Article


by Mohammad M. Burjaq

Since 2002, which marked my first involvement in the guarantee business in one of the banks in the Gulf region, I've been interested in understanding why most banks in the Arab world tended to issue their guarantees subject to local law rather than making them subject to ICC's Uniform Rules for Demand Guarantees (URDG). I also wondered why the banks refused any counter-guarantee subject to these rules.

Clearly, many heads of guarantee departments and their employees in the region either did not have an awareness of the URDG or did not understand the rules. Indeed, many Gulf banks used to refuse any guarantee application or counter-guarantee that did not mirror their standard templates word for word and letter for letter. Why, I wondered, did such behaviour not apply to their letters of credit and UCP?

In 2004, I was surprised when I read a study written in 1982 by a famous legal advisor in the banking sector, who worked as head of the legal department in one of top ten banks in the region. The study was addressed to one of the regional banking associations and asserted the importance of implementing the ICC's Uniform Rules for Contract Guarantees (URCG 325) despite all of the concerns about those rules and their lack of use at that time. The study, in comparing applicable local laws with the URCG, encouraged banks to issue their guarantees subject to these rules, as guarantees were not covered in local applicable laws.

Based on that study, I investigated Arab world jurisdictions and their guarantee practices and wrote a similar study that was published in December 2008. The study focused on the URDG and compared features of the new revision of the rules with applicable laws in several Arab countries. It encouraged banks to issue their guarantees subject to the URDG and also encouraged governments to update their national commercial codes to cover several banking services, such as letters of credit and guarantees, which are not covered by some current codes.

Arab world codes

The situation in the Arab world with regard to guarantees was not uniform. Some Arab country codes addressed guarantees using the same approach as the URDG, particularly in terms of the independent nature of guarantees. This was the case of the commercial codes of Egypt, Oman, the UAE, Qatar, Yemen and Kuwait. Other codes, such as those in Jordan and Syria, did not cover guarantees at all, but only addressed suretyships.

Yet, most banks in the Arab world issued their guarantees and accepted counter-guarantees subject to their national codes, regardless of whether the codes covered guarantees or not. None of abovementioned codes, except the Egyptian commercial code, which indicates in article 355 that any subject relating to guarantees not covered in the code would be subject to the international rules and practices on letters of guarantee, addressed issues - such as the time for examination, the standard for examination, the refusal of a non-complying demand or extend or pay - though clearly these subjects should be addressed to avoid disputes between parties to the guarantee. Two Arab countries, Kuwait and Tunisia, adopted the UN Convention on Independent Guarantees and Standby Letters of Credit and implemented it as one of their national laws.

Welcome and unwelcome provisions

When in 2007, during several seminars in Egypt and Jordan, I started my effort to promote the URDG and the new revision of these rules in mid2008, I noticed the following:

1. Most attendees had no idea about the URDG or its revision, nor about the local codes to which their guarantees were subject.

2. When I explained the features of the URDG and how they protect all parties to the guarantee, attendees were generally surprised that their institutions did not compel them to use these important rules.

I believe that the following provisions of the URDG revision will be welcome in the Arab world:

- Article 2 Definitions: this article compiles all definitions that were spread out in URDG 458. The definitions have been chosen to be in line with other rules such as the UCP and ISP98. This will make the rules clearer and reduce misinterpretations of defined terms.

- Article 5 Independence of Guarantee and Counter-Guarantee: the success story of URDG since 1992 concerning the independent nature of guarantees has been addressed and confirmed. Specifically, this article reconfirms that the guarantee is independent of any underlying relationship, application or other counterguarantees to which it relates.

- Article 10 Advising of Guarantee or Amendment and Article 11 Amendments: these two articles have been drafted to cover banking practice in the advising of guarantees issued by a bank and to be advised to beneficiaries by another bank (advising bank) and how to handle amendments. There were no equivalent rules in URDG 458;

- Article 14 Presentation: a separate article on presentation indicates where presentation is to be made ("place of presentation") when a presentation is complete, how incomplete presentations have to be examined under the rules and specifications for a presentation in paper and electronic forms;

- Article 19 Examination and Article 20 Time for Examination of Demand; Payment: using the same approach as the UCP, article 19 of URDG 758 addresses the standard for exami nation of documents under a guarantee. It also clearly indicates that the guarantor shall determine on the basis of a presentation alone whether or not it appears on its face to be a complying presentation. Article 20 clearly indicates that the guarantor, five business days following the day of presentation, must determine if a demand is complying. When the guarantor determines that it is, it must pay the beneficiary;

- Article 26 Force Majeure: for the first time the revision addresses the concept of force majeure. It includes an article specifying automatic extension of the guarantee for a period of 30 calendar days. Also, it covers the right of a guarantor to present a complying demand under a counter-guarantee regardless of the counter-guarantee's expiry date in cases where the guarantor has paid a complying demand under a guarantee but, due to force majeure, the counter-guarantor's business was interrupted and the guarantor was unable to present a complying demand within the counter-guarantee's validity period because of that interruption; and

- Model forms for guarantees and counter-guarantees: this is the first time the URDG includes one standard model form for guarantees and counter-guarantees regardless of the type of guarantee. This will make the practitioner's life considerably easier.

It may be that article 15, Requirements for Demand, will not be as welcome in the Arab world, even though the article can be excluded according to sub-article (c). Beneficiaries in this region are mostly governmental entities that issue extend or pay demands even though there may be no real default, but only because the departments that follow up on guaran tees often seek to extend the guarantee without any coordination with the departments responsible for the under lying transaction. This unfortunate prac tice exists, and while we must hope it will cease, it must, for now, be reckoned with.

Promotion of URDG

Since 2007, several efforts by some ICC Arab national committees have been launched to promote the URDG. For example, in April 2008, ICC Jordan and ICC Egypt sponsored a seminar to promote the URDG in the region, and more than 75 participants from nine Arab counties attended. As a follow-up, ICC Jordan conducted a seminar in December 2009 to promote the new URDG revision. More than 70 participants from the public sector - including the Jordanian Armed Forces (JAF), Jordan Customs and the Ministry of Health - attended, along with shipping agencies, construction associations and the banking sector. Several of the attendees, such as Jordan Customs and the JAF, expressed their readiness to co operate with ICC Jordan to implement the URDG and to replace their standard forms to comply with the rules.

Spurred by these efforts, some Gulf banks began conducting seminars for their employees and their customers to focus on the features of the new rules. In addition, several articles have been published in newsletters, and messages have been sent by Arab national committees to banks and other parties, encouraging all parties involved in guarantees to use the URDG.

Clearly, many heads of guarantee departments and their employees in the region either did not have an awareness of the URDG. For my part, I will do my best to spread the word and to encourage parties in the Arab world to implement the URDG and to use its provisions in the same way they are using the UCP today.

Mohammad M. Burjaq is Chief Central Operations at Union Bank in Jordan. He is a member of the UCP 600 Consulting Group and the ICC Task Force on Guarantees.
His e-mail is cdcsmmb@yahoo.com