Article

by Professor Sir Roy Goode

The current ICC Uniform Rules for Demand Guarantees (URDG 458) were produced by a Joint Working Party of ICC's Commission on International Commercial Practice (now the Commission on Commercial Law and Practice, or CLP) and the Banking Commission. They were finalized by a Drafting Group under my own chairmanship. Published just under 18 years ago, URDG 458 were slow to take off, but over the years gained increasing acceptance, due in no small measure to their promotion by a Task Force established by the Banking Commission under the dynamic leadership of Dr Georges Affaki of BNP Paribas. They were adopted early on by the International Federation of Consulting Engineers (FIDIC) and later by the World Bank, both of which incorporated them into their forms for demand guarantees. They also received the approval of the United Nations Commission for International Trade Law (UNCITRAL).

The Organization for Harmonization of Business Law in Africa (OHADA), an organization of some 16 west and central African States, incorporated the URDG into its 1997 Uniform Act on Guarantees. The rules have also been held to be compliant with Shari'a law. A substantial volume of business is now conducted under the rules.

URDG 458, which replaced the 1978 rules in ICC Publication No. 325, constituted the first set of rules truly responsive to market practice. They have served their purpose well. But with the passage of time it became increasingly clear that a substantial revision was required in order to reflect modern banking practice and commercial needs, to fill significant omissions from the text and to accommodate future developments in international commercial usage. So the Banking Commission and the CLP again joined forces to revise URDG 458.

Intensive work

The revision, URDG 758, is the result of two and a half years of intensive work by the Drafting Group. Prepared in consultation with ICC national committees, URDG 758, apart from one abstention, were approved unanimously by the two Commissions at their meetings in Brussels in November 2009 and formally adopted by the ICC Executive Board in December. In the words of ICC Secretary General Jean Rozwadowski:

"This collective effort has borne fruit, as it has produced rules that reflect a broad consensus among bankers, users and all members of the guarantee community. It is the result of an ambitious project to create a new set of rules for the 21st century that is clearer, more precise, and more comprehensive, offering the fairest balance yet between the parties' competing interests and doing so in innovative ways."

The new rules come into force on 1 July 2010 and apply to all demand guarantees issued on or after that date which do not state that they are to be governed by the 1992 version.

Key changes: definitions

A good deal of thought went into the definitions, which are now considerably expanded. The word "principal" is replaced by "applicant" so as to be aligned with the terminology in UCP 600. The term "instructing party", which in URDG 458 denotes a counter-guarantor, now has a different meaning. A counterguarantor is described as such, whilst the instructing party denotes the party, other than a counter-guarantor, that gives instructions for the issue of the guarantee. In many cases this will be the applicant. However, frequently the instructions for the issue of a guarantee come, for example, from the applicant's parent company, that being the party to which the guarantor will look for reimbursement. In this situation, the rules refer to the instructing party when directed to the relationship relevant to the right of reimbursement and to the applicant when directed to the relation ship with the beneficiary arising from the underlying contract.

Other significant new definitions include "authenticated" when applied to an electronic document; "guarantor's own records" (relevant to article 7 and subarticle 13 (b); "signed"; and "complying presentation", which requires reference, first, to the terms of the guarantee, second, to the rules, and third, in the absence of a relevant provision in the guarantee or the rules, to international standard demand guarantee practice. This last is a gap-filler, for there will inevitably be situations not covered by either the guarantee or the rules. It is true that at present it may be difficult to identify international standard demand guarantee practice outside the rules, but this is likely to evolve in the future, as it has for documentary credits, giving rise to the ICC's International Standard Banking Practice (ISBP 645, revised as ISBP 681) relating to the examination of documents under documentary credits.

Counter-guarantees

URDG 458 dealt with counter-guarantees in a rather fragmentary way; in URDG 758 they are covered comprehensively. Various rules contain provisions specific to counter-guarantees, for example the rules on the independence of the counter-guarantee from the guarantee (article 5), the requirements for a demand (article 15), extend or pay demands (article 23) and force majeure (article 26). Other rules apply to counter-guarantees by virtue of the rule of interpretation that, except where the context otherwise requires, a guarantee includes a counter-guarantee (article 3). To make it clear that chain counter-guarantees are also within the rules, the definition of counter-guarantee (article 2) refers to its being given to "another party" instead of being confined to a counter-guarantee given to the guarantor.

Sub-article 1 (b) provides that where, at the request or with the agreement of a counter-guarantor, a demand guarantee is issued subject to the URDG, the counter-guarantee is also governed by the URDG unless it excludes them. This rule is important in order to avoid a situation in which the guarantor, having complied with instructions to issue a guarantee subject to the URDG, is unable to resort to the same rules when claiming under the counter-guarantee. But incorporation of the rules into the counter-guarantor does not, by itself, subject the guarantee to the rules.

Acceptance by instructing party

Under sub-article 1(c), when, at the request or with the agreement of the instructing party, a demand guarantee or counter-guarantee is issued subject to the URDG, the instructing party is deemed to have accepted the rights and obligations expressly ascribed to it in the rules. This provision originally came in for criticism for seeking to govern the relationship between the guarantor and the instructing party which, it was felt, was a matter for agreement between them and not for the rules. However, this was based on a misconception. The purpose of sub-article 1 (c) is not to regulate relations between the guarantor and the instructing party, but simply to ensure that those rules which confer rights or impose obligations on the instructing party are effective, which might not be the case if they were not contractually incorporated. Examples of such rules are to be found in article 5 (independence of the guarantee and counter-guarantee), article 11 (amendments), article 21 (currency of payment), and article 26 (force majeure).

Requirements for demand

These requirements have been simplified to make explicit what was previously implicit, that if the nature of the breach has been stated, it is not also necessary to state separately that there has been a breach. They also allow a statement of breach to follow rather than to be incorpo rated in or to accompany the demand (article 15).

Extend or pay demands

The principal change regarding extend or pay is to make it clear that on presen tation of an extend or pay demand the guarantor may suspend payment for up to 30 days but is not obliged to do so.

There are three reasons for this change:

- first, if the beneficiary chooses to make a demand coupled with a request for an extension, he cannot complain if the bank pays the demand;

- second, in an extend or pay situation it is not infrequently the case that the instructing party is in some financial difficulty, so that the guarantor ought to be able to pay and have recourse to the instructing party while funds are still available; and

- third, the guarantor is always entitled to refuse to grant an extension even if this has been agreed between applicant and beneficiary, and if the guarantor has decided at the outset that it will not grant an extension, it is pointless to encourage the parties to negotiate one.

Force majeure

An important new provision regarding force majeure steers an intermediate course between UCP 600 and ISP98. Under article 36 of UCP 600, if an event of force majeure prevents presentation by the beneficiary, and the credit expires before the cessation of the force majeure, the credit will not be honoured. For demand guarantees this was felt to be too draconian since, if the beneficiary seeks to present the demand a day before expiry and is precluded from so doing by force majeure which ceases a day after expiry, the beneficiary is deprived of all benefit under the guarantee. In the case of demand guarantees, such a rule affects, not only the primary beneficiary, but also a guarantor who pays under the guarantee and is then unable to make a presentation under the counter-guarantee.

Rule 3.14 of ISP98 goes to the other extreme, extending the time for presentation until 30 days after the place for presentation re-opens for business. This was felt to be too open-ended; it could have the effect of extending the guarantee for several months. Consequently, article 26 of URDG 758 takes a middle position, providing a strictly limited extension of the guarantee.

The effect of force majeure on the guarantor depends on whether it prevents presentation, examination after presentation or payment after examination.

1. Prevention of presentation If presentation is prevented by force majeure, the guarantee and the counterguarantee are each extended by 30 calendar days.

2. Prevention of examination of documents presented prior to expiry In this case, the running of time is suspended until resumption of the guarantor's business. The time generally allowed for examination is five business days (sub-article 20 (a)). Therefore, if three business days had already elapsed between the time of force majeure and the time of presentation and the examination had not been completed by then, the guarantor has two further business days after resumption of business to complete the examination.

3. Prevention of payment after examination of complying demand Payment must be made on cessation of the force majeure.

The same rules apply to the effects of force majeure on the counter-guarantor, except that the 30-day extension of the counter-guarantee runs from the time the counter-guarantor informs the guarantor of the cessation of force majeure, not from the time the counter-guarantee would otherwise have expired.

Transfer of guarantee and assignment of proceeds

URDG 758 now incorporates rules on the transfer of guarantees and the assignment of proceeds. A guarantee may be transferred only if it is expressed to be transferable, and even then the guarantor may refuse a transfer request made after issue of the guarantee unless it has expressly consented to do so (sub-articles 33 (a) and (b)). Moreover, the transferor must provide a signed statement to the guarantor that the transferee has acquired the transfer or's rights and obligations in the underlying relationship.

In the past, fraudsters have offered demand guarantees for sale as if they had an independent value. The requirement for the signed statement is designed to ensure that a guarantee can be transferred only in conjunction with a transfer of rights and obligations under the underlying contract.

The rule on assignment of proceeds is much simpler. The beneficiary may assign any proceeds to which it may be or become entitled, but the guarantor is not obliged to pay the assignee unless it has agreed to do so.

Other provisions

1. Non-documentary conditions

A new provision (article 7) deals with non-documentary conditions in broadly the same way as UCP 600. Such a condition, unless specifying a document to indicate compliance with the condition, is to be disregarded - except for the purpose of determining inconsistency between the data in a document and data in the guarantee - unless its fulfilment can be determined from the guarantor's own records or from an index specified in the guarantee.

2. Incomplete presentations

Article 14 contains detailed rules on presentation, including a rule on incomplete presentations. An incomplete presen ta tion will be rejected unless it indicates it is to be completed later, in which case it must be completed before expiry (sub-article 14 (a)), and the time for examina tion does not begin to run until the presentation is completed (subarticle 20 (a)).

Conclusion

The virtually unanimous support given to the new URDG reflects a consensus that, though not perfect (nothing human is perfect!), they nevertheless constitute a very good text. Already, OHADA has signified its intention to amend its Uniform Act on Guarantees to incorporate the rules in URDG 758.

The rules are expected to become the standard for demand guarantee practice worldwide.

Professor Sir Roy Goode is Emeritus Professor of Law in the University of Oxford and Emeritus Fellow of St John's College, Oxford. A member of the URDG 758 Drafting Group, he is the author of numerous textbooks in the field of commercial law, and a former Chairman of the ICC Commission on Commercial Law and Practice. His e-mail is roy.goode@sjc.ox.ac.uk