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The URDG in the world

The URDG in various languages

635. Today, the URDG exist in 21 languages:¹⁰¹

• Arabic

• Chinese (Mandarin)

• Croatian/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.

The URDG and other ICC Rules

636. The URDG are not the only rules designed to harmonize international demand guarantee practice. Four other sets of rules also adopted by ICC could be perceived as having a similar objective. These rules are:

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

• the Uniform Rules for Contract Bonds (URCB);

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

• the International Standby Practices (ISP98).

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.

The UCP and demand guarantees

637. 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 Commission.¹⁰²

638. 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 of small and medium-sized banks and businesses to align the drafting style of the 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”, whose assessment depended on the particular circumstances of the case at hand and, as such, was considered too unpredictable.

639. 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 on: 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

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term in the undertaking or the rules, towards using international standard practice in the field of demand guarantees or documentary credits.

640. 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 be utilized 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, URDG 758 differ from UCP 600 in the following ways:

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The URCB and demand guarantees

641. 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.

642. 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.

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The URCG and demand guarantees

643. The Uniform Rules for Contract Guarantees (URCG), ICC Pub. No. 325, adopted in 1978, were presented earlier in this Guide (see paragraph 45 above). 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 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.

644. Today, the URCG no longer feature in 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 URDG 758.

ISP98 and demand guarantees

645. During the revision of the URDG, ISP98 were a constant source of reference, along with UCP 600 and the UN Convention on Independent Guarantees and Stand-by Letters of Credit, for the URDG Drafting Group. The reason for this 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.

646. Issuers and users should carefully scrutinize 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.

Similarities between URDG 758 and ISP98

647. 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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Differences between URDG 758 and ISP98

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648. 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 rule 1.11 of the ISP:

“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”.

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649. 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.

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.

The second example is the requirement in rule 4.09(c) that the demand repeat any typographical errors (e.g. “standby”) 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.

650. 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.

651. The URDG follow a different 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 formalize in their agreement, if they wish, or to the applicable law.

652. 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 selecting the set of rules that best suits their needs. In one highly schematic example, a third- party independent undertaking that is planned to be issued 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 the ISP. Conversely, 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.

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Again, the parties’ best choice is an informed decision that is adopted in advance and complied with in full.

The URDG and the UN Convention on Independent Guarantees and Stand-by Letters of Credit

653. The United Nations Commission on International Trade Law (UNCITRAL) 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 was also signed (though not ratified) by the United States on 11 December 1997.

654. 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.

The interaction of the URDG with the UN Convention

655. 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.

The provisions of the UN Convention and the URDG are compatible

656. Like the URDG, the UN Convention applies to irrevocable, independent and exclusively documentary undertakings, but not to accessory suretyships. Moreover, the URDG and the UN Convention contain 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.

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The URDG supersede the UN Convention

657. 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.

658. 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.¹⁰³

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.

659. Moreover, in the case of seemingly contradicting solutions, the URDG rules supersede the conflicting UN Convention provisions (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 article 20(a) of the URDG 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 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.¹⁰⁴

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The UN Convention supplements the URDG

660. In states that have ratified it, the UN Convention overrides any inconsistent provisions of the demand guarantee, for example provisions dealing with unfair demands or providing for provisional or protective measures.

661. 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:

1. Any document is not genuine or has been falsified;
2. No payment is due on the basis asserted in the demand and the supporting documents; or
3. 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:

1. The contingency or risk against which the undertaking was designed to secure the beneficiary has undoubtedly not materialized;
2. 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;
3. The underlying obligation has undoubtedly been fulfilled to the satisfaction of the beneficiary;
4. Fulfilment of the underlying obligation has clearly been prevented by wilful misconduct of the beneficiary;
5. 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.

(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.

662. 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:

1. 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
2. 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

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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.

663. The compatibility and the complementarity of the URDG and the UN Convention prompted UNCITRAL to endorse the URDG at its 44th session (27 June–8 July 2011) by adopting the following decision:

“The United Nations Commission on International Trade Law,

Expressing its appreciation to the International Chamber of Commerce for transmitting to it the revised text of the Uniform Rules for Demand Guarantees, which was approved by the Executive Board of the International Chamber of Commerce on 3 December 2009, with effect from 1 July 2010,

Congratulating the International Chamber of Commerce on having made a further contribution to the facilitation of international trade by making its rules on demand guarantees clearer, more precise and more comprehensive while including innovative features reflecting recent practices,

Noting that the Uniform Rules for Demand Guarantees constitute a valuable contribution to the facilitation of international trade, Commends the use of the 2010 revision of the Uniform Rules for Demand Guarantees, as appropriate, in transactions involving demand guarantees.”

664. The compatibility and the complementarity of the URDG and the UN Convention also led ICC to reciprocally endorse the UN Convention on 21 June 1999.

665. At its 55th session (27 June–15 July 2022), UNCITRAL adopted by consensus the following decision endorsing the ISDGP:

“The United Nations Commission on International Trade Law,

Recalling the general mandate received from the General Assembly, through resolution 2205 (XXI) of 17 December 1966, to further the progressive harmonization and unification of the law of international trade,

Recalling specifically its mandate to coordinate the work of organizations active in this field and to encourage cooperation among them, as well as its mandate to prepare or promote the adoption of new international conventions, model laws and uniform laws and to promote the codification and wider acceptance of international trade terms, provisions, customs and practices, in collaboration, where appropriate, with the organizations operating in this field,

Noting the approval by the Banking Commission of the International Chamber of Commerce, on 31 March 2021, of the International Standard Demand Guarantee Practice for URDG 758, as a companion document to the International Chamber of Commerce Uniform Rules for Demand Guarantees (URDG) 758:

1. Congratulates the International Chamber of Commerce on having made a further valuable contribution to the facilitation of international trade by compiling best practice when applying URDG 758 and offering guidance as to

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how rules and practices codified in URDG 758 are to be applied regardless of the applicable law;

2. Commends the use of the International Standard Demand Guarantee Practice for URDG 758, as appropriate, in conjunction with URDG 758.

The URDG as a model for national laws

The OHADA Uniform Act on Secured Transactions

666. 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.

667. 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 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 of the Act and its corresponding source in URDG 758.¹⁰⁵

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The URDG as a model for other organizations’ standard guarantee forms

FIDIC

668. 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 standard forms for independent guarantees. The new Conditions of Contract for Construction (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; and

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• an Example Form of Payment Guarantee by Employer, all of which incorporate the URDG.

669. 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.

670. 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.

The World Bank

671. Through its specialized 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 Form and the Bank Guarantee Form for Advance Payment. This step benefitted 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.

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