"A guarantee should be complete in all respects"

by N.D. George (CDCS Distinction)

I read with interest the Insight interview with Professor Sir Roy Goode in the DCInsight January - March 2009 issue entitled "The main issues in the URDG revision". The interview was very informative, as it enabled readers to take a peek at the things to come. While mostly welcome changes seem to be in the offing, I am deeply concerned about one aspect of the new URDG that Sir Roy mentioned.

The question DCInsight posed to him was: "The old article 20 of the present URDG 458 was perhaps the most controversial in that a demand for payment required a written statement that the principal was in breach and stating the manner in which it was in breach. Do you believe that present drafting in the revision will alleviate that controversy?"

What worries me was Sir Roy's response, as follows:

Goode: "I think that most people now accept the concept of a statement of breach and the respect in which there has been a breach. That is not a view universally held, but a great majority of the responses that we have had so far seem to indicate the acceptance of it. The comments we have received indicate that most ICC national committees accept the text of what is now [article 15]. If banks are concerned - and there are one or two jurisdictions where the courts may say that their law requires conditions to appear on the face of the guarantee - then the remedy for banks is quite simple, and that is to incorporate the actual requirements of article 15 into their guarantee forms and the problem disappears."

To put it simply, the above statement means that a beneficiary must present a statement of breach even if this is not stipulated in the guarantee. This is similar to saying that if a letter of credit lists five documents, the beneficiary is required to present an unlisted sixth document as well to receive payment! For documentary credit practitioners (who, in most banks, are also entrusted with handling guarantees), this position defies logic and reason. One would be excused for being blunt by asking the Drafting Group: "Why are they trying to hide such a requirement in the rules? Why are they choosing to sacrifice transparency by not stipulating that the documents and conditions required to trigger payment must be stipulated in an unambiguous manner within the text of the guarantee?"


Assuming the Drafting Group prevails and retains the requirement in article 15 of the new URDG, what are the implications for URDG practitioners, the trade finance staff in banks, the staff of the applicant and beneficiary? These individuals need to be aware that there is a trap, and that the uninitiated may trip over it. The problem is that lessons may be learned only after tripping over it and, if one is lucky, the amount involved will not be large.

The banking community is fast losing traditional bankers of the pre-IT era whose mindset was different from that of the present generation. If there were provisions in rules that had the potential to go unnoticed or to be misconstrued, older generation bankers made it a point to master them. But new rules should not be written for the older generation, nor should they be written by lawyers for lawyers. They should be written for the staff of banks and for applicants and beneficiaries, who, for the most part, are unlikely to have a law degree or the inclination to think as lawyers. The present generation needs transparent, easy to understand and easy to implement rules.

The new URDG should force the issuer of the guarantee to state the conditions and documents required to trigger payment. On a stand-alone basis, a guarantee should be complete in all respects. If one of the documents required is hidden within the rules and not stated in the guarantee, the guarantee loses its standalone and transparent nature. The purpose of the rules should be to guide practitioners about the application of best practices in their day-to-day work and to serve as a fall-back resource in case something mentioned within the text of guarantee requires interpretation.

Widespread use

One of the aims of the revision is to make the URDG a widely used set of rules, a distinction its predecessor unfortunately failed to achieve. The decision of the Drafting Group to retain the requirement of a statement of breach as one of the required documents to be presented with any claim, even if such a statement is not required in the guarantee, will not make the URDG more popular. Let me explain by using the following example of a guarantee received by a beneficiary:

Suppose the beneficiary presents a demand reading: "We hereby demand payment of EUR 100,000 under your guarantee No... dated ..." and also attaches the above listed documents on 30 June 2009 i.e., on the date of expiry of the guarantee. Suppose a statement of breach is not presented. Then one of the following actions could follow:

- the issuing bank pays, or

- the issuing bank refuses payment.

Something like the following scenario could ensue in each case.

If the issuing bank pays

Suppose the issuing bank pays when the applicant was in no mood to pay and was trying to wriggle out of the guarantee. The issuing bank could say that the documents were complying and hence it paid. The applicant might then check the documents and appear to agree with the bank, as it had asked for a demand and two other documents, and all three had been presented. But if the applicant was not yet ready to accept this outcome, it might approach a lawyer, who, in going through the guarantee, would find this statement: "This guarantee is subject to URDG Revision 2009, ICC Publication No ... ." The lawyer might ask the applicant: "What is URDG"? The applicant could then reply: "They are the rules that banks apply to guarantees." The lawyer might then ask to see a copy of the rules, which the applicant could obtain from his bank (possibly the first time it will have actually seen the URDG and even then might not bother to read it before delivering it to the lawyer). The lawyer might then do what he/she is trained to do - read the rules word by word. The lawyer could chance upon article 15, which states that in all cases a statement of breach must be presented. Something like the following conversation might then take place between the lawyer and applicant:

Lawyer: "Where is the statement of breach?"

Applicant: "What is a statement of breach?"

Lawyer: "The beneficiary is required to present it."

Applicant: "But I did not ask for it!"

Lawyer: "It does not matter; the rules say that it should be presented."

Applicant: "But the beneficiary presented a demand. Was that not sufficient?"

Lawyer: "What did they state in the demand?"

Applicant: "We hereby demand payment of EUR 100, 000 under your guarantee No. ... dated ..."

Lawyer: "The beneficiary did not state that the applicant is in breach and did not specify the manner in which it is in breach."

Applicant: "Is it not obvious as the claim is made after the scheduled date for completion of the contract as mentioned in the Project Consultant's certificate?"

Lawyer: "No, not when the applicant did not want the guarantee called. For the claim to be valid, the beneficiary should have mentioned in the claim itself or submitted a separate declaration stating that it had asked the applicant for payment and that the applicant had committed a breach by not making payment. Go to the bank and tell them that it honoured a claim that was discrepant and ask for refund of moneys debited to your account."

For this applicant, engaging a lawyer will have been worth every penny, for the applicant could then storm into the bank, throw the documents on the desk of the bank clerk and ask him/her to reverse the debit to his account. If the stunned clerk asks "Why?", the applicant could reply: "Where is the statement of breach?" The clerk might ask: "What is a statement of breach?" And so on.

The bank clerk will have been stung and have learned a lesson which he/she will never forget. The applicant will have also learned a lesson and will probably continue conveniently not to ask for a statement of breach in his guarantee applications, hoping that either the beneficiary or the bank will trip up and that there will always be an exit route open, just in case.

If the issuing bank refuses to pay

Remember that the beneficiary made the presentation on the expiry date. Around two days or so after that date, suppose it receives a refusal message from the issuing bank, stating this discrepancy: "Statement of breach was not presented." Perplexed, the beneficiary might call up the issuing bank to ask why such a statement is required, since the guarantee did not ask for it. The issuing bank could then direct the beneficiary to URDG article 15. Reacting, the beneficiary could then present a statement of breach. But the issuing bank could promptly send another refusal message: "Statement of breach presented after expiry of the guarantee." This time it's the beneficiary who has been stung. It soon develops an aversion to the URDG.


I am reminded of article 32 in UCP 600, which is nothing but a trap for the uninitiated (see my article in DCInsight Vol. 13 No. 1 January-March 2007 issue). Although that article existed in the previous UCP and the ones before it, its carry over into UCP 600 was thoughtless, in my opinion, and it has diminished UCP 600's claim to be a user-friendly document. I very much hope that the URDG Drafting Group will re-think the issue of statement of breach and be convinced that the interest of users will not be served by rules requiring presentation of documents that are not stated in the guarantee, i.e., if a statement of breach is needed, the responsibility to ask for it should be shifted to the applicant. If the internal procedure of an issuing bank requires that all of its guarantees should always call for it, it should be the responsibility of the issuing bank to agree with the applicant on its inclusion. The beneficiary should not be burdened with having to produce anything more than that which is stipulated in the guarantee.

N. D. George is a Vice President at Arab Banking Corporation, BSC, Kingdom of Bahrain where he heads Loans and Trade Finance Operations. His e-mail is The views expressed in this article are the author's and do not necessarily represent those of Arab Banking Corporation, which accepts no liability for them.

"Why should his particular requirement be singled out for mention in the guarantee?"

by Sir Roy Goode

In answer to N.D. George's comments concerning what is now article 15 of the latest draft of the revised URDG, it is worth recalling that the requirement for presentation of a statement of breach and the broad nature of the breach is not new; it has been in the URDG from the very beginning. When the URDG were being finalized in 1991 after several years of debate, particular attention was paid to article 20, which embodies the statement of breach requirements. It was felt that whilst it was important to protect the interests of the beneficiary, some safeguard against an unfair calling of a guarantee was needed. The measure introduced was of a relatively light nature. It was the beneficiary itself who would present the statement, and the bank issuing the guarantee would be concerned only to ensure that the statement was presented, not to enquire into its truth or accuracy.

After extensive consultations, the URDG, including article 20, were approved at meetings of the Commission on International Commercial Practice and the Commission on Banking Technique and Practice without a single dissent. So this is very well-trodden ground. Those who have utilized the URDG have not found that it has caused problems, and statements of breach have been furnished even when not required by the guarantee. The responses from national committees indicate widespread acceptance of the statement of breach requirements, with very few dissents.

N.D. George suggests that all the requirements for a proper presentation should be set out in the guarantee itself. But the whole point of incorporating uniform rules into the guarantee document is to avoid having to set them out in extenso. The statement of breach is only one of several requirements for a proper presentation, so one may ask why this particular requirement should be singled out for mention in the guarantee.

In any event, the problem is more academic than real. If a bank is concerned about the issue, all it has to do is to set out the requirements of article 15 in its guarantee. The ICC's own model forms for issuing demand guarantees do precisely that.

I would only add that article 15, whilst reproducing the substance of the old article 20, is still more flexible in its approach. In particular, the new rule makes it clear that it is unnecessary to have two statements, a statement that the applicant is in breach and a statement of the respect in which the applicant is in breach; the latter statement is sufficient by itself. Moreover, the statement of breach need no longer be contained in or accompany the demand; it may be furnished later.

Professor Sir Roy Goode is Emeritus Professor of Law in the University of Oxford and Emeritus Fellow of St John's College, Oxford. His is a member of the URDG Drafting Group and a former Chairman of the ICC Commission on Commercial Law and Practice. His e-mail is