of comments, but the principle had to be reshaped in two respects. First, by a 20 to 11 vote on the second draft dated 6 August 2008, the 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. Second, following comments received on the third draft, the fourth draft released on 8 June 2009 restricted the application of the expiry period in article 25(c) to guarantees that provide neither 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 liable to remain 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 happening of an event that is yet to occur would have banned 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.

Article 25(d)

Expiry date falling on a non-business day

25.7 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. In such cases, there is no extension.

Article 25(e)

Duty to inform of termination

25.8 Where to the knowledge of the guarantor the guarantee terminates on any of the three 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. However, this does not apply to termination on an expiry date, since this will be known to the instructing party and any counter-guarantor.

Cross-references within URDG 758

- Articles 2 (definition of expiry, expiry date, expiry event and signed), 7,

8 and 13.

Cross-references to other ICC rules

- UCP 600 article 29.

- ISP98 rules 3.13 and 9.

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Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- Articles 11 and 12.

Illustration 25-1

A guarantee issued by a bank in Amman, Jordan, on 11 March 2009 is stated to expire two years after issue. A demand and a supporting statement are presented on 13 March 2011. The presentation is a complying presentation because the expiry of the guarantee falls on a Friday, which in Jordan is not a business day, the next business day being Sunday 13 March. If the guarantee had been issued on 10 March 2009 instead of 11 March, the presentation would have to be made on or before 10 March 2011 (Thursday being a business day) in order to be in time.

Illustration 25-2

Following the presentation of an extend or pay demand that the guarantor has determined to be a complying demand, the guarantor suspends payment for 30 days. The applicant enters into negotiations with the beneficiary and, in the course of the negotiations, settles the dispute with the beneficiary by offering a number of concessions under the underlying contract against the beneficiary’s renunciation of the guarantee. As evidence of such renunciation, the applicant obtains from the beneficiary the original guarantee document, transmits it to the guarantor and requires immediate termination of the guarantee. However, the guarantee cannot be terminated because the return of the guarantee document to the guarantor was not accompanied by the beneficiary’s signed release from liability under the guarantee. Absent such a release, the guarantee will expire upon the occurrence of the expiry event or the advent of the expiry date indicated in its terms. Moreover, if the beneficiary does not withdraw the extend or pay demand, the guarantor is bound to pay the demand at the end of the suspension period.

Illustration 25-3

A guarantee stipulates that it will expire upon the earlier of 15 March 2011 or the presentation to the guarantor of the beneficiary’s signed release from liability under the guarantee. That guarantee also stipulates that its amount will be reduced by the amount indicated in the engineer’s report acknowledging the delivery of the works. By 29 January 2011, a series of reductions triggered by the presentation to the guarantor of engineer’s reports, which were determined to be complying presentations, resulted in no amount remaining payable under the guarantee. The guarantee terminates on 29 January 2011 and the guarantor has to inform the instructing party without delay of such termination. If the guarantor does not do so, the guarantee is still terminated but the guarantor may be liable for damages if its negligence has caused a loss to the instructing party.

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URDG 758

Article 26 Force majeure

a. In this article, “force majeure” means acts of God, riots, civil commotions, insurrections, wars, acts of terrorism or any causes beyond the control of the guarantor or counter-guarantor that interrupt its business as it relates to acts of a kind subject to these rules.

b. Should the guarantee expire at a time when presentation or payment under that guarantee is prevented by force majeure:

i. each of the guarantee and any counter-guarantee shall be extended for a period of 30 calendar days from the date on which it would otherwise have expired, and the guarantor shall as soon as practicable inform the instructing party or, in the case of a counter-guarantee, the counter-guarantor of the force majeure and the extension, and the counter-guarantor shall so inform the instructing party;

ii. the running of the time for examination under article 20 of a presentation made but not yet examined before the force majeure shall be suspended until the resumption of the guarantor’s business; and

iii. a complying demand under the guarantee presented before the force majeure but not paid because of the force majeure shall be paid when the force majeure ceases even if that guarantee has expired, and in this situation the guarantor shall be entitled to present a demand under the counter-guarantee within 30 calendar days after cessation of the force majeure even if the counter-guarantee has expired.

c. Should the counter-guarantee expire at a time when presentation or payment under that counter-guarantee is prevented by force majeure:

i. the counter-guarantee shall be extended for a period of 30 calendar days from the date on which the counter-guarantor informs the guarantor of the cessation of the force majeure. The counter-guarantor shall then inform the instructing party of the force majeure and the extension;

ii. the running of the time for examination under article 20 of a presentation made but not yet examined before the force majeure shall be suspended until the resumption of the counter-guarantor’s business; and

iii. a complying demand under the counter-guarantee presented before the force majeure but not paid because of the force majeure shall be paid when the force majeure ceases even if that counter-guarantee has expired.

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d. The instructing party shall be bound by any extension, suspension or payment under this article.

e. The guarantor and the counter-guarantor assume no further liability for the consequences of the force majeure.

URDG 458

Article 13

Guarantors and Instructing Parties assume no liability or responsibility for consequences arising out of the interruption of their business by acts of God, riots, civil commotions, insurrections, wars or any other causes beyond their control or by strikes, lock-outs or industrial actions of whatever nature.

Comment

Article 26 provides for the rights and duties of the parties in cases where presentation, examination or payment is prevented by an event of force majeure. This provision is new and, in order to reflect the particular characteristics of demand guarantees, departs from the solution offered in UCP 600 by providing for a limited extension of the guarantee period.

Changes from URDG 458

- Reversing the approach to force majeure in URDG 458, new article 26 extends guarantees and counter-guarantees for periods that differ according to the stage reached by a presentation upon the occurrence of the force majeure event, namely prevention of presentation, prevention of completion of examination and prevention of payment

. - Adds “acts of terrorism” as a force majeure event.

The need for a force majeure provision

26.1 Through no fault of either party, the presentation, examination or payment of a demand may be prevented by a force majeure event affecting the guarantor or counter-guarantor, such as a governmental freeze on payments to nationals of the beneficiary’s country, the outbreak of hostilities at the place for payment and so forth. UCP 600 and the International Standby Practices (ISP98) both contain force majeure provisions, but they differ radically from each other. The effect of UCP 600 article 36 is that the issuer accepts no responsibility for events of force majeure. Thus if force majeure prevents presentation on the day before expiry and the impediment ends the day after expiry, the beneficiary is deprived of the whole benefit of the documentary credit for a mere two-day interruption. The impact of such a rule is more pronounced in the case of demand guarantees, because it not

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only affects the primary beneficiary but may also preclude a guarantor that has made payment under the guarantee from obtaining payment under the counter-guarantee. ISP98 rule 3.14(a) goes to the other extreme, extending 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 felt to be too burdensome. Accordingly, the URDG adopt a middle course, extending the guarantee and any counter- guarantee for a period of 30 calendar days, after which, if the impediment still exists, the guarantee will come to an end. However, this affects the beneficiary only where it is the presentation that has been prevented by force majeure. Where a demand has been presented before the advent of force majeure and only examination or payment is prevented, the beneficiary whose demand has been found to be complying is entitled to be paid when the force majeure ends. This is because the only condition of the beneficiary’s right to be paid is that a complying demand is presented before expiry of the guarantee. Nevertheless, the extension of 30 calendar days remains important where a demand has been presented but not examined, or not completely examined, before the force majeure. This is because, if the demand turns out not to be a complying demand, it may be that a notice of rejection sent within the extended period of examination is received in time to allow the beneficiary to make a fresh and complying presentation. However, where the force majeure merely prevents payment of a demand already found to be a complying demand, the 30-day extension has no significance.

Article 26(a) and (b)

What constitutes force majeure

26.2 There are two elements to be considered: the nature of the force majeure event and the impact on the guarantor’s business.

Nature of the force majeure event

26.3 The events constituting a force majeure under article 26(a) fall into two groups. The first 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. The second consists of other events that suspend the guarantor’s duty to perform only if they are beyond its control. This could cover such events as industrial action that the guarantor did not provoke and could not have avoided by reasonable measures, a widespread illness affecting many members of staff and necessitating closure of the branch, failure of the computer system and back-up for reasons beyond the guarantor’s control or economic sanctions precluding payment in any currency to nationals of the beneficiary’s country where that country is considered hostile to the guarantor’s country, though in each case only where such events interrupt the guarantor’s guarantee-related business as indicated in paragraph 26.4 below. It should be noted that an event of force majeure preventing presentation is relevant only where the beneficiary’s inability to present is due to the guarantor’s inability to receive the presentation because of the force majeure. If the force majeure affects only

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the beneficiary it falls outside the scope of article 26, as is clear from the fact that “force majeure” is defined in terms of events beyond the control of the guarantor or counter-guarantor and that the duty to give information about the force majeure is imposed only on the guarantor, not the beneficiary.

Impact on the guarantor’s business

26.4 The event of force majeure must be such that (a) it interrupts the guarantor’s business as it relates to acts of a kind subject to the rules and (b) the effect of the interruption is that presentation, examination or payment is prevented. Article 21(b) provides a special rule for cases where the guarantor is unable to make payment in the currency specified in the guarantee or where it is illegal under the law of the place for payment to make payment in that currency. In such cases, article 21(b) provides for payment in the currency of the place for payment, and article 26 does not apply. Force majeure affecting the guarantor’s ordinary banking business but not its demand guarantee business does not fall within the scope of article 26. 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 considered to be different entities.

26.5 Interruption of the guarantor’s demand guarantee business attracts the application of article 26, but only if it is such as to prevent presentation, examination or payment of the demand before expiry of the guarantee. In fact, the opening lines of article 26(b) do not mention examination, only presentation or payment, but force majeure as an impediment to examination is specifically covered by sub-paragraph (ii) of paragraph (b). Obviously, if the guarantee has expired before the event of force majeure, it is too late for the beneficiary to present a demand, and the force majeure is irrelevant. In other cases, the guarantee and counter-guarantee are extended for 30 calendar days, after which they expire, regardless of whether it is presentation, examination or payment that is affected by the force majeure. However, as pointed out above, expiry does not affect a beneficiary that has presented a complying demand before the advent of the force majeure.

26.6 Article 26 assumes that the effect of the force majeure is only temporary. Where it is permanent, for example because all records are destroyed, the question is whether other evidence is available to establish the facts. Situations where this is not the case are not governed by the rules and have to be resolved in accordance with the applicable law.

Force majeure affecting presentation

26.7 Where force majeure prevents presentation of the demand before expiry, both the guarantee and any counter-guarantee are extended for a period of 30 days from the date on which they would otherwise have expired. The original date of expiry is included for the purpose of calculating the 30-day period. As soon as practicable, the guarantor must inform the instructing

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party or, in the case of a counter-guarantee, the counter-guarantor of the force majeure and the extension, and the counter-guarantor must so inform the instructing party. At the end of the 30-day period, the guarantee and counter-guarantee expire and no claim can be made under them, even if the force majeure continues to prevent the presentation of the demand. Article 26 does not deal with cases where presentation is prevented by an impediment that is due to the fault of the guarantor. This obviously constitutes a breach of the guarantor’s duty to accept and examine a presentation made on or before expiry, and the guarantor therefore cannot plead force majeure. However, the effect of the breach is determined by the applicable law, not the rules.

Force majeure affecting examination

26.8 A situation where a complying demand has already been presented prior to the force majeure is quite different. In such cases, the beneficiary is entitled to be paid in due course, because the expiry of a guarantee after presentation does not affect the right to payment even if the time for examination and payment has not yet arrived. Where the force majeure occurs after presentation but prevents examination of the demand and related documents from being commenced or completed within the five business days allowed by article 20(a), the running of time for examination is suspended until the resumption of the guarantor’s business. Thus, if two business days have elapsed between the presentation of the demand and the advent of the force majeure, the guarantor, if it has not already completed its examination, has three further business days to examine the demand after the resumption of its business. 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 deemed 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, taking 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.

26.9 The rules do not deal with cases where examination has become permanently impossible because of destruction of the guarantor’s records without fault on its part. This is a matter to be resolved in accordance with the applicable law.

Force majeure affecting payment

26.10 Where the demand, along with any related documents, was examined before the force majeure and found to be a complying demand, but the force majeure prevents payment, as in the case of war interrupting the guarantor’s guarantee-related business, payment must be made when the force majeure ceases, even if the guarantee has expired by then. Cessation of the force majeure should not be taken literally as meaning the very day on which the war or other force majeure event 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, taking reasonable steps to do so.

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Presentation of a demand under a counter-guarantee

26.11 After the cessation of the force majeure in the sense described in paragraph 26.10, the guarantor may within 30 days of that cessation present a demand under the counter-guarantee, even if it has already expired. It is not necessary for the guarantor to have already made payment under the guarantee.

Article 26(c)

Force majeure affecting the counter-guarantor

26.12 Similar rules, with appropriate modifications, apply where the force majeure affects presentation, examination or payment under the counter-guarantee prior to expiry. Where force majeure affects presentation the counter- guarantee is extended for 30 calendar days from the date on which the counter-guarantor informs the guarantor of cessation of the force majeure. Until it receives such information the guarantor will not necessarily know that the force majeure has ended so as to start the 30-day period. The counter-guarantor must “then” inform the instructing party of the force majeure and the extension. Plainly the word “then” refers to the time when the 30-day period commences. The rules governing suspension of the time for examination and prescribing the time for payment are the same as those applicable to force majeure affecting the guarantor, that is to say, the running of time for an examination prevented by the force majeure is suspended until resumption of the counter-guarantor’s business, while a demand examined but not paid before the advent of force majeure must be paid when it ends. Force majeure affecting the counter-guarantor does not extend the period of the guarantee.

Article 26(d)

Instructing party bound by article 26

26.13 The instructing party is bound by any extension, suspension or payment under article 26.

Article 26(e)

Guarantor and counter-guarantor have no further liability

26.14 The guarantor and the counter-guarantor assume no further liability for the consequences of the force majeure. 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.

Cross-references within URDG 758

- Articles 2 (definitions), 14 and 20.

Cross-references to other ICC rules

- UCP 600 article 36.

- ISP98 rule 3.14(a).

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Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- None.

Illustration 26-1

A branch of G Bank in a town centre issues a guarantee in favour of Beta that is stated to expire on 11 May 2011. The guarantee calls for the presentation of any demand to be made in paper form by delivery to the branch. On 9 May 2011, when Beta had planned to present a demand, the whole of the town centre is inundated by floods, making the roads to G Bank impassable and forcing it to close its business, so that Beta is unable to present the demand. The effect of article 26(a)(i) is that the guarantee is extended until 10 June 2011. Access to G Bank does not become possible until 13 June 2011. It is too late for the demand to be presented, as the guarantee has expired.

Illustration 26-2

G Bank issues a guarantee in favour of Beta that is stated to expire on 12 May 2011. The guarantee requires electronic presentation. Beta attempts to present a demand under the guarantee on 9 May 2011 but is unable to do so because, as the result of the negligence of G Bank’s employees, its computer system has broken down. The system is not restored until 15 May 2011. G Bank is not entitled to invoke force majeure and is in breach of its obligation to receive and examine a presentation made in due time. The effect of its self-induced inability to receive the presentation prior to expiry of the guarantee is a matter for the applicable law.

Illustration 26-3

The facts are as in Illustration 26-1, except that G Bank’s guarantee was issued on the instructions of CG Bank against CG Bank’s counter-guarantee, which is stated to expire on 15 June 2011. In this case, both the guarantee and the counter-guarantee are extended for a period of 30 calendar days, that is, until 10 June 2011 in the case of the guarantee and 15 July 2011 in the case of the counter-guarantee.

Illustration 26-4

G Bank in Ljubljana issues a guarantee in favour of Beta that is stated to expire on 12 May 2011 (a Thursday). Beta presents a demand on 10 May 2011, but on 13 May 2011 an event of force majeure prevents completion of the examination. In Slovenia, Saturday and Sunday are not business days for demand guarantees, meaning that by the time of the force majeure two business days have elapsed (the day when force majeure occurred does not count). This leaves G Bank with three business days after the resumption of its business to complete the examination. If G Bank’s business resumes on 20 June 2011, G Bank has until the end of 22 June 2011 to complete its examination. If the examination shows that the demand is a complying demand, Beta is entitled to be paid even though the guarantee has expired.

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If the demand is not a complying demand, G Bank can send a notice of rejection up to and including 22 June 2011. If it sends the notice on 22 June 2011, the fact that it does not reach Beta until 25 June 2011 is irrelevant: the notice is valid. Beta cannot make a new and complying presentation, as the guarantee has expired.

Illustration 26-5

G Bank issues a guarantee in favour of Beta on the instructions of CG Bank and against its counter-guarantee. The guarantee is due to expire on 31 August 2011 and the counter-guarantee on 16 September 2011. An event of force majeure affecting CG Bank occurs on 26 August 2011. This does not result in any prolongation of the guarantee issued by G Bank, which will still expire on 31 August 2011. G Bank receives a demand under its guarantee on 29 August 2011 but is unable to present a demand under the counter- guarantee because of the force majeure affecting CG Bank, which due to an oversight does not inform G Bank of the cessation of the force majeure until 25 September 2011. The counter-guarantee is extended for 30 days from 25 September 2011 (not 30 days from the counter-guarantee’s original expiry date). The instructing party is bound by this extension and is obliged to reimburse the counter-guarantor if the guarantor’s demand is a complying demand.

Illustration 26-6

Banca del Palio issues a demand guarantee out of its branch in Sienna, Italy, in favour of a Polish beneficiary and indicates that presentations shall be made to its office in Milan, Italy, out of which guarantee business is regularly transacted. The beneficiary insists on this indication, because courier companies are able to deliver documents shipped from Warsaw to Milan overnight, while it takes 24 hours more to ensure delivery to Sienna. Five days before the expiry of the guarantee, an earthquake hits Tuscany forcing the guarantor to close all its business in Sienna for a full week, during which the guarantee expires. Article 26 does not apply because the Milan office is open to presentations and its examination and payment ability is not impaired by the force majeure that affected the issuing office.

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URDG 758

Article 27 Disclaimer on effectiveness of documents

The guarantor assumes no liability or responsibility for:

a. The form, sufficiency, accuracy, genuineness, falsification, or legal effect of any signature or document presented to it;

b. The general or particular statements made in, or superimposed on, any document presented to it;

c. The description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods, services or other performance or data represented by or referred to in any document presented to it; or

d. The good faith, acts, omissions, solvency, performance or standing of any person issuing or referred to in any other capacity in any document presented to it.

URDG 458

Article 11

Guarantors and Instructing Parties assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification, or legal effect of any document presented to them or for the general and/or particular statements made therein, nor for the good faith or acts or omissions of any person.

Comment

Article 27 is one of three articles exculpating the guarantor from liability or responsibility for acts or omissions of the kind described therein. These disclaimers follow the UCP, of which they have been an integral part since the very first version of the UCP in 1933. Under article 27, the guarantor has no responsibility for the effectiveness of documents.

Changes from URDG 458

- Expansion of scope to include language incorporated from UCP 600 article 34.

- Various drafting adaptations to fit the URDG 758 style.

27.1 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 it 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, document or statements contained in a document, nor with

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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 or the date of shipment, a supposed breach by the applicant that has not in fact occurred or otherwise.

27.2 There are two qualifications to this rule. 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)).

27.3 URDG 458 article 15 also excluded exemption from liability for failure to act with reasonable care, in line with article 11, which required an examination of documents with reasonable care. By contrast, URDG 758 article 30 refers only to good faith, not reasonable care, and the reference to reasonable care in the examination of documents no longer appears (see article 19). Nevertheless, the guarantor must perform its duties of examination in accordance with article 19 and will incur liability if it accepts documents that are manifestly non-complying documents or contain inconsistent data.

Cross-references within URDG 758

- Articles 6, 19 and 30.

Cross-references to other ICC rules

- UCP 600 article 34.

- ISP98 rule 1.08(b).

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- None.

Illustration 27-1

Beneficiary presents Guarantor with a demand, a supporting statement and what appears on its face to be an authentic certificate signed by the engineer under the underlying contract as required by the guarantee, the engineer being employed by an engineering company. Guarantor, acting in good faith, pays the demand. In fact, the certificate is a forgery. Guarantor has no responsibility for the forgery and is entitled to be reimbursed by the instructing party.

Illustration 27-2

The facts are as in Illustration 27-1, except that the engineer’s certificate is not forged. However, it was signed on the engineer’s behalf in good faith by a fellow employee of the engineering company who, as it turns out, did not have authority to sign it. Guarantor, being unaware of the lack of authority, pays the demand. It is entitled to reimbursement from the instructing party.

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URDG 758

Article 28 Disclaimer on transmission and translation

a. The guarantor assumes no liability or responsibility for the consequences of delay, loss in transit, mutilation or other errors arising in the transmission of any document, if that document is transmitted or sent according to the requirements stated in the guarantee, or when the guarantor may have taken the initiative in the choice of the delivery service in the absence of instructions to that effect.

b. The guarantor assumes no liability or responsibility for errors in translation or interpretation of technical terms and may transmit all or part of the guarantee text without translating it.

URDG 458

Article 12

Guarantors and Instructing Parties assume no liability or responsibility for the consequences arising out of the delay and/or loss in transit of any messages, letters, demands or documents, or for delay, mutilation or other errors arising in the transmission of any telecommunication. Guarantors and Instructing Parties assume no liability for errors in translation or interpretation of technical terms and reserve the right to transmit Guarantee texts or any parts thereof without translating them.

Comment

Article 28 exempts the guarantor from liability for the consequences of loss, delay or errors in the transmission of a document and for errors in the translation or interpretation of technical terms.

Changes from URDG 458

- Minimal drafting changes to suit the URDG 758 drafting style.

Article 28(a)

Loss or error in transmission

28.1 Article 28(a) exempts the guarantor from liability in a wide range of situations, 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;

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

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

However, this exemption is available only if the document or message is transmitted or sent according to the requirements stated in the guarantee or when the guarantor has taken the initiative in the choice of delivery service in the absence of instructions to that effect. Where the guarantor deviates from its instructions on the transmission of documents, it cannot rely on the exemption given by article 28.

Article 28(b)

Errors in translation

28.2 Similarly, the guarantor is not liable for errors in the translation or interpretation of technical terms, regardless of whether the translation or interpretation is carried out by the beneficiary, the third party from which the document emanates or the guarantor itself if it chooses to carry out the translation, which it is not obliged to do.

Transmission without translation

28.3 The guarantor may also transmit all or part of the guarantee without translation. It is interesting to read this provision in conjunction with article 14(e), which states that 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. Accordingly, presentation of any such document in a language different from that of the guarantee and not authorised by it must be treated as a non-complying presentation and must be rejected, unless the guarantor decides to approach the other party for a waiver.

Cross-references within URDG 758

- Article 14(g).

Cross-references to other ICC rules

- UCP 600 article 35.

- ISP98 – none.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- None.

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Illustration 28-1

Bosphorus Bogazi, a company based in Turkey, tenders for the award of a procurement contract in Iran. The tender conditions include the requirement that an original copy of the tender guarantee be delivered by courier to the procurement authority in Tehran before the close of business on 19 April 2010. Upon the instructions of Bosphorus Bogazi, Anadolu Bank issues the guarantee on 14 April 2010 and remits the original guarantee document to Rocketspeed Deliveries, an international courier company, for delivery to the Iranian beneficiary. Rocketspeed Deliveries boasts a 24-hour delivery deadline for any capital in the world and relies on its automated dispatch platform located near Reykjavik, Iceland, through which all parcels are routed. A volcanic eruption prompts the closure of all airports in Iceland on 15 April 2010 at the time when the guarantee is being shipped through Reykjavik. The airports open a week later and the guarantee is delivered to the Iranian beneficiary on 22 April 2010 after the expiry of the deadline for tender submission, with the result that Bosphorus Bogazi was excluded from the procurement process. Anadolu Bank assumes no liability or responsibility for the consequences of delay in the transmission of the guarantee in the absence of instructions from Bosphorus Bogazi to that effect.

Illustration 28-2

Alpha, carrying on business in Amsterdam, has entered into a contract with Beta in Bahrain for the supply of equipment to Beta. Alpha instructs its local bank, CG Bank, to arrange for the issue of a guarantee to Beta by a Bahrain bank for a maximum amount of €1,200,000 against CG Bank’s counter- guarantee. CG Bank requests its Bahrain correspondent G Bank to issue the guarantee, but owing to a clerical error in the transmission by CG Bank the message received by G Bank states the amount for both the guarantee and counter-guarantee as €12,000,000, and G Bank issues the guarantee for this amount. Beta later presents demands totalling €2,000,000. Assuming good faith on the part of G Bank, G Bank is entitled to claim €2,000,000 under the counter-guarantee. By contrast, CG Bank is not entitled to invoke the disclaimer in article 28 to obtain reimbursement from Alpha, as article 28 covers acts outside the control of the guarantor.

Illustration 28-3

Swedish company ABC purchases Dubai company XYZ for SEK 1bn. The share purchase agreement indicates that the seller shall procure the issue of a refund guarantee subject to the URDG 758 for an amount of 25% of the purchase price payable in the event that the new software developed by XYZ does not pass a determined ISO standard test. The seller sends a letter of instructions containing the guarantee text drafted in Arabic to its bank in Dubai, Masraf Al-Qamar, to issue the requested guarantee, which is swiftly done. Whether or not the share purchase agreement indicates a particular language for the guarantee is not of concern to the guarantor, which is entitled to transmit the guarantee text without translating it.

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After a week of negotiations between ABC and XYZ, the parties agree that the refund guarantee shall be issued in English. XYZ immediately instructs Masraf Al-Qamar to translate into English the guarantee text previously sent to it in Arabic and to issue the guarantee as a replacement for the former guarantee released by ABC. Masraf Al-Qamar agrees to translate the instructions into English and, in doing so, assumes no liability or responsibility for any error that may be committed by the bank’s staff or by an external translator hired on the bank’s initiative when translating the instructions into English or interpreting the technical terms in the instructions. It is XYZ’s responsibility to transmit to the guarantor the text of the guarantee in order to issue it in the language of issue. If it does so in another language, XYZ assumes the consequences of the guarantor issuing the guarantee without translating the text or, if it is translated, any errors in the translation.

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URDG 758

Article 29 Disclaimer for acts of another party

A guarantor using the services of another party for the purpose of giving effect to the instructions of an instructing party or counter-guarantor does so for the account and at the risk of that instructing party or counter-guarantor.

URDG 458

Article 14

a. Guarantors and Instructing Parties utilising the services of another party for the purpose of giving effect to the instructions of a Principal do so for the account and at the risk of that Principal.

[…]

Comment

Under article 29, a guarantor is responsible only for its own acts or omissions but not those of a third party whose services it uses for the purpose of giving effect to the instructions of an instructing party or counter- guarantor, regardless of whether that third party is chosen at the initiative of the guarantor or on the instructions of the instructing party or counter- guarantor.

Changes from URDG 458

- Drafting changes to suit the URDG 758 drafting style.

General effect of article 29

29.1 Article 29 reproduces the substance of URDG 458 article 14(a). However, it omits URDG 458 article 14(b), which provides that guarantors and instructing parties (under the new rules, counter-guarantors) assume no liability or responsibility should the instructions they transmitted not be carried out even if they have themselves taken the initiative in the choice of that other party. This was considered redundant and has been omitted from article 29, though without changing its substance.

29.2 The effect of this article is twofold. First, if the guarantor, in order to give effect to the instructions of an instructing party or counter-guarantor, utilises the services of another party, it bears 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.

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This is subject to the mandatory rules of the applicable law, which may impose limits on such a contractually incorporated exemption in order to ensure that the applicant is not left without a remedy. Secondly, 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.

29.3 Article 29 applies not only where the party whose services are used is a separate legal entity but also where it is a branch of the guarantor itself and is situated in a country different from that of the branch from which it receives its instructions, as the two branches are then to be considered separate entities (article 3(a)).

Choosing another party

29.4 It is implicit in article 29 that the guarantor is entitled to use the services of another party to carry out the instructions that it has received. Where the instructions do not require the use of a third party but do not prohibit its use, the guarantor is free to use any party to ensure that the instructions are given effect and, in doing so, benefits from the disclaimer 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 banking relationship and which is thus unlikely to accept its direct guarantee. 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.

Exceptions

29.5 There are three cases in which the guarantor is not entitled to invoke article 29. The first is where the guarantor utilises the services of another party to perform acts other than those designed to give effect to the instructions the guarantor has received. Thus, if the details of the guarantee transmitted by the guarantor to the advising party are not in accordance with the guarantor’s instructions, the guarantor cannot rely on article 29 to exempt it from liability. The second case is where a domestic mandatory rule of the applicable law or an internationally mandatory rule of the forum overrides the exemption conferred by article 29. The third 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.

Cross-references within URDG 758

- Articles 2 (definitions), 10 and 30.

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Cross-references to other ICC rules

- UCP 600 article 37.

- ISP98 rule 1.08(c).

Cross-references to the UN Convention on Independent Guarantees and

Stand-by Letters of Credit

- Article 14.

Illustration 29-1

CG Bank in Urbs, capital of Urbania, is asked by Alpha to issue a guarantee in favour of Beta in Rus, the capital of Ruritania, to support Alpha’s obligations under a contract between Alpha and Beta. Ruritanian law requires all guarantees to be advised by a local bank. CG Bank accordingly instructs G Bank, its correspondent in Rus, to advise Beta of the issue of the guarantee. G Bank fails to do so, as the result of which Beta terminates its contract with Alpha. CG Bank incurs no liability to Alpha. The position would be otherwise if under Urbanian law the exemption provided by article 29 had no effect.

Illustration 29-2

CG Bank is asked by Alpha to arrange for the issue of a guarantee to Beta no later than 12 April 2011, after which Beta is entitled to rescind its contract with Alpha if it has not received the agreed bank guarantee. CG Bank communicates with G Bank on 9 April, requesting it to issue the guarantee but omitting to specify that it must be issued by 12 April. G Bank issues the guarantee on 13 April, but Beta rejects it as too late and terminates the contract. CG Bank cannot claim exemption under article 29, having deviated from Alpha’s instructions.

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URDG 758

Article 30 Limits on exemption from liability

Articles 27 to 29 shall not exempt a guarantor from liability or responsibility for its failure to act in good faith.

URDG 458

Article 15

Guarantors and Instructing Parties shall not be excluded from liability or responsibility under the terms of articles 11, 12 and 14 above for their failure to act in good faith and with reasonable care.

Comment

Article 30 precludes a guarantor that does not act in good faith from invoking articles 27 to 29.

Changes from URDG 458

- Deletion of requirement to act with reasonable care.

- Minimal drafting changes to suit the URDG 758 drafting style.

General effect

30.1 In contrast to URDG 458, the exemptions given by articles 27 to 29 are only lost where the guarantor does not act in good faith. However, this is subject to any contrary domestic mandatory rule of the applicable law or internationally mandatory rule of the forum. The purpose of deleting the reference to “reasonable care” that was included in URDG 458 is clearly not to encourage guarantors to engage in reckless behaviour. Rather, it reflects a key revision objective of freeing the rules from uncertain standards, such as reasonable time and reasonable care, the assessment of which depends on the particular circumstances of the case in question.

30.2 In essence, the reference to reasonable care as a general standard of conduct is replaced by strict rules under each article of the URDG that the guarantor must respect. If the guarantor does not respect those rules, it risks being held liable for the consequences. This is the case, for example, where the guarantor is no longer required to examine the documents with reasonable care (URDG 458 article 11) but is required to perform its duties of examination in accordance with new article 19. In this scenario, the guarantor will incur liability if it accepts documents that are non-complying documents or contain inconsistent data.

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Cross-references within URDG 758

- Articles 19, 27, 28 and 29.

Cross-references to other ICC rules

- UCP 600 – none.

- ISP98 rule 8.02.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- None.

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URDG 758

Article 31 Indemnity for foreign laws and usages

The instructing party or, in the case of a counter-guarantee, the counter- guarantor shall 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. The instructing party shall indemnify the counter-guarantor that has indemnified the guarantor under this article.

URDG 458

Article 14

[…]

c. The Principal shall be liable to indemnify the Guarantor or the Instructing Party, as the case may be, against all obligations and responsibilities imposed by foreign laws and usages.

Comment

The instructing party or counter-guarantor, as the case may be, is required by article 31 to indemnify the guarantor against all obligations imposed by foreign laws and usages, even if they override the terms of the guarantee.

Changes from URDG 458

- Expansion of scope to also cover the indemnification duty owed by the counter-guarantor to the guarantor under the counter-guarantee in cases covered by article 31.

- Specific reference to cases where foreign laws and usages override guarantee or counter-guarantee terms.

The case for article 31

31.1 As a general rule, the guarantor is required to abide strictly 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 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

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override possibly conflicting terms of the guarantee or the rules. If that 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 such laws or usages in the absence of a specific agreement to this effect. The reason is that the guarantor is presumed to be aware of such laws or usages and to have issued its guarantee only in accordance with their 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 such laws or usages, by the party on whose instructions it acted when issuing the guarantee⁷⁷.

31.2 In light of the above, the conditions of the application of article 31 are threefold:

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

(2) that foreign law and 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 caused that guarantor to make a payment or to perform an act other than what it was instructed to do. It is that loss that would lead to indemnity under article 31.

These conditions are explained in more detail below.

Foreign laws and usages

31.3 “Foreign laws and usages” in article 31 refers to the laws and usages of a country other than that in which the guarantor or its issuing branch is located. 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 or (b) a law chosen by the parties under article 34 other than the law of the location of the guarantor or its issuing branch.

31.4 “Usages” may be usages of a particular trade or profession (e.g. banking), a particular locality or a particular market. Usages are not usually able to override the express terms of a contract, but they may supplement them or influence their interpretation.

Mandatory laws

31.5 National laws that have the effect of overriding contractual provisions are known as mandatory rules. Mandatory laws are not covered by the URDG, since they are a matter for the law of the forum state. These rules fall into two categories: (1) rules that cannot be excluded by the agreement of the parties but which the law of the forum state does not find it necessary to

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impose on contracts governed by a foreign law, such as contract formalities; and (2) international mandatory, or super-mandatory, rules that apply regardless of the otherwise applicable law, such as rules on competition policy or consumer protection. The URDG, which take effect by way of contractual incorporation, have effect subject to any mandatory rules.

31.6 Examples of domestic mandatory rules could be those that deal with evidential requirements for a contract or set periods of limitation for its enforcement. These will only apply if under the conflict of laws rules of the forum state the law of which they form part is the applicable law. Examples of international mandatory rules include laws on consumer protection, currency exchange controls, securities exchange laws, the protection of workers under labour laws and cultural property laws protecting antiquities. These apply regardless of the otherwise applicable law, which nevertheless remains effective in other respects. “Law” is not confined to the acts of legislative bodies but also includes acts of governments and independent regulatory authorities.

31.7 Article 31 does not formally distinguish between domestic and international mandatory rules. It simply assumes that a foreign law applies in a way that imposes obligations on the guarantor and entitles the guarantor to be indemnified against them. Whether domestic mandatory rules do in fact apply depends on the conflict rules of the forum state. By contrast, the forum state must always apply its own international mandatory rules where the transaction falls under those rules.

Indemnity against obligations

31.8 The foreign law or usage may impose obligations, such as an obligation to obtain a licence or pay duties. Where the obligation is to perform a non-monetary act, such as obtaining a licence, the instructing party or counter-guarantor is responsible for the costs incurred by the guarantor in performing the act or procuring its performance. Where the guarantor incurs a monetary liability, it is entitled to reimbursement. A counter- guarantor incurring such obligations is entitled to an indemnity from the instructing party.

Indemnity against overriding of terms of the guarantee

31.9 Article 31 also covers cases where the foreign law or usage overrides the terms of the guarantee (including, for this purpose, terms derived from the contractual incorporation of the URDG into the guarantee) or imports terms into the guarantee. For example, foreign law may contain mandatory rules prescribing a fixed period for the duration of a guarantee, irrespective of its terms. Thus, where a guarantee issued directly to a foreign beneficiary is stated to be for a period of five years and the foreign law contains a mandatory rule extending this to ten years, a guarantor that makes payment after six years is entitled to be indemnified by the instructing party or counter- guarantor, even though the guarantee states an expiry date scheduled to occur one year before the payment. Similarly, foreign law or usage may make

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the termination of the guarantee dependent on the return of the guarantee document. In such cases, the guarantor that makes a payment pursuant to a demand made prior to the return of the guarantee document but otherwise within the terms of the guarantee is entitled to reimbursement.

Effect of guarantor’s prior knowledge of foreign law or usage

31.10 The rules do not make the guarantor’s right of indemnity 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. The position of the instructing party in such cases is governed not by article 31 but by the applicable law.

Cross-references within URDG 758

- Articles 1(c) and 2 (definitions).

Cross-references to other ICC rules

- UCP 600 article 37(d).

- ISP98 rules 1.08(d) and 8.01(b).

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- None.

Illustration 31-1

G Bank, at the request of its customer Alpha, issues a guarantee to Beta, which is located in another country. Under the laws of that country, the guarantor is required to notify the exchange control authorities of the issue of the guarantee and to pay a notification fee. G Bank is therefore compelled to do so and is entitled to be indemnified by Alpha.

Illustration 31-2

CG Bank, at the request of its customer Alpha, arranges for a guarantee to be issued by G Bank, which is located in another country, against CG Bank’s counter-guarantee. Under the laws of that other country, G Bank is required to obtain a licence before issuing a guarantee upon the instructions of a non- resident and to pay a stamp duty on the guarantee. Article 31 does not apply, because the above requirements are imposed by G Bank’s own law, not by a foreign law. G Bank has no right of indemnity against Alpha, with which it has no direct relationship. The only party from which G Bank can claim an indemnity is CG Bank, and this right depends not on the URDG but on the arrangements between them and the law governing those arrangements. Obviously this case study is drafted only to cover the applicability of article 31; the guarantor may well be able to recoup the stamp duty under article 32 as charges.

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Illustration 31-3

CG Bank, at the request of its customer Alpha, arranges for a guarantee to be issued by its correspondent G Bank in favour of Beta, which is located in another country, against CG Bank’s counter-guarantee. The guarantee is stated to expire on 3 January and the counter-guarantee on 15 January. Both the guarantee and the counter-guarantee are stated to be governed by the law of the country where G Bank is located. This law requires guarantors and counter-guarantors to prolong their undertaking for a maximum of one year if so demanded by the beneficiary before expiry, regardless of what the undertaking may indicate. On 2 January, Beta presents an extension request for one year and G Bank extends the guarantee. On 5 January, G Bank informs CG Bank of the extension and asks for a similar extension under the counter-guarantee, which CG Bank grants. Alpha is bound by the extension of the counter-guarantee because it is imposed by the law of the location of G Bank – a foreign law for CG Bank. Any charges imposed by CG Bank based on the duration of its counter-guarantee commitment will continue to be paid by Alpha through the duration of the extension.

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URDG 758

Article 32 Liability for charges

a. A party instructing another party to perform services under these rules is liable to pay that party’s charges for carrying out its instructions.

b. If a guarantee states that charges are for the account of the beneficiary and those charges cannot be collected, the instructing party is liable to pay those charges. 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 to the guarantor, and the instructing party to the counter-guarantor, to pay those charges.

c. Neither the guarantor nor any advising party should stipulate that the guarantee, or any advice or amendment of it, is conditional upon the receipt by the guarantor or any advising party of its charges.

Comment

Article 32 deals with liability for the charges of a party instructed to perform services under the rules. This article is new and is taken from UCP 600.

Changes from URDG 458

- New article.

Article 32(a)

Services to be performed under the rules

32.1 Article 32(a) imposes on a party instructing another party to perform services 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 either, 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 imposed in paragraph (a) on 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.

Article 32(b)

Liability where charges cannot be collected

32.2 Where the guarantee states that charges are for the account of the beneficiary, the party instructed to perform the services must where possible collect the charges from the beneficiary. If it fails to do this when it is able to do so, it cannot look to the instructing party for payment. The rules do not state how far the party performing the services has to go to collect the charges. That is

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a matter for international standard demand guarantee practice. Where the charges cannot be collected from the beneficiary, they must be paid by the instructing party.

32.3 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.

Article 32(c)

Guarantee not to be made conditional on the payment of charges

32.4 Neither the guarantor nor any advising party should stipulate that the guarantee or any advice or amendment of it is conditional on the receipt of charges by the guarantor or any advising party. This rule does not relate to payment under a guarantee, amended or otherwise, but to the coming into force of the guarantee or amendment under article 4. Article 32(c) is not mandatory but is intended to emphasise that a guarantee or amendment binds the guarantor on issue and that it is undesirable to impose a condition that qualifies that principle.

Cross-references within URDG 758

- Article 2 (definition of charges).

Cross-references to other ICC rules

- UCP 600 article 13(b)(iv).

- ISP98 rule 8.02.

Cross-references to the UN Convention on Independent Guarantees andStand-by Letters of Credit

- None.

Illustration 32-1

CG Bank, on the instructions of Alpha, requests G Bank to issue a guarantee in favour of Beta against CG’s counter-guarantee. G Bank’s charges are to be collected from Beta. If G Bank is unable to collect payment of those charges from Beta, it may recover the charges from CG Bank, which may in turn recover them from Alpha. Whether G Bank was sufficiently diligent in its attempts to collect its charges from Beta is to be determined according to international standard demand guarantee practice.

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URDG 758

Article 33 Transfer of guarantee and assignment of proceeds

a. A guarantee is transferable only if it specifically states that it is “transferable”, in which case it may be transferred more than once for the full amount available at the time of transfer. A counter-guarantee is not transferable.

b. Even if a guarantee specifically states that it is transferable, the guarantor is not obliged to give effect to a request to transfer that guarantee after its issue except to the extent and in the manner expressly consented to by the guarantor.

c. A transferable guarantee means a guarantee that may be made available by the guarantor to a new beneficiary (“transferee”) at the request of the existing beneficiary (“transferor”).

d. The following provisions apply to the transfer of a guarantee:

i. a transferred guarantee shall include all amendments to which the transferor and guarantor have agreed as of the date of transfer; and

ii. a guarantee can only be transferred where, in addition to the conditions stated in paragraphs (a), (b) and (d)(i) of this article, the transferor has provided a signed statement to the guarantor that the transferee has acquired the transferor’s rights and obligations in the underlying relationship.

e. Unless otherwise agreed at the time of transfer, the transferor shall pay all charges incurred for the transfer.

f. Under a transferred guarantee, a demand and any supporting statement shall be signed by the transferee. Unless the guarantee provides otherwise, the name and the signature of the transferee may be used in place of the name and signature of the transferor in any other document.

g. Whether or not the guarantee states that it is transferable, and subject to the provisions of the applicable law:

i. the beneficiary may assign any proceeds to which it may be or may become entitled under the guarantee;

ii. however, the guarantor shall not be obliged to pay an assignee of these proceeds unless the guarantor has agreed to do so.

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URDG 458

Article 4

The Beneficiary’s right to make a demand under a Guarantee is not assignable unless expressly stated in the Guarantee or in an amendment thereto.

This article shall not, however, affect the Beneficiary’s right to assign any proceeds to which he may be, or may become, entitled under the Guarantee.

Comment

Article 33, which deals with the transfer of guarantees and the assignment of proceeds, is new insofar as it relates to transfers and modifies the rule in URDG 458 as to assignments by requiring the guarantor’s consent for the assignment. Article 33 is based on UCP 600 but with important modifications: (1) to reflect the fact that a demand guarantee is not a saleable asset in itself and possesses value only if assigned as part of a transfer of rights and obligations in the underlying relationship; and (2) to make the effectiveness of the assignment of proceeds vis-à-vis the guarantor dependent on the agreement of that guarantor.

Changes from URDG 458

- Transfer of guarantee now regulated in detail.

- Transfer procedure and its consequences described in detail in article 33.

- Counter-guarantees not transferable.

- Subject to applicable law, assignment of proceeds binding on guarantor only where it has so agreed.

The case for transferable guarantees

33.1 The transfer of guarantees was dealt with summarily in URDG 458 article 4, essentially by discouraging such transfers, which have sometimes lent themselves to fraudulent schemes. By simply banning transfers, or obliging parties desirous of transferring their guarantee to engage in the drafting of complicated transfer provisions, ICC was leaving an important practice without proper rules that ensure certainty and transparency. Consistent feedback before and throughout the revision of the URDG showed that the transfer of guarantees, in conjunction with the transfer of the underlying transaction, performs a valuable service in secured financing. This applies, for instance, to financial or operating leases of aircrafts, ships or equipment (particularly high technology equipment), as well as leases 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

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underlying lease agreement provides the obvious solution. The transfer of guarantees in conjunction with the trading of loan notes on the secondary market is also a widespread practice. 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 was no reason to consider transferring counter-guarantees as well. The transfer of counter-guarantees accordingly falls outside the URDG. Counter-guarantees transferred by operation of law, for example as the result of a merger between the counter- guarantor and another person, are not covered in the URDG.

33.2 New article 33 seeks to provide the parties to a URDG guarantee with a rule covering transfers by clearly allocating the parties’ rights and obligations in relation to the change of the beneficiary. It is expected that this will dispense with the need to draft lengthy clauses in the guarantee, while ensuring that the transfer process remains transparent so that it cannot lend itself to dubious uses. UCP and ISP98 have provided a helpful model for drafting the new provision on transfers, although the URDG makes significant departures where necessary.

Risks where transfer is uncontrolled

33.3 When drafting article 33, the URDG drafting group was mindful of the risks that may accompany the uncontrolled transfer of a guarantee. Guarantors could find themselves committed vis-à-vis new beneficiaries that are unknown to them and may not meet the guarantor’s legal, regulatory or creditworthiness criteria for entering into a business relationship. Instructing parties could equally have valid reasons not to entrust guarantees issued upon their instructions into the hands of new beneficiaries, such as existing disputes between the instructing party and the transferee or doubts as to the creditworthiness of the transferee in case of a claim for the refund of a guarantee that was unfairly called.

33.4 Article 33 addresses these legitimate concerns by ensuring that no guarantee is transferred unless (i) the instructing party instructs the guarantor to issue the guarantee as a transferable guarantee; (ii) the guarantor subsequently expressly consents to a request for transfer presented by the initial beneficiary; and (iii) the transfer of the guarantee is concomitant with the transfer of the underlying relationship to the transferee of the guarantee. These safeguards are examined below, following a presentation of the nature of the transfer operation.

Nature of a transferable guarantee

33.5 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 is issued in favour of the transferee, which thus replaces the transferor as the beneficiary. One consequence of this is

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that the transferee’s rights are not subject to the defences and rights of set-off that would previously have been available to the guarantor against the transferor. A signed statement by the transferor that the transferee has acquired all the transferor’s rights and obligations under the underlying relationship is an essential condition of the transfer of the guarantee. This means that there must also have been a novation of the underlying relationship (see paragraphs 33.14 et seq.).

Conditions of transferability

33.6 Four cumulative conditions have to be satisfied in order for a guarantee to be transferable:

(1) the guarantee must specifically state that it is transferable (article 33(a));

(2) the transferor must request a transfer to a new beneficiary (article33(c));

(3) the guarantor must expressly assent to that request (article 33(b)), 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; and

(4) 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)).

Article 33(a)

Guarantee must state that it is “transferable”

33.7 In order for a guarantee to be transferable, the word “transferable” must be used in the guarantee. Words such as “assignable” or “divisible” do not suffice. However, even a guarantee that states that it is transferable does not commit the guarantor to issue a new guarantee in favour of the transferee unless the guarantor agrees to do so in response to a request made after the issue of the guarantee (see paragraph 33.9).

Partial transfers and successive transfers

33.8 Where the above conditions 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 authorise partial transfers, because this would expose the guarantor to separate claims by two or more beneficiaries and create serious problems in determining which partial transferee was entitled to be paid. Moreover, partial transfers do not feature in demand guarantee practice. Thus, a guarantee may be transferred only for the full amount that remains 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 successive transfers, that is, onward transfers (retransfers) by the transferee to another transferee. Each transfer must be for the full amount available at the time of that transfer.

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Article 33(b)

Guarantor’s separate assent to transfer

33.9 The fact that a 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 after issue to the extent and in the manner expressly agreed by the guarantor pursuant to a request to transfer the guarantee after the issue of the guarantee. Strictly speaking, the phrase “after its issue” is redundant because a guarantee cannot be transferred before it has been issued, nor can a transfer request made before issue have any effect, since a transfer can be requested only after the transfer of the beneficiary’s rights in the underlying relationship. At the 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. Thus, the question whether “after its issue” (i.e. after the issue of the guarantee) refers to the time of the request itself or the time when the transfer is desired to be effected is academic. The practical effect of article 33(b) is therefore that the issue of a transferable guarantee does not commit the guarantor to honouring a request for transfer, 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.

Who should agree to transfer?

33.10 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 issue of the new guarantee.

When should the transfer be agreed?

33.11 As long as the guarantor has expressly consented to the transfer, it does not matter whether that consent is expressed after the submission of a request by the transferor or in anticipation thereof. An example of the latter is where the guarantee provides that it is “transferable” and that the guarantor agrees to its transfer to a new beneficiary whose identity is determined in the guarantee. All that is required then is for the beneficiary to request transfer and refer to the guarantor’s consent as recorded in the guarantee. Requiring the express consent of the guarantor in order to carry out a 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 its consent to this transfer in the guarantee, both the guarantor and the instructing party thereby explicitly consent to the transfer taking place and there is no need to seek any further assent.

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Article 33(c)

33.12 This has already been explained in paragraph 33.5. Though only the guarantor itself can issue a transferred guarantee, such guarantee can be advised by an advising party.

Article 33(d)

Amendments

33.13 A transferred guarantee must include all the amendments agreed by the transferor and the guarantor as of the date of transfer. Thus, if the guarantor issues a new guarantee in favour of the transferee that does not include all these amendments, the transferee may reject it as not conforming to the guarantor’s obligations under the rules. Conversely, the transferee is not entitled to demand a guarantee that (a) includes amendments that have been issued by the guarantor but not agreed by the transferor or (b) omits any of the agreed amendments.

Transferor’s signed statement as to rights arising from the underlying relationship

33.14 The guarantor will not issue a new guarantee to the transferee unless the guarantor has been provided with a signed statement from the transferor to the effect that the transferee has acquired all the transferor’s rights and obligations arising from the underlying relationship. The effect of this requirement is that there must have been a novation of the underlying relationship. 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. However, as regards the applicant, obligations cannot be transferred by assignment. This can be done only by novation, that is, by means of a new agreement in which the transferor is released from its obligations, which are then assumed by the transferee.

33.15 The reason for the above rule is that a guarantee has no independent commercial value; the beneficiary is entitled to make a demand only if the applicant has committed a breach of the underlying relationship. Thus, the guarantee is only of value in the hands of a transferee that has become party to the underlying relationship. There have been a significant number of fraudulent “sales” of guarantees made independently of the underlying contract, and one purpose of the rule in article 33(d) is to ensure that a person who “buys” a guarantee without having acquired the rights and obligations arising from the underlying relationship is not entitled to invoke the guarantee.

33.16 At this point, the authors hope that they will be indulged while expressing an aside concerning credit default swaps (CDSs) and the likely rethinking of the regulations applicable to them (or the lack thereof) in the wake of the financial crisis of 2007. Originally, CDSs were devised to serve a helpful purpose, namely to provide insurance to bondholders. However, because they were allowed to be freely traded, they were often misused to mount

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bear raids, effectively turning into a means to manipulate the price of securities. A consensus is emerging among financial market regulators to confine the benefits of CDSs to persons who have an insurable interest in the bonds of a country or company. As a result, CDSs can be transferred from a beneficiary to another only when the underlying bond is also transferred to the same transferee. In a way, this harks back to the time when an insurer would indemnify the insured party only to the extent that this party had retained an insurable interest in the damaged property at the time when the loss occurred. Savvy insurers still stick to this golden rule.

The indefectible link between the guarantee and the underlying relationship that article 33(d)(ii) proposes should be approved if we want to prevent demand guarantees – as well as CDSs and insurance policies – from turning into instruments of speculation or, worse, scams.

Article 33(e)

Transferor to pay all charges

33.17 Unless otherwise agreed, all charges incurred for the transfer are to be borne by the transferor, the only party with which the guarantor has a relationship prior to the transfer.

Article 33(f)

Demand and supporting statement

33.18 Under a transferred guarantee, a demand and any supporting statement are to be signed by the transferee. The aim is to avoid the transferee being dependent on the transferor for the supporting statement. However, the rule even applies to breaches committed by the applicant prior to the transfer, because the transferred guarantee is a new guarantee. The transferred guarantee therefore covers breaches committed prior to its issue as well as subsequently. While it could be argued that the breach should be asserted only by the creditor of the breached obligation, that is, 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 the signing of the demand, the statement of breach and any other document that the guarantee requires the beneficiary to issue. Requiring a different signatory according to the time when the breach occurred would lead to uncertainty and place 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 position where it is dependent on the transferor for the signing of the supporting statement. This would not be conducive to sound uniform practice. The transferee may in any case have to ask the transferor for information about the general nature of such breaches. One would expect the transferee to require this information to be given before the novation of the underlying contract.

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Other documents

33.19 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 the presentation of a certificate signed by the transferor, as the original beneficiary, the transferee may present a certificate bearing its own name and signature without this being considered a discrepancy.

Assignment of proceeds as distinguished from transfer of the guarantee

33.20 An assignment of the proceeds of a guarantee is to be distinguished from the transfer of the guarantee itself. When the guarantee itself is transferred, under the conditions set out above, the transferee replaces the transferor as beneficiary, and it is the transferee as the new beneficiary that is entitled to present any future demand. By contrast, in the case of an assignment of the proceeds, there is no contractual relationship between the assignee and the guarantor, whose engagement is solely with the assignor, so that the demand and the statement of breach have to be presented by or on behalf of the assignor. 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 guarantor has received a complying demand from the assignor. If the assignor fails to present a complying demand prior to the expiry of the guarantee, the assignee has no claim against the guarantor and it has to rely on whatever remedy is available under the applicable law against the assignor.

33.21 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 and subject to rights of set-off as arising under the applicable law. This typically relates to set-off in respect of cross-claims by the 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.

Subject to the applicable law

33.22 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 particularly characterised. Moreover, some legal systems restrict assignability to existing debts, thereby banning the assignment of future debt because it is too aleatory or uncertain. The URDG do not – and cannot – decree that assignments of the proceeds of guarantees – a future, conditional debt – are effective regardless of the position that the applicable

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law takes in this respect. Article 33(g)(i) therefore affirms, as a general principle, that the beneficiary may assign any proceeds to which it may be entitled under the guarantee, subject, however, to the applicable law indicating otherwise.

Priority between competing assignees

33.23 Article 33 does not deal with priority in the case of competing assignments of proceeds. That is left to the applicable law.

Cross-references within URDG 758

- Articles 10 and 15.

Cross-references to other ICC rules

- UCP 600 articles 38 (transfer) and 39 (assignment of proceeds).

- ISP98 rule 6.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- Articles 9 (transfer) and 10 (assignment of proceeds).

Illustration 33-1

Hula Kahiko LLC, a company based in Lahaina, Maui, agrees to sell Humuhumunukunukuapua’a tropical fish to the zoo of Berlin, the price to be paid in advance. Hula Kahiko instructs its bank in Honolulu, Waikiki Bank, to issue a performance guarantee in favour of the zoo of Berlin to cover the seller’s delivery obligations. The guarantee is labelled as “transferable”. Later, Hula Kahiko, the zoo of Berlin and Tierpark Hagenbeck agree that the zoo of Berlin’s rights and obligations under the contract are to be assumed by Tierpark Hagenbeck. The zoo of Berlin requests Waikiki Bank to transfer the guarantee to Tierpark Hagenbeck. Waikiki Bank, which knows nothing of Tierpark Hagenbeck’s business standing, refuses to make the transfer. It is entitled to do so, not having consented to transfer. The mere fact that the guarantee was expressed to be transferable does not commit Waikiki Bank to accept the transfer instructions.

Illustration 33-2

On the instructions of Hula Kahiko LLC, Waikiki Bank issues a guarantee in favour of the zoo of Rurs to cover Hula Kahiko’s delivery obligations to the zoo of Rurs, Ruritania, under a contract of sale of tropical fish. The zoo of Rurs persuades ’Ukulele to buy this guarantee, but without also offering an interest in the contract of sale. ’Ukulele then requests Waikiki Bank to transfer the guarantee in its favour. Waikiki Bank should refuse to do so for two reasons: first, because the request should have come from the zoo of Rurs, not from ’Ukulele, and, secondly, because of the absence of a signed (or any) statement from the zoo of Rurs that its rights and obligations under the contract have been transferred to ’Ukulele. This is a typical case of a suspicious sale of a guarantee as if it had some independent value, which it does not.

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Illustration 33-3

S, the beneficiary under a transferable guarantee issued by G Bank to cover the obligations of A, requests that the guarantee be transferred to T. G Bank agrees and issues a new guarantee to T in place of that issued to S. T now wishes to make a demand based on various breaches of the underlying relationship by A, some committed before the transfer, others afterwards. The supporting statement must be incorporated in the demand or contained in a statement signed by T and must cover the pre-transfer as well as the post-transfer breaches.

Illustration 33-4

B, the beneficiary under a guarantee issued by G Bank and not stated to be transferable, assigns the proceeds to A. Upon a breach of the underlying contract by B’s counterparty, B presents a demand and the requisite supporting statement and asks for the proceeds to be paid to A. G Bank is not obliged to do this unless it has previously agreed to do so, and even if it has so agreed it may assert against A any defences and rights of set-off provided by the applicable law.

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URDG 758

Article 34 Governing law

a. Unless otherwise provided in the guarantee, its governing law shall be that of the location of the guarantor’s branch or office that issued the guarantee.

b. Unless otherwise provided in the counter-guarantee, its governing law shall be that of the location of the counter-guarantor’s branch or office that issued the counter-guarantee.

URDG 458

Article 27

Unless otherwise provided in the Guarantee or Counter-Guarantee, its governing law shall be that of the place of business of the Guarantor or Instructing Party (as the case may be), or, if the Guarantor or Instructing Party has more than one place of business, that of the branch that issued the Guarantee or Counter-Guarantee.

Comment

Article 34 follows URDG 458 in providing that the law governing a guarantee or counter-guarantee is to be the law of the branch or office of the issuer unless otherwise provided in the guarantee or counter-guarantee.

Changes from URDG 458

- Separating the governing law rule for guarantees from the rule for counter-guarantees.

- Minor drafting changes.

Parties can choose the applicable law

34.1 Subject to any overriding rules of the forum (see paragraph 34.7), parties to a guarantee or counter-guarantee are free to select the law that is to govern the guarantee or counter-guarantee. Article 34 states that it is subject to a contrary stipulation in the guarantee or counter-guarantee and thus does not affect the principle of party autonomy. However, the choice of law must be in the guarantee itself. It is not sufficient that it appears in a separate contract or general business conditions, unless the guarantee refers to that contract or general conditions so as to incorporate the choice of law provision by contractual reference. Said differently, the choice of law must be in the guarantee itself, in an amendment to the guarantee or in a set of general terms and conditions incorporated in the guarantee by contractual reference.

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The same applies to the choice of law with regard to the counter-guarantee.

34.2 The law applicable to the underlying relationship or the application has no influence in terms of determining the law applicable to the guarantee. Similarly, the choice of a jurisdiction in the guarantee or elsewhere should not be considered as necessarily entailing the choice of law governing the guarantee. The same applies to the choice of law with regard to the counter- guarantee.

Governing law

34.3 “Governing law” means the law of a national legal system. The selection of non-national legal rules, such as the lex mercatoria, the UNIDROIT Principles of International Commercial Contracts or the Principles of European Contract Law falls outside the scope of article 34 and is dependent for its efficacy on the conflict of law rules of the forum.

Multiple laws

34.4 Subject to any contrary conflict rule of the forum, the parties can also choose to apply different laws to different parts of the guarantee, each of which is to be governed by a different law (dépeçage). For example, a guarantee can be issued subject to French law, with the exception of the waiver of sovereign immunity clause, which is stated in the guarantee to be subject to Swiss law.

Guarantee and counter-guarantee governed by separate laws

34.5 The effect of article 34 is that, unless provided otherwise in the guarantee, the governing law is the law of the issuing branch or office, while the law governing the counter-guarantee is the law of the branch or office issuing the counter-guarantee. In following URDG 458, article 34 reflects current practice and aligns itself with generally accepted principles of private international law that select as the governing law of a contract the law of the country where the party required to effect the characteristic performance under that contract has its habitual residence⁷⁸. Clearly, the party required to effect the characteristic performance under the guarantee is the guarantor and, under the counter-guarantee, the counter-guarantor. It may happen that a guarantor in an indirect guarantee situation insists that its own law shall govern not only the guarantee but also the counter-guarantee, but this is not normally the case. Usually, a counter-guarantor will wish to specify its own law, with which it is familiar, while the guarantor will specify its local law. Neither will usually be willing to subject itself to the other’s law.

34.6 It is sometimes argued that the guarantee and the counter-guarantee are so closely linked that they should be governed by the same law. This, however, runs counter to the express rule in article 5(b) that a counter-guarantee is by its nature independent of the guarantee. On this issue, see further paragraph5.7. Where the parties find this inconvenient, they can always agree that the law governing the guarantee shall also apply to the counter-guarantee.

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Mandatory rules

34.7 Article 34 has effect subject to any mandatory rules (lois de police) or rules of public policy (ordre public) of the State before whose courts the dispute is brought, i.e., rules the respect for which is regarded as crucial by a country for safeguarding its public interests to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract⁷⁹. Economic sanctions, exchange control regulations, access to and operation in regulated sectors and exchanges, rules of capacity and any criminal liability aspect to which the issue or payment of a guarantee or counter-guarantee may give rise are typically governed by mandatory rules that cannot be avoided by choosing a law under article 34 that would be different from the law governing such issues.

Transfers and assignments

34.8 Article 34 applies only to the rights and obligations of the parties to the guarantee; it does not apply to the relationship between the transferor and the transferee or to the relationship between the assignor and the assignee of proceeds, which will be governed by the law chosen in their transfer or assignment agreement or by the law applicable under the conflict of laws rules of the forum. However, when it comes to the rights of the transferee or assignee against the guarantor under the guarantee, the law of the guarantee will apply because both the transferee and the assignee are exercising the rights of the transferor or the assignor, which are subject to that law.

Are the URDG a substitute for the governing law?

34.9 This oft-asked question comes in many forms. Below is a (hypothetical) exchange between a customer and a bank:

Instructing party:

Is there any point in referring to the URDG in my instructions when they already indicate that the guarantee is governed by Swedish law?

Guarantor:

Interesting question. My operation manual indicates that guarantees should refer to the URDG.

Instructing party:

But if I use the URDG, why should I further specify which law applies to my guarantee?

[etc.]

34.10 The above exchange shows confusion between the nature and scope of the URDG and nature and scope of the governing law. The URDG are rules of a contractual nature. They have the same effect as any expressly stipulated clause in the guarantee. As such, they supersede provisions of the governing law that are optional (non-mandatory) but are superseded by the mandatory provisions of the governing law. The following distinctions illustrate this rule:

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- Where the URDG provide a rule that governs a given situation and that situation is not covered by a mandatory rule of the applicable law, the URDG rule applies. This is expected to be the case for all the rules in the URDG: interpretation, issue and effectiveness, independence, documentary character, amendments, presentation, demands, information, examination, payment, rejection, force majeure, transfers and so forth.

- Where the URDG provide a rule that governs a given situation but that situation is covered by a mandatory rule of` the applicable law that differs from the URDG rule, the mandatory rule of the applicable law applies. This could be the case, for example, where the mandatory law requires that a guarantee expires only upon written release by the beneficiary, that the guarantor is responsible for losses caused by errors in its translation of guarantee texts or that the guarantor is bound to pay the assignee of the proceeds of the guarantee even where it did not agree to do so.

- Where the URDG do not provide a rule to govern a specific situation and that situation is covered by a provision in the governing law (whether mandatory or otherwise), the governing law rule applies. This may apply, in particular, to the confirmation of guarantees, payment by acceptance of bills of exchange, transfers by operation of law and fraudulent demands.

34.11 There is therefore no internal conflict in a guarantee that refers to the URDG and to a governing law. In fact, it is best practice to have such a dual reference in every guarantee and counter-guarantee. The URDG are insufficient, in themselves, to govern every aspect of a guarantee or counter-guarantee. They need to be supplemented by a law. However, where the URDG apply, a guarantee that is issued without an explicit choice of law does not find itself in a legal vacuum. Article 34 fills the gap by selecting the law of the guarantor’s branch or office that issued the guarantee to apply to that guarantee and the law of the counter-guarantor’s branch or office that issued the counter-guarantee to apply to that counter-guarantee.

Cross-references within URDG 758

- Article 5.

Cross-references to other ICC rules

- UCP 600 – none.

- ISP98 – none.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- Articles 21 and 22.

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Illustration 34-1

Teatime Co. in England concludes a supply contract with Beaujolais Nouveau SARL in France under which a performance guarantee is to be issued to Beaujolais Nouveau by a French bank. At the request of Teatime Co.’s bank, the London-based Proudly Albion Bank, and under its counter-guarantee, a guarantee is issued by Banque Gauloise, which has its place of business in France. Neither the guarantee nor the counter-guarantee contains a choice of law clause. The effect of article 34 is that the guarantee is governed by French law and the counter-guarantee by English law.

Illustration 34-2

The facts are as in Illustration 34-1, except that Proudly Albion Bank arranges for the counter-guarantee to be issued by its Paris branch. The counter- guarantee is governed by French law.

Illustration 34-3

The facts are as in Illustration 34-1, except that the counter-guarantee states that it is governed by Swiss law, which will accordingly apply in place of the law referred to in article 34.

Illustration 34-4

The Emirate of Ajman issues an international request for tenders for the construction of an industrial desalination plant. The request for tenders is governed by the federal laws of the United Arab Emirates and refers in detail to the terms of the tender guarantee that each contractor should procure in support of its tender. The text of the tender guarantee itself is mandatory, refers to the URDG and does not select a governing law. KK Mizu To Shio, a Japanese contractor, asks its Tokyo-based bank, Tôkyô Ginkô, to issue a tender guarantee according to the required terms. A dispute arises between the contractor and the project owner following the presentation of an unfair demand for payment. The judge should apply article 34 and, in the absence of a choice of law in the guarantee, apply Japanese law. The law applicable to the request for tenders has no impact on the determination of the law applicable to the guarantee.

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URDG 758

Article 35 jurisdiction

a. Unless otherwise provided in the guarantee, any dispute between the guarantor and the beneficiary relating to the guarantee shall be settled exclusively by the competent court of the country of the location of the guarantor’s branch or office that issued the guarantee.

b. Unless otherwise provided in the counter-guarantee, any dispute between the counter-guarantor and the guarantor relating to the counter- guarantee shall be settled exclusively by the competent court of the country of the location of the counter-guarantor’s branch or office that issued the counter-guarantee.

URDG 458

Article 28

Unless otherwise provided in the Guarantee or Counter-Guarantee, any dispute between the Guarantor and the Beneficiary relating to the Guarantee or between the Instructing Party and the Guarantor relating to the Counter- Guarantee shall be settled exclusively by the competent court of the country of the place of business of the Guarantor or Instructing Party (as the case may be), or, if the Guarantor or Instructing Party has more than one place of business, by the competent court of the country of the branch which issued the Guarantee or Counter-Guarantee.

Comment

Article 35 adopts a jurisdiction rule that is similar to the governing law rule in article 34. Exclusive jurisdiction over disputes between the guarantor and the beneficiary is given to the competent court of the country where the issuing branch or office is located, while jurisdiction over disputes arising under the counter-guarantee is conferred exclusively on the competent court of the country where the branch or office issuing the counter-guarantee is located.

Changes from URDG 458

- Separates the jurisdiction rule for guarantees from the rule for counter- guarantees for clarification purposes.

- Minor drafting changes.

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Parties can choose jurisdiction

35.1 Just as article 34 does not affect the ability of the parties to choose the law that is to govern the guarantee or counter-guarantee, so also article 35 leaves the parties free to select the forum for determination of disputes relating to the guarantee or counter-guarantee. This is subject, of course, to any contrary rules of the selected forum. The choice of forum must be in the guarantee itself, not in a separate contract or in the general conditions, unless they are incorporated by contractual reference in the guarantee. The same applies to a counter-guarantee.

Arbitration – DOCDEX

35.2 The parties’ choice under article 35 is not limited to selecting a court of law of a country or State. They can also opt for arbitration, whether or not preceded by a non-binding (amicable) dispute resolution method. Among these methods, particular mention should be made of DOCDEX. The ICC Documentary Instruments Dispute Resolution Expertise (DOCDEX) Rules provide an alternative dispute resolution mechanism for settling disputes arising under the URDG, the UCP, the URR (Uniform Rules for Bank-to-Bank Reimbursement under Documentary Credits) and the URC (Uniform Rules for Collections). They lead to an independent, impartial and prompt expert decision.

35.3 The procedure, in a nutshell, is as follows. The initiating party must file its request with the ICC International Centre for Expertise. The Centre will invite the responding party to file an answer within a maximum of 30 days. The Centre will then promptly appoint three experts with a mandate to render their decision within 30 days of receiving the case. Experts are chosen from a list based on their extensive experience and knowledge of the applicable ICC Rules. The names of the appointed experts are not disclosed to the parties. There are no hearings. The technical adviser of the ICC Banking Commission reviews the decision to ascertain whether it is in line with the applicable ICC Rules and their interpretation by the ICC Banking Commission. The technical adviser’s proposed amendments are subject to acceptance by a majority of the appointed experts.

35.4 The DOCDEX decision is not binding on the parties, unless they agree otherwise. However, it provides them with an expert evaluation of their case and can encourage an amicable and final settlement of the dispute. The parties usually receive the DOCDEX decision within 60 days of the filing of the initial request. The DOCDEX rules are available at: and Appendix 4.

Jurisdiction in the absence of choice

35.5 Where the parties have not selected a forum, article 35 provides that exclusive jurisdiction is to be given to the competent court of the country where the issuing branch or office is located. This usually means that disputes arising under the guarantee will fall to be determined by the courts of a country different from the country whose courts have jurisdiction over

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disputes arising under the counter-guarantee. This, too, is a consequence of the independence of the counter-guarantee from the guarantee. It is, of course, open to the parties to the counter-guarantee to agree to submit disputes to the courts of the guarantor’s place of business or to arbitration. The parties can also modify article 35(a) by providing that the jurisdiction conferred by that article is to be non-exclusive. In such cases, either party is allowed to commence legal proceedings before a forum other than the non-exclusive forum chosen in the guarantee.

Mandatory rules

35.6 The jurisdiction chosen by the parties or, in the absence of such a choice, the jurisdiction determined by article 35 takes effect subject to any overriding mandatory rules in the law applicable to the guarantee. Typically, where a consumer is involved, the applicable law may require that any proceedings against the consumer be commenced before the court of its place of domicile, regardless of what a potentially different jurisdiction clause in the guarantee may indicate.

Cross-references within URDG 758

- Article 34.

Cross-references to other ICC rules

- UCP 600 – none.

- ISP98 – none.

Cross-references to the UN Convention on Independent Guarantees and Stand-by Letters of Credit

- None.

Illustration 35-1

G Bank in Germany, at the request of CG Bank in Italy acting on the instructions of an Italian contractor, C, issues a guarantee to B, a German company, against CG Bank’s counter-guarantee. In the absence of any provisions in the guarantee to the contrary, the German courts have exclusive jurisdiction over disputes arising between G Bank and B under the guarantee. Disputes relating to the counter-guarantee fall under the exclusive jurisdiction of the Italian courts, unless the counter-guarantee provides otherwise.

Illustration 35-2

The facts are as in Illustration 35-1, except that the guarantee provides that the jurisdiction of the German courts is to be non-exclusive. In this situation, courts of other countries will also have jurisdiction if their own jurisdiction rules so provide.

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Illustration 35-3

The Emirate of Ajman issues an international request for tenders for the construction of an industrial desalination plant. The request for tenders is governed by the federal laws of the United Arab Emirates, selects ICC arbitration in Ajman to settle any disputes and refers in detail to the terms of the tender guarantee that each contractor should procure in support of its tender. The text of the tender guarantee itself is mandatory, refers to the URDG and provides no indication as to the competent jurisdiction. KK Mizu To Shio, a Japanese contractor, asks its Tokyo-based bank, Tôkyô Ginkô, to issue a tender guarantee according to the required terms. A dispute arises between the guarantor and the project owner following the presentation of an unfair demand for payment. The project owner submits a claim to the ICC International Court of Arbitration. The Court should reject the claim for lack of an arbitration agreement. Under article 35, the competent court is the Tokyo district court. The choice of jurisdiction in the request for tenders has no impact on the determination of the competent jurisdiction for the guarantee.

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