Article

by Georges Affaki

By the time this issue of DCInsight reaches its readers, ICC national committees will have held caucuses to go through the fourth comprehensive draft of the revised URDG with a view to compiling a set of comments representing the views of their constituents.

The fourth draft brings together comments received from 43 national committees plus observations made by ICC members and observers during the article-by-article discussion sessions that the Banking Commission and the Commercial Law and Practice Commission (CLP) each conducted earlier this year in Dubai and Helsinki respectively. As always, the Task Force on Guarantees - the ICC expert body on guarantees - has reviewed and commented extensively on the draft before its release. The URDG revision process has been highly representative, both from a geographical and a sectoral standpoint.

This on-going revision of URDG 458 will not be a mere updating of the rules. Rather, it is the result of an ambitious process that seeks to bring into the 21st century rules that are clearer, more precise and more comprehensive. The new rules will offer the most reasonable balance of the parties' interests and innovate in ways not yet covered in any other set of ICC rules.

Clearer

The new URDG adopt the UCP drafting style in bringing together definitions in a distinct article (article 2). Rules of interpretation follow (article 3). The other provisions of the draft appear in the order of the key stages in the life cycle of the demand guarantee: its independent nature, instructions, issuance, amendments, presentations, demands, post-payment duties, liability and disclaimers, assignment, applicable law and jurisdiction. Particularly important is the new concept of "complying presentation", which clarifies the process according to which a presentation will be checked for conformity.

The first stop in determining conformity will always be the terms of the guarantee itself. The rules to the extent they are not varied in the guarantee come next. It is only in the absence of a relevant term in the guarantee or the rules that the conformity of a presentation will be assessed against international standard demand guarantee practice. A novel concept in the URDG, international standard demand guarantee practice is a gap-filler needed because no guarantee or rules can ever address all conceivable situations. When construing a guarantee, courts guided by this new standard are expected to prefer international practices to local ones. Any other approach would defeat the purpose of the URDG, which seek to level the playing field between parties of different countries by elevating the standardization of demand guarantees to one that transcends local practices.

More precise

The current URDG 458 are user-friendly in their size and style. No doubt this was instrumental in their growing acceptance that culminated in their adoption by the World Bank and FIDIC. Nonetheless, they contained some standards that left a margin for interpretation that often varied according to the particular facts of the case. This is particularly the case for the standard of "reasonable time" in URDG 458 articles 10 and 26. The new URDG opt for more precise parameters. For example, a demand has to be examined in no more than five business days (article 20). Force majeure triggers an extension of the guarantee for 30 days (article 28). A complying extend or pay demand allows the guarantor to suspend payment for a maximum of 20 business days (article 31). All imprecise standards have been removed from the revised rules to foster certainty and predictability.

More comprehensive

Important practices were left out of the scope of the current URDG 458. This is particularly the case for the advice of a guarantee, amendments, standards for examination of presentations, partial and multiple demands, linkage of documents, incomplete demands and transfer of guarantees. What was understandable for a first attempt at codifying demand guarantees can no longer be justified 18 years later. The new URDG now cover all of those practices.

Balanced

The new URDG endorse the balanced approach characteristic of URDG 458 and add to it new components that result from observing URDG practice and receiving comments from all over the world. In a nutshell:

- The beneficiary is entitled to payment upon presentation of a complying demand without the need to seek the applicant's approval. This is the linchpin of the independent nature of the guarantee. Its absence in the ill-fated Uniform Rules for Contract Guarantees (325) led to those rules not being accepted in the marketplace. The new URDG also correct an unfair situation that would have left the beneficiary without recourse to the guarantee if its expiry coincided with the interruption of the guarantor's business as a result of force majeure. Unlike documentary credits where the beneficiary can have recourse against the issuing bank in case the confirming bank's business is interrupted, beneficiaries of guarantees have no relationship with the counter-guarantor. Hence, the unfairness to the beneficiary when force majeure strikes the guarantor's business at the expiry date. It was considered a fairer treatment to require the guarantee in that case to be extended for 30 days from its expiry (new article 28). In the vast majority of cases, this extension will allow the beneficiary to present a claim it had intended to present had it not been for force majeure.

- The guarantor's independent role is expressed in stronger and clearer terms and, more importantly, in exclusively documentary terms. Non-documentary conditions are deemed to be not stated (article 7), and the guarantor's duty is restricted to dealing with documents and not with goods, services or performance (article 6). The rules also uphold the guarantor's right to be indemnified against all obligations and responsibilities imposed by foreign laws and usages (article 29), the obvious example being local mandatory expiry terms that supersede those of the guarantee. Conversely, a guarantor that does not reject a non-complying demand within the five business day period by using a rejection notice that lists all of the discrepancies will be precluded from claiming that the demand is non-complying (article 23). Largely accepted in letter of credit practice, the preclusion sanction is necessary to discipline some unfair practices that work to the detriment of the beneficiary.

- The applicant/instructing party is expected to indemnify the guarantor for the consequences of carrying out its instructions for issuing a URDG guarantee. Conversely, the rules acknowledge the applicant's right to be informed about the occurrence of any of the key stages in the life cycle of the guarantee, though such information should not be a prerequisite for payment. Providing timely information often proves instrumental in enabling the parties to the underlying relationship to reach a compromise or to protect the applicant's rights to recourse against the beneficiary in case of an unfair call.

Innovative

The new URDG deal with the new issue - not covered previously - concerning when payment in the currency specified in the guarantee becomes impossible, either because of a supervening illegality or because the currency becomes temporarily or permanently unavailable. The substitution of currencies solution offered in article 21 is in line with the principles of international monetary law and is expected to avoid protracted litigation.

The new URDG also address the situation occurring when the guarantee states neither an expiry date nor an expiry event. In such a case, instead of leading to an open-ended undertaking, article 32 dictates termination after the lapse of three years from the date of issue. The Drafting Group considered extending the rule to also cover the case in which a guarantee provides for an expiry event that does not occur during the aforesaid three-year period, but eventually decided not to do so, given the need for long-term guarantees that reflect the performance schedule of some major work contracts.

Signs that the revision has reached a mature stage are very visible, one sign of which is that comments on the third draft substantially narrowed the issues under consideration to no more than 16 (of 35) articles, and two national committees have already said they would be voting for the draft! Interestingly, a banker informed the author that she has already changed her bank's guarantee format to include the 11 drafting recommendations featuring in article 8.

Next steps

The new URDG will be accompanied by a set of model guarantee and counter-guarantee forms. The new ICC Publication No. 758 will feature both the rules and the model forms. Experience shows that such a comprehensive ready-to-use package will be more attractive to users than the currently separate publications 458 and 503, and it will certainly be more conducive to a harmonized and sound guarantee practice. A guide to the new rules will also be drafted, with the objective of releasing it with the new rules.

Subject to a fine-tuning and the insertion of further comments received from national committees, it is reasonable to contemplate adoption of the new URDG 758 soon. The consultation round launched for the fourth draft should lead to a mature fifth draft that substantially surpasses in clarity, precision and comprehensiveness the current URDG 458 and, as such, will foster sounder guarantee practice and wider success for the URDG.

Dr Georges Affaki is a member of the Executive Committee and Head of Structured Finance, Corporate and Investment Banking, Legal Affairs at BNP Paribas in Paris.
He is Vice-Chair of the ICC Banking Commission and chairs the URDG Drafting Group.
His e-mail is georges.affaki@bnpparibas.com