The Business Case for the Revision of the URDG (approved on 26 April 2007)

Department of Policy and Business Practices

Commission on Banking Technique and Practice

Attached is the business case for the revision of the ICC’s Uniform Rules for Demand Guarantees (URDG), prepared by the Banking Commission’s Task Force on Guarantees. This document will be discussed at the Banking Commission meeting in Singapore, after which the Commission will be requested to give its approval for a revision of the URDG to begin.

– A report by the ICC Task force on Guarantees –

The ICC Task Force on Guarantees (the Task Force) is submitting this note to the ICC Banking Commission to explain the business case in the matter of the revision of the Uniform Rules for Demand Guarantees, ICC Publication 458 (URDG).

1 Executive Summary

The Task Force believes that the practice of the URDG worldwide has now reached a level of maturity that warrants a revision of the rules and the accompanying model forms. The objective of the revision would be to:

- address new market trends that have been identified since the URDG were drafted over two decades ago;

- provide clearer answers where the current rules were reported to give rise to ambiguity or misinterpretation;

- build on the solutions devised and implemented in UCP, ISP and the UN Convention; and

- align the next URDG with the drafting style of UCP 600.

The Task Force seeks the Commission’s approval to launch the revision of the URDG and the accompanying model forms. It believes that demand guarantees and counter-guarantees possess a significant potential waiting to be released. It submits that the revision will boost the potential of the URDG to move towards a wider worldwide application. The Task Force commits to make the revision broadly representative of the relevant sectors of trade and industry and to deploy its efforts to reach a successful completion of the work.

[Page477:]

2 Background Information

2.1

Jointly drafted by the ICC’s Banking Commission and its Commercial Law and Practice Commission over a period spanning 11 years, the URDG were adopted by the ICC Council in December 1991. They came into effect in April 1992. The Model Forms for Issuing Demand Guarantees (ICC Publication 503) were adopted in 1994.

2.2

From 1992 through 1999, reports are that only a negligible number of URDG guarantees and counter-guarantees were issued in Western Europe, Canada and Latin America. No reports were available from other regions. In particular, the rules were not used in major public works where State-owned beneficiaries often imposed stringent guarantee wording. ICC did not undertake a major promotion of the rules during that period.

2.3

In 1999, the Fédération Internationale des Ingénieurs Conseils (FIDIC), an organisation whose model construction contracts are used worldwide, moved to incorporate the URDG in all of its independent guarantee templates. In 2002, the World Bank incorporated the URDG in all its independent guarantee templates. The latter development prompted a noticeable increase in the number of URDG guarantees and counter- guarantees being issued in emerging markets. This was accompanied by an equal increase in the demand for URDG training and technical support.

2.4

After its Rome meeting of 19-21 October 2002, the Banking Commission responded by establishing a dedicated task force with the mission of monitoring international guarantee practice and specifically supporting and promoting the URDG.

2.5

The support of the Banking Commission and the commitment of the Task Force members brought more success to the URDG. Among the many tangible signs are the adoption by major banks in Europe of the URDG in their guarantee model forms as default rules; a rising number of queries for URDG Opinions; the issuance of URDG guarantees in an increasing number of countries in the Middle East once reputed for being bastions of stringent guarantee practices and the regular featuring of the URDG in trade finance seminars worldwide.

[Page478:]

3 Analysis

3.1

The justification for the undertaking of the revision

The success of the URDG has been steadily growing since the Banking Commission decided in 2000 to dedicate a special effort to promote them. Why then is a revision needed?

3.1.1

An obvious reason for a revision is the fact that the URDG were drafted in the eighties for a market that has since evolved. It is ICC’s consistent policy that its rules should reflect the actual state of market practice and the current legitimate aspirations of market users. While it is difficult to single out an article of the URDG as being completely contrary to current market practice, it is a fact that the drafting of many provisions lacks the degree of precision of recent revisions of ICC rules. Examples include URDG articles 2(d), 7(a), 10, 17, 20, 21, 25, 26 and 27, many of which have prompted queries to the Commission and all of which regularly feature amongst the questions raised in URDG seminars.

3.1.2

Since 2000, the Commission has approved eight URDG Opinions, the majority of which are unknown outside the limited circle of Commission members. It is only lately that URDG Opinions were included in the compilation of ICC Banking Commission Opinions. A revision is an opportunity to bring the Opinions into the new revised set, thus levelling the playing field for all URDG users.

3.1.3

Numerous seminars conducted by Task Force members throughout the world have provided a unique compilation of comments, experiences, criticisms and feedback on the rules. Many of these comments were accompanied by suggestions for drafting improvements. Using these comments and the experience of task force members, a revision would bring the rules more in line with the market’s needs and expectations and would enhance their efficiency.

3.1.4

While UCP and URDG were both products of the ICC Banking Commission, the URDG differ from UCP, and to a certain extent from other Commission- endorsed rules such as ISP, both with regard to substance and terminology. Obvious examples include the absence in the URDG of both a preclusion sanction and clear standards for the examination of documents. Further, ambiguous terms such as “reasonable time”, which were eliminated from the last revision of UCP, still persist in URDG. The recent revision of UCP has made this difference even more striking to the detriment of the coherence of the

[Page479:]

codification work done by the Banking Commission. A revision of the URDG would build on the experience and findings that resulted from the revision of the UCP and seek inspiration from the solutions devised in the ISP, thus bringing the rules closer to common phraseology and shared concepts.

To summarise, the Task Force submits that a revision is necessary to update the URDG in light of the evolution in the past twenty years of international guarantee practice and to align the next generation of rules with the needs and expectations of users.

3.2

Evaluating available options

No business case can be complete without identifying alternatives to the proposed project and assessing their realistic outcome in light of the targeted objectives. Alternatives to the revision include maintaining the rules as they now stand or launching a limited revision that would target only those provisions that have generated disputes or prompted queries. The Task Force submits that neither of these two options would achieve the desired objectives.

3.2.1

Keeping the status quo. The Task Force submits that rejecting the proposed revision will lead to a disaffection of the rules by the market as they fall gradually into obsolescence. Promoting rules drafted over two decades ago is contrary to ICC practice of revising rules to keep pace with changes in the market.

3.2.2

Agreeing to a limited revision. The Banking Commission could alternatively opt in favour of a limited revision that would only incorporate into the rules the eight URDG Opinions adopted so far. The Task Force submits that such a decision would be wrong for two reasons. First, experience shows that the cost of a limited revision involving setting up a dedicated revision group; devising and implementing the logistics of a revision; working through the national committees comments; changing banks’ internal processes to adapt to the new rules; and, finally, publishing and marketing the new rules is substantially similar to the cost of a full revision. Secondly, the recent UCP revision experience (and, indeed, the revision of any set of ICC rules) shows that the dynamics created by the revision process, including the constant interaction between the members of the revision group as well as with their constituencies, result in identifying new areas of improvements that ultimately prove beneficial to the project. There is no doubt that it is precisely for these reasons that ICC rules are regularly revised and that there is no precedent at ICC of any revision of rules approved on a limited scope basis.

The Task Force recommends the only rational choice for the way forward: a revision of the URDG without preconceived limitations other than the objective of ensuring enhanced clarity, comprehensiveness and efficiency.

[Page480:]

3.3

The objective

The objective of the proposed revision is to produce a new set of rules that are:

- more comprehensive in covering areas of guarantee practice that are not covered today by the existing rules. Examples include non-documentary conditions, effectiveness of amendments, rejection of a non-complying demand, a possible preclusion rule, instalment guarantees, partial demands, the language of the documents accompanying a demand and the expiry of a guarantee that provides no expiry terms.

- more specific in providing precise solutions for the issues addressed in the rules, including partial rejections and standards for the examination of a demand. Compiling definitions that are currently spread out in the rules would contribute towards achieving this objective.

- clearer in crafting a new phraseology that addresses what may have been reported in the past as an ambiguity or given rise to a misinterpretation. An example is the interaction between articles 20(a)(i) and (ii), as well as between articles 10 and 21, the application of the rules to counter- guarantees and what constitutes a “writing”.

The Task Force submits that these objectives are achievable. Task Force members have acquired, collectively, a considerable expertise through years of applying the URDG in their organisations and promoting the rules with their customers and correspondents. They have also a considerable logistical experience in revision processes as a result of their participation in revisions of other ICC rules.

3.4

Expected benefits and costs

A revised set of rules that is more comprehensive, precise, up-to-date and clearer will boost the potential for the URDG to exceed the rules’ current degree of acceptance and progress towards wider worldwide acceptance.

Like any revision, the revision of the URDG will require guarantors to adapt their internal systems and invest in large-scale training efforts. The Task Force submits that those costs are largely offset by the expected benefits of having widely accepted rules for demand guarantees and counter-guarantees. Those benefits are twofold. First, uniform guarantee rules that are widely accepted would save substantial negotiation and drafting time and costs. Secondly, such rules can be expected to reduce the number of disputes that still plague international guarantee practice. Fraud apart, the majority of guarantee-related litigation revolves around the nature and the attributes of a demand guarantee. Determining whether a guarantee is accessory or independent, when a demand is timely made, or when an extend or pay demand constitutes a demand for payment, regularly feature in the guarantee litigation on court dockets. All of those topics can be addressed in the URDG to promote a better understanding of demand guarantees that would transcend geographical, sectorial and cultural boundaries.

[Page481:]

4. Implementation strategy

The Task Force outlines below its proposal for a management and governance structure for the revision; scheduled milestones and key deliverables; monitoring and reporting and communication strategy.

4.1

Structure of the revision

4.1.1

The Task Force believes that the revision structure of UCP 500 is a model to emulate. It recommends that the revision of the URDG follow a similar model, consisting of a two-tier structure:

- a drafting group comprising a small number of experts to be chosen by the Task Force amongst its members and other ICC members with the relevant expertise; and

- a larger consulting group which would consist of the current members of the Task Force to whom observers can be added as necessary.

4.1.2

The revision process should be seen as an opportunity to bring together the relevant sectorial and geographical expertise. To this end, the Task Force will open its meetings to observers from other ICC Commissions, including Commercial Law and Practice and Financial Services and Insurance, as well as to representatives of FIDIC and the World Bank. It will also ensure that the successive revision drafts are submitted to the relevant international organisations and professional federations for comments.

4.2

Time line

The Task Force is determined that the revision of the URDG will proceed on a fast-track basis. It will seek to produce a first comprehensive draft and submit it to the Commission and the national committees for comments within 18 months after it receives the go-ahead.

4.3

Monitoring and reporting

The Task Force will follow the customary revision process and submit a progress report to each meeting of the Commission. It will also seek the Commission’s guidance and direction in case of any difficulty.

4.4

Communication strategy

The Task Force will seek the assistance of the ICC secretariat in devising and implementing an appropriate communication strategy similar to the one that accompanied the revision of UCP.

[Page482:]

4.5

Logistical Needs

The Task Force will need ICC secretariat support and the customary IT services for the duration of its mandate for the revision.

5. Recommendation

In summary, it is the Task Force’s unanimous opinion that revising the URDG is necessary and timely. It therefore recommends that the Commission approve the launch of the revision and entrust it with the task of leading the project. The Task Force pledges its commitment to lead the revision project to a successful outcome