Books

5.1 The URDG in various languages

567 Today, the URDG exist in 21 languages:⁸⁰

• Arabic

• Chinese (Mandarin)

• Croatia / Croat

• Czech

• English (original drafting language)

• Finnish

• French

• German

• Hebrew

• Hungarian

• Italian

• Japanese

• Korean

• Polish

• Russian

• Serbian

• Slovenian

• Spanish

• Swedish

• Turkish

• Ukrainian

In case of a conflict between one of the above translations and the English original, the English original prevails.

5.2 The URDG and other ICC Rules

568 The URDG are not the only rules that were written to harmonise international demand guarantee practice. Four other sets of rules also adopted by ICC could be perceived to have a similar objective. These rules are:

- the Uniform Customs and Practice for Documentary Credits (UCP);

- the Uniform Rules for Contract Bonds (URCB);

- the Uniform Rules for Contract Guarantees (URCG); and

- the International Standby Practices (ISP98).

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With varying frequency, all of the above rules have been incorporated in instruments that the parties intended to be demand guarantees or counter- guarantees. The result was often disappointing, because these rules are not suitable to govern demand guarantees.

5.2.1 The UCP and demand guarantees

569 Throughout their revision, UCP 600 were a main source of inspiration for the URDG’s drafting style and substantive solutions. There were many compelling reasons for this policy choice, as indicated in the business case for the revision submitted on 26 April 2007 for the approval of the ICC Banking Commission⁸¹.

570 By way of background, UCP 600 had just come into force, introducing a new drafting style and practical solutions to which many members of the ICC Task Force on Guarantees had contributed. There was no question that the mass of expertise thus garnered in the new UCP would benefit the revised version of the URDG. This was all the more so in light of the continuing requests by small and medium-sized banks and businesses to align the drafting style of URDG to that of the UCP and to incorporate solutions not specifically linked to the payment function of documentary credits. Again, this is very understandable. In a world where documentary credits and guarantees are– rightly – perceived as sharing a common independent and documentary nature and are used for similar purposes in support of trade finance, it is difficult to justify as dramatic a divergence as the one that existed between UCP 500/600 and URDG 458. Differences included the lack of specific rules in the URDG concerning non-documentary conditions, the transfer of guarantees, the process of rejection of non-complying demands and the preclusion sanction. Furthermore, URDG 458 contained standards such as “reasonable time” and “reasonable care”, the assessment of which depended on the particular circumstances of the case at hand and, as such, was considered too unpredictable.

571 The new URDG 758 share many features with UCP 600 in both form and substance. They include a similar drafting style that formulates definitions and rules of interpretation in separate articles. They also share identical substantive rules on various issues, including: the independence of the undertaking; the banning of non-documentary conditions; the presumption of irrevocability; the role of the advising party; the effectiveness of amendments; the conditioning of transferability upon the issuer’s consent; the rejection process for non-complying demands; and the provision of a standard for the examination of presentations limited to the appearance of conformity that directs, in the absence of a relevant term in the undertaking or the rules, towards using international standard practice in the field of demand guarantees or documentary credits.

572 That being said, URDG 758 are not merely a copy of UCP 600, nor should they ever become so. Demand guarantees aim to fulfil a different purpose than documentary credits, even if they share a common independent and documentary nature. Documentary credits are a means of payment that is to

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be utilised when the beneficiary performs its obligation. By contrast, demand guarantees are paid when there is a breach of the applicant’s obligation, although that breach need not be established before payment. Among other features, the URDG 758 differ from UCP 600 in the following ways:

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5.2.2 The URCB and demand guarantees

573 The Uniform Rules for Contract Bonds (URCB), ICC Pub. No. 524, adopted by the ICC Insurance Committee in 2000, govern guarantees that are payable upon the applicant’s established default. In the URCB, “default” is defined as any breach, default or failure to perform the applicant’s obligation, giving rise to a claim by the beneficiary for performance, damages, compensation or other financial remedy.

574 Furthermore, the URCB require the default to be established by a final judgment, order or award. For that reason, the URCB should only be chosen to govern accessory guarantees that are payable upon the proof of the breach. The URCB are not appropriate to govern independent guarantees.

5.2.3 The URCG and demand guarantees

575 The Uniform Rules for Contract Guarantees (URCG), ICC Pub. No. 325, adopted in 1978, were presented earlier in this Guide (see paragraph 45 in this Guide). Some of their provisions conflict with fundamental principles of independent guarantees. On the one hand, the URCG refer to essential attributes of the independence of guarantees (article 3), but they condition the payment of these guarantees on the proof of the applicant’s default (articles 2 and 9). As a result, it is impossible to determine with certainty whether a URCG guarantee is an independent or an accessory undertaking.

576 Today, the URCG no longer figure on the ICC Banking Commission’s list of official publications and their use is rarely reported in practice. To the extent that parties wish to favour transparency and sound practice, they should avoid using the URCG in their demand guarantees and consider instead the many advantages offered by the flexible balance of interests in the URDG 758.

5.2.4 ISP98 and demand guarantees

577 During the revision of the URDG, ISP98 were, along with UCP 600 and the UN Convention on Independent Guarantees and Stand-by Letters of Credit, a constant source of reference for the URDG Drafting Group. The reason is that, apart from the URDG themselves, the ISP are the only set of contractual rules that can be incorporated in a demand guarantee without putting in peril either its independence from the underlying relationship or its guarantee function. However, the parties should not expect to find in ISP98 rules that are identical to those in the URDG. While both sets of rules affirm beyond doubt the independence and documentary nature of the undertaking they govern, each has a different scope and, at times, proposes different solutions for identical issues. The differences relate largely to the geographical and sectoral practices, the period of rule drafting and the idiosyncrasies of the particular instrument that the drafting group for each set of rules took into account when performing its drafting task.

578 Issuers and users should carefully scrutinise both sets of rules and identify their advantages and limitations in the context of the operational environment of their transaction before choosing the set of rules that best suits their needs. The comparison below aims to facilitate this choice.

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(1) Similarities between URDG 758 and ISP98

579 Whether the parties choose to incorporate URDG 758 or ISP98 in their undertaking, the following rules will apply identically unless modified in the text of the undertaking:

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581 In addition to taking note of the above differences, parties deciding whether to use the URDG or the ISP in their independent undertaking should be cautious about default interpretations listed in the ISP. The majority of these are merely restatements of normal language, such as the following extract from ISP rule 1.11:

“Including” means “including but not limited to”; “A or B” means “A or B or both”; “either A or B” means “A or B, but not both”; and “A and B” means “both A and B”.

582 Other default interpretations, however, could well become traps for unwary parties or parties that are not proficient in legal English. The two following examples illustrate this risk:

(i) The first example is also excerpted from rule 1.11:

“The phrase ‘stated in the standby’ or the like refers to the actual text of a standby whereas the phrase ‘provided in the standby’ or the like refers to both the text of the standby and these Rules as incorporated”.

(ii) The second example is the requirement in rule 4.09(c) that the demand repeat any typographical errors (e.g. “standbbby”) that might be included in the wording required in the standby if the standby requires such wording to be “exact” or “identical”. If the beneficiary does not exactly reproduce the typographical error in its demand for payment, its demand must be rejected.

583 Overall, ISP98 come out as more law-oriented than the URDG. The reason for this difference, which is visible throughout the ISP’s 89 articles, is indicated in the preface to ISP98: “Because standbys are often intended to be available in the event of disputes or applicant insolvency, their texts are subject to a degree of scrutiny not encountered in the commercial letter of credit context. As a result, ISP98 is also written to provide guidance to lawyers and judges in the interpretation of standby practice”. In keeping with this objective, ISP98 endeavour to cater for the concerns of a universe of users that extends beyond the traditional banks and businesses to include rating agencies, government agencies, indenture trustees, lawyers and judges. They also focus on the US practice of standby letters of credit, and rightly so given that this is where their use is the most developed.

584 The URDG opt for a different drafting approach. They concentrate on the fundamental and commonly encountered issues in demand guarantee practice without focusing on a particular regional practice or legal system. Specifics are left to the parties to formalise in their agreement, if they wish, or to the applicable law.

585 In the end, rather than recommending one set of rules over the other, it is recommended that parties carefully assess the needs of their particular transaction and the structure they wish to implement before determining the set of rules that best meets their expectations. In one highly schematic example, a third-party independent undertaking that is planned to be issued

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and confirmed in the United States, that is designed to be payable by negotiation of a draft and regarding which the applicant accepts that documents that conform to the terms of the undertaking be considered as compliant, although they could possibly be inconsistent with each other, is probably best governed by ISP. Conversely, the URDG 758 would be the better choice to govern independent counter-guarantees and guarantees that are payable upon the presentation of a complying demand, where time periods need to be determined in terms of a precise number of days, where the beneficiary is required to support its demand with a supporting statement and where force majeure can lead to a predetermined extension period. Again, the parties’ best choice is an informed decision that is adopted in advance and complied with in full.

5.3 The URDG and the UN Convention

586 The United Nations Commission on International Trade Law (UN) adopted the Convention on Independent Guarantees and Stand-by Letters of Credit on 11 December 1995. The Convention entered into effect on 1 January 2000 following its ratification by Belarus, Ecuador, El Salvador, Gabon, Kuwait, Liberia, Panama, and Tunisia. The Convention has also been signed (although not yet ratified) by the United States.

587 An international treaty, the UN Convention has become the law applicable to international demand guarantees and counter-guarantees in all the countries that have ratified it. It supersedes commercial or civil code provisions that generally apply to contracts or commercial transactions, as well as any existing specific provisions on demand guarantees in these codes or in separate statutes. For the UN Convention to apply to a given demand guarantee or counter-guarantee, there is no need to specifically incorporate it in the undertaking, because it is considered to be part of the ratifying state’s laws and, as such, to be just as binding as any other law of that state.

5.3.1 The interaction of the URDG with the UN Convention

588 The incorporation of the URDG in a guarantee or counter-guarantee governed by the law of a country that has ratified the UN Convention results in an efficient and harmonious regulatory environment for that guarantee or counter-guarantee. Indeed, the Convention supports the parties’ choice to apply the URDG. In addition to being essentially consistent with the solutions found in the URDG, the Convention supplements their operation by dealing with issues beyond the scope of these rules. It does so in particular regarding the question of fraudulent or abusive demands for payment and judicial remedies in such instances. Furthermore, the deference of the Convention to the specific terms of demand guarantees, including the URDG where incorporated in the guarantee, enables the Convention to work in tandem with the URDG.

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(1) The provisions of the UN Convention and the URDG are compatible

589 Like the URDG, the UN Convention applies to irrevocable, independent and exclusively documentary undertakings, but not accessory suretyships. Moreover, the URDG and the UN Convention provide substantially similar rules concerning governing law, irrevocability upon issue, time of issue, transfer of guarantee upon the guarantor’s consent, free assignability of proceeds and termination in the event of total payment, expiry or cancellation.

(2) The URDG supersede the UN Convention

590 Article 13 of the UN Convention provides:

“The rights and obligations of the guarantor/issuer and the beneficiary arising from the undertaking are determined by the terms and conditions set forth in the undertaking, including any rules, general conditions or usages specifically referred to therein, and by the provisions of this Convention”.

591 In the explanatory note appended to the text of the Convention, the URDG are specifically referred to as rules of practice that the Convention aims to support.⁸²

By way of illustration, the articles of the URDG:

− requiring a statement of breach in support of a demand for payment;

− considering an extend or pay demand to amount to a payment demand if the extension is refused;

− requiring a notice of rejection to be sent to the presenter at a specific time and with a specific content; or

− imposing information duties upon the guarantor,

should be given full effect under the UN Convention in the absence of rules to the contrary.

592 Moreover, in the case of seemingly contradicting solutions, the URDG rules supersede the conflicting UN Convention provision (see the reference to “rules” in article 13(1) of the Convention). This is the case, in particular, in the two following situations:

− The time for the examination of a demand, where URDG article 20(a) requires the completion of the examination within five business days following the day of presentation, whereas article 16(2) of the UN Convention adopts the UCP 500 standard – in force at the time of adoption of the Convention – giving the guarantor a reasonable time, but no more than seven business days following the day of receipt of the demand.

− The termination of a guarantee or counter-guarantee that states neither an expiry date nor an expiry event, for which article 25(c) of the URDG provides that it shall terminate after three years from the date of issue, while article 12(c) of the UN Convention provides that termination shall occur after six years from the date of issue. Here, too, the URDG

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provision supersedes the UN Convention provision, because the three- year termination period in the URDG is regarded as the functional equivalent of an expiry date explicitly stated in the guarantee.⁸³

(3) The UN Convention supplements the URDG

593 Because it acts at the legislative level, the UN Convention can go beyond the natural boundaries of the URDG, which are the same as those of any contract. These boundaries are encountered when dealing with that part of demand guarantee practice that is generally governed by mandatory rules in the applicable law. These rules therefore cannot be defined in the parties’ contracts or standardised in non-governmental organisations’ rules of practice. They typically cover unfair demands and provisional court measures.

594 The UN Convention provides specific rules for each of these issues. Article 19 offers a comprehensive restatement of unfair demands entitling a guarantor or counter-guarantor not to pay its undertaking:

Article 19. Exception to payment obligation

(1) If it is manifest and clear that:

(a) Any document is not genuine or has been falsified;

(b) No payment is due on the basis asserted in the demand and the supporting documents; or

(c) Judging by the type and purpose of the undertaking, the demand has no conceivable basis,

the guarantor/issuer, acting in good faith, has a right, as against the beneficiary, to withhold payment.

(2) For the purposes of subparagraph (c) of paragraph (1) of this article, the following are types of situations in which a demand has no conceivable basis:

(a) The contingency or risk against which the undertaking was designed to secure the beneficiary has undoubtedly not materialised;

(b) The underlying obligation of the principal/applicant has been declared invalid by a court or arbitral tribunal, unless the undertaking indicates that such contingency falls within the risk to be covered by the undertaking;

(c) The underlying obligation has undoubtedly been fulfilled to the satisfaction of the beneficiary;

(d) Fulfilment of the underlying obligation has clearly been prevented by wilful misconduct of the beneficiary;

(e) In the case of a demand under a counter-guarantee, the beneficiary of the counter-guarantee has made payment in bad faith as guarantor/issuer of the undertaking to which the counter- guarantee relates.

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(3) In the circumstances set out in subparagraphs (a), (b) and (c) of paragraph (1) of this article, the principal/applicant is entitled to provisional court measures in accordance with article 20.

595 Article 20 covers provisional court measures in the event of unfair demands falling under article 19:

Article 20. Provisional court measures

(1) Where, on an application by the principal/applicant or the instructing party, it is shown that there is a high probability that, with regard to a demand made, or expected to be made, by the beneficiary, one of the circumstances referred to in subparagraphs (a), (b) and (c) of paragraph (1) of article 19 is present, the court, on the basis of immediately available strong evidence, may:

(a) Issue a provisional order to the effect that the beneficiary does not receive payment, including an order that the guarantor/issuer hold the amount of the undertaking, or

(b) Issue a provisional order to the effect that the proceeds of the undertaking paid to the beneficiary are blocked, taking into account whether in the absence of such an order the principal/ applicant would be likely to suffer serious harm.

(2) The court, when issuing a provisional order referred to in paragraph (1) of this article, may require the person applying therefor to furnish such form of security as the court deems appropriate.

(3) The court may not issue a provisional order of the kind referred to in paragraph (1) of this article based on any objection to payment other than those referred to in subparagraphs (a), (b) and (c) of paragraph (1) of article 19, or use of the undertaking for a criminal purpose.

596 The compatibility and the complementarity of the URDG and the UN Convention prompted UN to endorse the URDG after they were adopted and led ICC to reciprocally endorse the UN Convention on 21 June 1999.

5.4 The URDG as a model for national laws

The OHADA Uniform Act on Secured Transactions

597 On 17 April 1997, the Organisation pour l’Harmonisation en Afrique du Droit des Affaires (OHADA) adopted the Uniform Act on Secured Transactions. The Act entered into effect on 1 January 1998 as national law in all of OHADA’s 16 member states: Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Comoros, Congo, Equatorial Guinea, Gabon, Guinea, Guinea Bissau, Ivory Coast, Mali, Niger, Senegal and Togo. Chapter 2 of the Act, which relates to independent guarantees, consists of 11 articles, the majority of which were modelled on URDG 458.

598 In 2010, with strong support from the World Bank, OHADA revised its Uniform Act on Secured Transactions and again chose the URDG as the model for its

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chapter on independent guarantees. This time, however, the chosen version was the new URDG 758. Although the URDG are not specifically named in the revised Act, it is still immensely gratifying for ICC to see its rules chosen as a model for the domestic laws of 16 countries governing everyday domestic and international demand guarantee transactions. Below is a comparison between the Act and its corresponding source in URDG 758.⁸⁴

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5.5 The URDG as a model for other organisations’ standard guarantee forms

5.5.1 FIDIC

599 The standard forms of contract published by the International Federation of Consulting Engineers (FIDIC) are used worldwide in the procurement of engineering works. In 1999, FIDIC adopted the URDG in all of its independent guarantee standard forms. The new Conditions of Contract for Construction

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(the former Red Book), the new Conditions of Contract for Plant and Design-Build (the former Yellow Book) and the new Conditions of Contract for EPC Turnkey Projects (the new Silver Book replacing the former Orange Book), now include:

− an Example Form of Tender Security

− an Example Form of Performance Security

− an Example Form of Advance Payment Guarantee

− an Example Form of Retention Money Guarantee

− an Example Form of Payment Guarantee By Employer

all incorporating the URDG.

600 In choosing the URDG to govern the model guarantees, FIDIC acknowledged that the URDG provide a reasonable compromise between the employer’s preference for an immediately payable security and the contractor’s preference for a substantiation of the employer’s entitlement to call the guarantee prior to its payment. FIDIC also expressed appreciation for the shortened and simplified drafting and the move towards a common international standard that the URDG represent. These were precisely the objectives of ICC in drafting the URDG.

601 FIDIC’s books also incorporate the Uniform Rules for Contract Bonds (URCB) in the Performance Surety Bond Example Form, which is meant to be accessory to construction contracts and whose payment is conditioned upon first establishing the contractor’s default and the loss caused by that default. The users of FIDIC contracts thus have a clear-cut choice between using independent guarantees subject to the URDG or accessory guarantees subject to the URCB. Provided the choice is knowingly made at the outset, the incorporation of the URDG or the URCB, as the case may be, will ensure that the parties obtain an undertaking in tune with their expectations.

5.5.2 The World Bank

602 Through its specialised agencies, the World Bank funds or advises on thousands of projects in the developing world, covering all sectors of agriculture, industry, infrastructure and services. In 2002, the World Bank adopted the URDG in all its independent guarantee forms: the Bid Security Form, the Performance Security Bank Guarantee and the Bank Guarantee Form for Advance Payment. This step benefited all parties to World Bank projects by levelling the playing field between foreign contractors and State-owned entities acting as project owners and beneficiaries of guarantees, while boosting the proportion of URDG guarantees in development projects overnight.

5.6 The URDG in the courts

A number of court decisions referring to the URDG have been reported to ICC. On the following pages are a summary of these decisions.

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5.6.1 Belgium

(1) Commercial Court of Brussels, 15 December 1992, S.A. Fabricom and S.A. Laurent Bouillet Ingénierie v. Générale de Banque and ACEC Union Minière

603 The case concerned a demand guarantee covering the performance of the contractor’s obligations in a construction contract. The guarantee provided that its amount would be reduced by 50% upon the provisional delivery planned to occur on 31 July 1987 and by a further 50% upon the final delivery and expiry of the maintenance period planned to occur on 31 July 1988. The beneficiary requested five successive extensions, which were agreed by the applicant and granted by the guarantor. The expiry date was thereby postponed to 31 March 1990 without, however, referring any longer to the final delivery and the expiry of the maintenance period.

604 Ultimately, the contractor/applicant did not deliver the works. This prompted the beneficiary to present a demand for payment under the guarantee on 16 May 1991. The guarantor rejected the demand, arguing that the guarantee had already expired. The beneficiary argued that the guarantee could not terminate absent the occurrence of the expiry event – the final delivery – that should have been deemed to override the 31 July 1988 time limit, which was indicative only.

605 The court rejected the beneficiary’s contention that the 31 July 1988 date was only for convenience purposes and had no binding character. The beneficiary was considered to be estopped from so contending because it had requested the extension of the validity date five successive times, leaving no doubt that it considered the date to be binding. The court considered that the guarantee provided for both an expiry event (the delivery) and an expiry date (31 July 1988). Referring URDG 458 article 22, the court ruled that the guarantee expired on the expiry date or on the occurrence of the expiry event, whichever occurred first.

606 Authors’ comment: It is interesting to note that the URDG were not incorporated in the guarantee. Yet, the court referred to URDG 458 article 22 as a restatement of established trade usage in demand guarantee practice. Excerpts of this decision are reported in Revue de droit commercial belge 1993, page 1055.

5.6.2 United Kingdom

(1) Court of Appeal (Civil Division), 7 November 1995, Wahda Bank v. Arab Bank PLC, [1996] 1 Lloyd’s Rep.470

607 This case concerned the determination of the governing law in a number of counter-guarantees issued by an English bank in favour of a Libyan bank. None of the counter-guarantees provided a choice of law clause.

608 The court found at the outset that counter-guarantees were “intimately connected with the guarantees”. It then went on to decide that the counter-

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guarantor and the guarantor intended the counter-guarantees to be governed by the same law as the guarantees, namely Libyan law. The court based its ruling on the doctrine of “infection” that allows a court to decide that the parties must be held to have implicitly submitted two legally or commercially connected contracts to the jurisdiction of the same law.

609 Seeking to have the court uphold the application of the law of the counter- guarantor to the counter-guarantee, the guarantor relied on URDG 458 article 27, although the URDG were not incorporated in either of the guarantees or counter-guarantees in dispute. In an opinion that was entirely unnecessary to the decision of the case, the court expressed its disagreement with URDG 458 article 2(c), which affirms the principle of the independence of counter-guarantees. The court then discounted article 27, expressing its doubt as to the attractiveness of its terms to bankers. Noting that the guarantor issued its guarantee “for a tiny commission”, the court held that such a guarantor would want to ensure that it takes no greater risk than the insolvency of the counter-guarantor and that its right of reimbursement was back-to-back the same as its liability towards the beneficiary.

610 Authors’ comment: This decision is at odds with the principle of independence of counter-guarantees, as acknowledged by various national laws, courts decisions and international practice. Where the URDG (458 or 758) are incorporated in a given counter-guarantee, the Wahda Bank case will have no authority when faced with the parties’ choice of governing law under URDG 458 article 27 or URDG 758 article 34.

The decision is reported in [1996] 1 Lloyd’s Rep. 470.

(2) Court of Appeal (Civil Division), 15 july 2008, Uzinterimpex JSC v.Standard Bank plc [2008] Bus.L.R.1762

Note: Only those aspects relating to the URDG in this long decision are reported below.

611 Background: Uzinterimpex, an Uzbek state company, sold cotton to A. Meredith Jones and Co. Ltd, an English cotton trader. The sale contract required the purchaser to make an advance payment to the seller in respect of 90% of the value of the cotton, with the balance of the payment to be provided by letter of credit. Uzinterimpex arranged for an advance payment guarantee subject to the URDG (incorrectly referred to in the guarantee as “UCP 458”) to be issued by an Uzbek bank in favour of Standard Bank, and Standard Bank opened a letter of credit in favour of Uzinterimpex. The guarantee provided that its amount would be automatically reduced by 90% of the value of each consignment of cotton delivered to the purchaser on the basis of tested telexes sent by the beneficiary of the guarantee to the issuer. Delivery was to be proved by the presentation of the shipping documents and commercial invoices as required by the letter of credit. There were difficulties in performing the sale contract. Uzinterimpex failed to present documents promptly in respect of goods afloat or in warehouses awaiting shipment, which prompted Meredith Jones to take control of goods without waiting for those documents.

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612 The result was that Meredith Jones sold and delivered cotton to its customers while Uzinterimpex had not been paid for that cotton and the amount of the guarantee had not been reduced. Standard Bank then presented a demand under the guarantee and received the full amount outstanding. Standard Bank held documents of title to cotton that had been presented by Uzinterimpex for payment but did not conform to the letter of credit. Standard Bank refused to release those documents. Uzinterimpex succeeded in an arbitration against Meredith Jones, but the latter went into liquidation. Uzinterimpex filed a claim against Standard Bank.

613 Decision: The judge found in favour of Uzinterimpex and awarded damages for conversion, but only up to the date when Uzinterimpex failed to mitigate its loss. Uzinterimpex appealed. The Court of Appeal dismissed the appeal.

The following issues are worth mentioning in this summary.

614 The court refused to accept that there was an implied term in the guarantee to the effect that, if the beneficiary made a demand that turned out to be excessive, it would repay the excess. If a demand resulted in a wrongful refund of part of the price due to the seller/applicant, then that seller would have a remedy against the purchaser under the contract (although little, if anything, would be recovered as the purchaser was insolvent).

The judge noted:

“It is essential to the maintenance of international commerce … that the documents by which those undertakings are given should operate in accordance with the terms which appear on their face. Banks can be expected to examine the documents and demands made under them (together with any supporting documents) to satisfy themselves of their obligations. Thus article 9 of the Uniform Rules for Demand Guarantees provides that:

‘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’.

However, they cannot be expected to be aware of, or to implement, terms that do not appear on the face of the documents. The implied term for which Uzinterimpex contends would have the potential effect of imposing on the Bank a liability which could not be identified from the face of the document and which would be very uncertain in its effect, since as pleaded the term leaves it wholly unclear when or by whom the demand is to be found to have exceeded the loss sustained by Meredith Jones or might otherwise be found to be excessive”.

615 The judge stated clearly that it was common ground between the parties that the advance payment guarantee was independent of the sale contract and

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noted that such a class of guarantee had much more in common with a promissory note than a guarantee. He further noted that the guarantee in the present case was expressly subject to the Uniform Rules for Demand Guarantees (ICC Pub. No. 458), which in article 2(b) provides as follows:

“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”.

616 He observed that it was therefore important to appreciate that the letter of credit and the guarantee gave rise to obligations that were independent of, and collateral to, the sale contract. Accordingly, if Uzinterimpex had failed to deliver the full quantity of cotton provided for in the contract and if the guarantor had for any reason failed to meet a demand under the guarantee, the purchaser would still have had a right to recover from the seller that part of the price that related to the goods that had not been delivered. Similarly, if the documents had been accepted and the issuer of the letter of credit had failed to pay the balance of the price in accordance with the letter of credit, the seller would have been entitled to recover it from the purchaser.

617 It was against this background that the argument put forward by the applicant was examined, namely that there was an implied term that the beneficiary would account to the guarantor (or the applicant as its assignee) in circumstances where the beneficiary had received both the proceeds of the guarantee and the proceeds of the cotton to which it related. The judge found that there was no basis for saying that a term of this kind was implied by law, nor could it be said that this was necessary in order to give business efficacy to the contract:

“the guarantee stands as an independent contract between [the guarantor] and [the beneficiary] and is capable of operating effectively without the need for such a term”.

(3) Court of Appeal (Civil Division), 3 October 2003, Manx ElectricityAuthority v. JP Morgan Chase Bank [2003] EWcA civ 1324

618 This case is best summed up in the words of Rix LJ:

“It would be extraordinary if a performance guarantee was intended to cease to operate in exactly the situation in which its beneficiary most needs it – when the contract has failed because the principal has repudiated it”.

619 Background: JP Morgan Chase Bank issued a guarantee in favour of the Manx Electricity Authority in support of the Manx Electricity Authority’s contract

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with another company, Nepco Europe Limited, pursuant to which Nepco undertook to design and construct a power station.

The judge, while noting that the guarantee referred to URDG 458, commented,

“It is common ground that nothing in such Rules affects this appeal”.

620 Nepco repudiated its contract with the Manx Electricity Authority and the Manx Electricity Authority made a formal demand under the guarantee in a letter to the defendant in December 2001, the “first demand”. JP Morgan submitted that that demand was defective and invalid. The Manx Electricity Authority and the administrators of Nepco then entered into a fresh agreement, the Settlement and Transfer Agreement, which provided that the Manx Electricity Authority would release and discharge Nepco from any claims but also stated that in no circumstances would the agreement be deemed to constitute a waiver of Nepco’s breaches.

621 In October 2002, the Manx Electricity Authority served a further demand on the defendant under the guarantee, the ‘second demand’, which stated that Nepco was in breach of its obligations under the contract. JP Morgan contended that by reason of the Settlement and Transfer Agreement, Nepco was no longer in breach of its obligations under the contract. JP Morgan therefore applied to strike out the Manx Electricity Authority’s amended particulars of claim on a summary judgment.

622 Decision. The judge accepted JP Morgan’s submissions in this respect and allowed the application on the basis that Nepco’s breach in December 2001 had merely been of an anticipatory nature, “writ in water”, and that with the conclusion of the Settlement and Transfer Agreement that breach could no longer be said to exist since no further performance was required. The Manx Electricity Authority appealed against that decision on the grounds that the judge had erred in finding that the December breach was merely writ in water and therefore could not survive the conclusion of the Settlement and Transfer Agreement, as Nepco had been in actual breach at the time of the first demand, and those breaches were unaffected by the disappearance of the contract and were present, current breaches in respect of which the Manx Electricity Authority could take an action at the time of the second demand.

623 The appeal was allowed: the judge had erred in striking out the Manx Electricity Authority’s claim against JP Morgan under a performance guarantee on the grounds that in law there was no prospect of making it good.

624 In the normal course of events, a repudiatory breach would lead to the termination of the repudiated contract, although it might not. It was held that it would be extraordinary if a performance guarantee was intended to cease to operate in exactly the situation in which its beneficiary needed it most – when the contract had failed because the principal had repudiated it. In these circumstances, it was clear that the breaches complained about

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under the second demand were the same breaches that had been complained about under the first demand, and the fact that the contract had ceased to exist in the period between the two demands was irrelevant. Nepco had been in actual repudiatory breach of its contract, and the point on which the judge decided the defendant’s application could not, therefore, be supported. The judge’s decision to allow the application for summary judgment was therefore set aside.

625 Authors’ comment: The essential point worth taking away from the case is that the fact that the underlying contract had been terminated or had otherwise became unenforceable did not permit JP Morgan to refuse to pay on a letter of credit/demand guarantee.

5.6.3 France

(1) Commercial Court of Paris, 13 February 1997, Air Mauritius v. Caribjet and BNP, unreported.

626 This decision was rendered in the matter of a petition for an injunction against the payment of a guarantee stated to be subject to URDG 458. In petitioning the court, the applicant argued that the rights and obligations of the parties under the underlying contract were being litigated in proceedings pending before another court and that no payment should be made under the guarantee pending the adjudication of the dispute under the underlying contract.

627 To decide on the granting of the injunction, the court considered that it first had to determine whether the guarantee was an independent undertaking or an accessory suretyship. Acknowledging that the guarantee incorporated the URDG 458, the court ruled:

“We find beyond all doubt that the guarantee is not a suretyship, but rather an autonomous guarantee payable on first demand, governed by the ICC Rules for Demand Guarantees No. 458. We also find that the guarantee is subject to French law and that the conditions for its payment are met. Consequently, only a proof of fraud or unfair demand can enjoin the bank from honouring its undertaking.”85

628 Authors’ comment: A key advantage of the URDG is that they strongly express the independent nature of the guarantee and counter-guarantee in which they are incorporated. In this case, the court – as many other courts would probably do in a similar situation – inferred from the incorporation of the URDG in the guarantee in dispute a strong indication of the parties’ intent to have an independent guarantee and drew the right conclusions from this construction.

(2) Court of Cassation, Commercial Section, 30 March 2010, Eurocopter v.Banque Melli Iran, Decision No. 375 F-PB, Petition No. S 09-12.701

629 The case arose in the matter of a procurement contract between Eurocopter and the Iranian Ministry of Roads and Transportation in security of which a

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performance guarantee was issued by Banque Melli Iran, counter-guaranteed by Bank Natexis Banques Populaires. The guarantee was stated to be subject to URDG 458 and indicated that it was payable upon presentation of a demand accompanied by a statement stating that the applicant was in breach of its obligations under the underlying contract.

630 The economic sanctions against Iran prevented Eurocopter from delivering the agreed equipment. The beneficiary presented a demand for payment under the guarantee, obtained payment, and the guarantor in turn presented a demand under the counter-guarantee and obtained payment. After having reimbursed the counter-guarantor, the applicant Eurocopter filed a claim in restitution against both the counter-guarantor and the guarantor because the guarantor paid the beneficiary in breach of the guarantee terms and, in particular, URDG 458 article 20.

631 The guarantor contested the standing of the applicant to bring a claim against the guarantor in tort and submitted that the independence of the guarantee from the counter-guarantee barred any claim by the applicant for the alleged non-performance of the guarantor’s duty under the guarantee.

632 The court disagreed and upheld the Commercial Court’s and the Court of Appeal’s rulings that where the applicant is obliged to reimburse the counter- guarantor for any sums paid under the counter-guarantee, it is entitled to file a claim against the guarantor that paid the beneficiary in breach of the guarantee terms. Turning to URDG 458 article 20, the court noted that, unless expressly agreed to the contrary, the beneficiary has to state in writing that the applicant is in breach of its obligation under the underlying contract and the respect in which it is in breach. In this case, the beneficiary had stated that the applicant was in breach but did not state the respect in which it was in breach. Accordingly, the court ruled that the demand was not a complying demand.

633 The court further ruled that the guarantor had caused a prejudice to the applicant by paying the beneficiary, notwithstanding the discrepancy in the demand, and subsequently claiming and obtaining payment under the counter-guarantee, thus prompting a claim for reimbursement against the applicant. The court added in terms denoting a solemn principle that the independence of the counter-guarantee from the guarantee did not bar the applicant from filing a liability claim against any guarantor or counter- guarantor that, by its prejudicial act, had compelled that applicant to make payment in connection with the guarantee or counter-guarantee.

634 Authors’ comment: The French Supreme Court’s decision is correct in its two main parts. First, it has strictly enforced the URDG by requiring that the statement presented by the beneficiary meets the two-tier statement requirement: indicating that the applicant is in breach as well as the respect in which it is in breach. Stating only the first part of the statement is insufficient, unless the second part is expressly excluded in the guarantee. An indication that the guarantee is subject to the URDG and that a demand shall be accompanied by a statement stating that the applicant is in breach of

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its obligations does not amount to an exclusion of the full, two-tier statement requirement in URDG 458 article 20.

635 Secondly, the applicant’s claim in restitution against the guarantor in an indirect guarantee breaches no independence of the guarantee principle because it comes after the guarantee and counter-guarantee were paid and the applicant had reimbursed the counter-guarantor. In such cases, the independence principle no longer holds and the applicant is allowed to claim reparation, including in tort, for any damage caused by the breach of any agreed term in the underlying contract, the counter-guarantee or the guarantee.

636 It would have been interesting to see if the court would have applied the same reasoning if, instead of filing a post-reimbursement claim in restitution, the applicant had raised the breach by the guarantor of its duties under the guarantee as a defence against the reimbursement claim by the counter- guarantor. The authors believe that, in such cases, the applicant should be barred from raising such a defence precisely because of the independence of the counter-guarantee from the guarantee. If the counter-guarantor complies with the instructions it received and with the terms of its counter-guarantee, it is entitled to be reimbursed by the applicant, which in turn is free to pursue any claim for restitution or unjust enrichment against the guarantor or the beneficiary.

(3) Court of Cassation, Commercial Section, 22 March 2011, Alstom Hydro Energia Brasil LTDA et al. v. Hydropastaza, Decision No. 289 F-D, Petition No. K 09-71.690

637 The case arose in the matter of a performance guarantee issued by a bank in Ecuador in favour of a project owner, counter-guaranteed by a French bank acting upon the instructions of a French exporter, which itself was a partner in a joint-venture performing the project. Guarantees and counter-guarantees were subject to URDG 458. The guarantee was stated to be payable upon presentation by the beneficiary of:

– the original letter of guarantee,

– a statement indicating that the “guaranteed party” breached its obligation under the underlying contract and the respect in which it is in breach, and

– a copy of a written notice by the beneficiary to the “guaranteed party” indicating its intention to demand payment under the guarantee.

638 Upon presentation by the beneficiary of a demand under the guarantee, deemed to be a complying demand, the guarantor paid the guarantee amount and requested in turn payment under the counter-guarantee. The applicant obtained a court injunction preventing the counter-guarantor from paying the guarantor under the counter-guarantee. The Court of Appeal upheld the injunction and the guarantor petitioned the Supreme Court to reverse the judgment and order the payment of the counter-guarantee.

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639 To obtain the injunction, the applicant advanced the following arguments:

– The beneficiary sent the notice of breach to the consortium which is not a legal person and therefore cannot be a “guaranteed party”. Because the beneficiary did not send that notice to the exporter acting as applicant, the beneficiary’s demand under the guarantee is not complying, should not have been paid and the counter-guarantor should not pay the corresponding counter-guarantee;

– Prior to presenting the demand, the beneficiary required the applicant to increase the amount of the guarantee. The guarantor was copied of that request and the refusal of the applicant to comply with it. Accordingly, the demand for payment was motivated by the refusal to increase the guarantee amount, not by any breach of the contract, and should therefore be considered as abusive;

– The guarantor paid immediately upon receipt of the demand without using the customary period of three to four days used by banks to examine the conformity of the demand. By so doing, the guarantor sought to stop the applicant from obtaining an injunction to prevent payment of what amounts to an abusive demand;

– Because the demand under the guarantee was not a complying demand and was an abusive demand, no demand could be presented by the guarantor under the counter-guarantee.

640 The guarantor countered with the following arguments:

– Under the project contract, all the partners in the joint-venture were jointly liable. Accordingly, a notice given to the consortium, which is not a legal person separate from its members, is necessarily deemed to be given to the members amongst which figures the “guaranteed party”;

– Because the counter-guarantee is independent from the guarantee, the alleged abusive character of the demand under the guarantee cannot make the demand under the counter-guarantee itself abusive as well. Further, the counter-guarantor cannot refuse payment under the counter-guarantee because of an alleged discrepancy in the demand under the guarantee.

641 The Supreme Court upheld the Court of Appeal’s ruling that the “guaranteed party” is indeed the applicant and not the consortium. By sending the required notice of breach to the consortium, the beneficiary did not comply with the terms of the guarantee and the demand was not a complying demand. By paying the guarantee notwithstanding this discrepancy, the guarantor breached article 9 of URDG 458. In addition to being discrepant, the Court of Appeal had found that the demand was abusive as well because it was prompted by the beneficiary’s attempt to extract from the applicant an increase of the guarantee amount, and not by any genuine breach in the performance of the underlying contract. Being so informed by the beneficiary, the guarantor could not have

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ignored the manifestly abusive character of the demand. This results in the demand under the counter-guarantee being itself abusive. The Supreme Court upheld this finding and decided that the identified abuse was sufficiently characterised to justify the maintaining of the injunction pending trial.

642 Authors’ comment: The court is right in its identification of a discrepancy that should have prompted the rejection of the beneficiary’s demand under the guarantee. The guarantee required a notice to be sent to the guaranteed party, which the court found to be the applicant. Any notice given to another person, with or without a separate legal personality, is necessarily a non-complying notice. The guarantor should not have paid the beneficiary under the guarantee. This makes the guarantor’s statement under article 20(b) of URDG 458 stating that it received a demand in compliance with the terms of the guarantee incorrect. This motivation is sufficient to stop the payment under the counter-guarantee without the need to go into the fraudulent or abusive character of the demand. Fraud or abuse is a matter of fact that trial courts have the discretion to assess. However, fraud or abuse in the demand under the guarantee cannot in itself make a demand under the counter-guarantee equally fraudulent or abusive. Fraud or abuse should also be identified in the guarantor’s demand under the counter-guarantee. Whether or not the guarantor’s awareness of the beneficiary’s attempt to extort better terms from the applicant is sufficient to characterise fraud or abuse in the guarantor’s demand under the counter-guarantee is for the trial judge to decide. It is in any way outside the URDG, whether 458 or 758.

5.6.4 Kazakhstan

(1) Supreme Court of Kazakhstan, 30 December 1998, Moscow Narodny Bank (Singapore) v. TuranAlemBank

643 In this regrettable decision, the court refused to give effect to the URDG although they were expressly incorporated in the litigated guarantee. In its ruling, the court stated that the URDG “are not part of the legislation of Kazakhstan, are not an international treaty, and do not belong to international traditions”.

644 Authors’ comment: This reasoning obviously reflects a misunderstanding of the nature of ICC rules, which are contractual rules and apply when incorporated in the agreement by the parties of their own free will. They do not need to be codified in any legislation or adopted as treaty, nor do they need to be authorised by any national or supra-national legislative authority. Excerpts from this decision are reported in ICC Document 470/854, dated 5 March 1999.

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5.6.5 People’s Republic of China (PRC)⁸⁶

(1) Banca Commerciale Italiana v. Jiangsu Liyang Shafeite Non-woven Co., Ltd. civil Ruling (1998), Jing Zhong Zi No. 289 (Sup. People’s court, 1998)

645 The case arose in the matter of an international advance payment guarantee issued by an Italian bank to secure the repayment of advances paid by the Chinese purchaser to the Italian seller under a sale contract. The guarantee text complied with a model form attached as an appendix to the sale contract. It provided no governing law or jurisdiction clause. In the guarantee, the guarantor undertook to pay within three days of the presentation of the beneficiary’s demand accompanied by a statement stating that the seller was in breach of its contractual obligations. The guarantee further indicated that any demand should be presented before 30 February. This expiry date was obviously a typo and did not appear to have been debated in the case.

646 Upon the seller’s failure to make a timely delivery under the contract, the beneficiary presented a complying demand under the guarantee accompanied by the required statement. The guarantor rejected the demand.

647 The beneficiary filed two separate claims, one against the guarantor for wrongful dishonour and the other one against the seller for damages for breach of contract. Both the trial court and the court of appeal upheld the right of the beneficiary to demand payment of the guarantee and rejected its claim against the applicant for reasons relating to the sale agreement.

648 On appeal, the Supreme Court ruled at the outset that the URDG 458 should apply as international custom. It then decided to consolidate both the beneficiary’s claim against the guarantor and its claim against the seller arising from the underlying relationship. In so deciding, the court noted that the guarantee text was appended to the sale agreement and held:

“[i]t was agreed upon in the sale agreement that the production line is to be installed, experimented and adjusted in Liyang, Jiangsu Province, China, which justifie[d] Jiangsu High Court’s jurisdiction over any dispute arising from the sale agreement on the basis that Jiangsu [was] the place of performance … and Beneficiary [was] entitled to bring a single litigation against Guarantor. According to Chinese law, nothing prohibit[ed] consolidation hearing of disputes over the underlying relationship and over the guarantee. Furthermore, the agreed sample letter of guarantee was included as one of the appendixes to the sale agreement. It [was] appropriate for the trial court to consolidate the hearing of two disputes when Beneficiary sued Guarantor for failure in fulfilling its obligation towards Beneficiary at the same time it sued Seller. Guarantor raised no objection to jurisdiction within the period specified by the trial court for it to file its statement of defence, which meant Guarantor ha[d] accepted jurisdiction of the trial court in accordance with PRC Civil Procedure Law”.

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649 On the merits, the court ruled that the beneficiary was entitled to payment under the guarantee since it presented a complying demand in a timely manner. In so holding, the court stated:

“The bank guarantee issued by the Guarantor to the Beneficiary is a demand guarantee, and the Guarantor’s undertaking is legally effective…. The Beneficiary met the documentary requirements of the guarantee by presenting, before its expiry, a complying demand. According to international practice, the Guarantor should fulfil its obligation to pay under the guarantee”.

“The ICC Uniform Rules for Demand Guarantees should apply to the dispute as international practices. Under URDG, the duty of a guarantor under a guarantee is to pay the sum or sums 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. In the case, the Beneficiary presented a complying demand before the expiry of the guarantee, and Guarantor raised no discrepancy. The Guarantor should therefore pay or otherwise be liable for breach of contractual obligation”.

650 On the independence of the guarantee, the court ruled:

“The Guarantor issued a demand guarantee, which is generally separate from the sale agreement. The guarantor should pay unconditionally the amount under the guarantee as a primary obligation. The trial court’s holding that the seller should refund the advance payment, failing which the guarantor should pay the advance payment guarantee, applies to a conditional guarantee but is contradictory to the unconditional undertaking under a demand guarantee. However, because the buyer/beneficiary did not appeal this point of the trial court ruling, the ruling is therefore affirmed”.

651 Authors’ comment: This landmark judgment of the Supreme Court is of great significance. While PRC courts are expected to give effect to the URDG where expressly incorporated in an international guarantee or counter-guarantee, this is the first reported application by the PRC Supreme Court of the URDG as a trade usage in the absence of their incorporation in the guarantee. Lower courts are expected to follow this precedent. Indeed, a few years later, in a similar case, the Liaoning Shenyang Intermediate Court reached a similar finding in an identical case.⁸⁷

652 The court’s affirmation of the independence of the guarantee and the guarantor’s duty to make payment upon presentation of a complying demand merits acknowledgment and praise. Conversely, it is regrettable that a procedural detail led to the confirmation of the lower court’s decision that the guarantor should only pay under the guarantee where the seller fails to reimburse the advance payment. The guarantor’s undertaking is independent of the underlying relationship; payment ought to be made upon presentation of a complying demand without the need to give the applicant a chance to

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redeem its breach under the contract. Claims in restitution under the underlying contract belong to the post-guarantee payment stage. Because the appellant had not appealed that aspect of the lower court’s ruling, the Supreme Court felt it should not correct it, regrettably leaving it at odds with the rest of the decision.

653 It is also difficult to accept the Court’s decision to consolidate the beneficiary’s claim under the guarantee and its separate claim under the underlying contract. Demand guarantees are separate from the underlying relationship. The parties to each relationship are different and it does not serve the independence purpose to consolidate the claims under both relationships, whereupon arguments from one claim are sure to infect the reasoning under the other. It is unclear whether the guarantee was issued by the PRC branch of the Italian guarantor or by the head office in Italy. In the latter case, the court, if it were to refer to the URDG in this respect as well, would have been bound to relinquish jurisdiction in favour of the court of the place of business of the guarantor as provided in URDG 458 article 28 (and URDG 758 article 35). While the case report does not provide an answer on this point, we can only add that the court should not have given any weight to the fact that the guarantee text was appended to the underlying contract in deciding to consolidate the cases. Guarantee terms are often agreed between the parties to the underlying contract and memorialised in an appendix thereto. However, when the guarantee is later issued as an independent guarantee by a third party, the fact that its text was originally appended to the contract is clearly outweighed by the parties’ will to have a legally separate independent guarantee. In any event, this should have been the natural consequence of the court’s decision to uphold the URDG as implied terms in the guarantee.

5.6.6 Finland

(1) Helsinki District Court, 1st division, 25 March 2010, No. 10/10610, case book No. 09/27536, District court ⁸⁸

654 The case arose in the matter of a performance guarantee issued by a German bank in favour of a Finnish buyer of an industrial plant. The guarantee provided “…we, the undersigned bank, hereby unconditionally and irrevocably guarantee to pay you any amount not exceeding EUR [X] on your first written demand notwithstanding any contestation by the [applicant] or by ourselves, should you declare in your demand the [applicant] to be in default under the Contract”. It was stipulated to be subject to URDG 458 and governed by the laws of Finland.

655 One day before the expiry of the guarantee, the beneficiary presented a demand to the guarantor stating that “[w]e hereby declare that the [applicant] is in default under the Contract concerning the Performance obligations. This is our claim under the Guarantee to pay us the amount of EUR [Y]”. Four days later, the guarantor informed the beneficiary that it rejected the demand on the grounds that it did not contain a statement

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stating the respect in which the principal was in breach as required by article 20(a)(ii) of URDG 458. The guarantor also referred to article 9 of URDG 458 according to which it has the duty to examine the demand and refuse it in case it does not conform to the terms of the guarantee, including the URDG.

656 The beneficiary initiated court proceedings against the guarantor claiming that the guarantor had no grounds to refuse the payment. The beneficiary argued that according to the principles of Finnish contract law, the express terms of the guarantee should be given priority over the rules of the URDG. While article 20(a)(ii) of URDG 458 indeed required the beneficiary’s statement to state the respect in which the principal is in breach, the guarantee itself did not so require. It only required the statement to indicate that the principal is in breach under the contract, which represents the requirement under article 20(a)(i) of URDG 458. Accordingly, the beneficiary submitted, article 20(a)(ii) of URDG 458 should be deemed to be excluded by the terms of the guarantee. The beneficiary claimed in the alternative that its demand did comply with article 20(a)(ii) of URDG 458 when stating that the principal was in default “concerning the performance obligations”. Finally, the beneficiary claimed that the principal was aware of the dispute in the underlying contract which, therefore, need not be further particularised in the statement of breach.

657 The District Court dismissed the beneficiary’s claim and upheld the guarantor’s rejection of the demand which did not comply with article 20(a) (ii). The court noted that the guarantee expressly incorporated the URDG and did not indicate any particular priority between the rules of the URDG and the terms of the guarantee. If the parties had intended the guarantor to comply only with the terms of the guarantee, the court reasoned, it would not have been sensible for them to refer to the URDG. The court emphasised that the URDG are well-known to businesses in international trade which, in fact, have themselves drafted the rules. Thus, the contents of the URDG could not have come as a surprise to the beneficiary and both the terms of the guarantee and the rules of the URDG are equally applicable to the case.

658 Referring to Article 20(c) of URDG 458 which stipulates that article 20(a) applies unless it has been expressly excluded by the terms of the guarantee, the court noted that no such exclusion is stipulated in the guarantee. Accordingly, the two-tier statement of article 20(a) needs to be complied with in its entirety for the demand to be a complying demand. The court rejected the beneficiary’s contention that its demand stating “the [applicant] is in default under the Contract concerning the Performance obligations” complies with the requirements of article 20(a)(ii) of the URDG. For the beneficiary’s demand to comply, it needs to state the respect in which the principal is in default concerning the performance obligations.

659 As to whether the applicant’s possible awareness of the dispute between the parties to the underlying contract has an impact on the guarantor’s payment duty under a demand guarantee where a complying demand is presented, the court rightly referred to article 2 of URDG 458 and the principle of

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independence therein stated. It ruled that the principle of “pay now, dispute later” is the linchpin of the independence of guarantees. Whether or not the applicant is aware of a dispute in the underlying contract has no impact on the guarantor’s obligation under the guarantee.

660 Authors’ comment: The District Court’s judgment is a strict and an excellent application of article 20(a) of URDG 458. It also finds support in the ICC Banking Commission’s opinion 470/TA.454rev. rendered on 14 June 2000. The Court’s enforcement of article 20(a) in accordance with its terms underscores the authority of the rules and takes away any doubt as to the enforceability of the statement requirement under article 20, whether or not it is explicitly copied in the guarantee itself. The rationale of the decision also applies to the statement requirement under article 15 of new URDG 758.

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