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by Glenn Ransier

The URDG 758 is the first-ever URDG update, and it comes 18 years after the original URDG 458 entered into force. With URDG 758 coming into effect on 1 July 2010, the nagging questions have begun to surface:

1. Did we drafters do a good job in capturing the practices in effect in today's market?;

2. Did we adequately predict future needs and trends?;

3. Should the drafters have followed the "majority consensus" in all cases?;

4. Will the new URDG be implemented by new users and markets?

These questions will be debated for years to come.

I read with interest the preceding article on the new URDG written by N.D. George in this issue of DCInsight. His balanced views, those of an experienced user, provide insights into the questions being posed about the revised URDG. They question whether our wording has created a clear understanding of the rules and whether or not the general user will comprehend our intentions.

I have been on both sides of the fence: first as a user who had no input into the rules, and second as a drafter who has privileged insights into the thinking and the nuances that lie behind the revised wording. As a practitioner, I have always raised questions and sought clarifications, much to the chagrin of my co-workers and trade professionals. Now, in my role as a URDG drafter, I believe it's incumbent on me to address the points raised by N.D. George and hopefully to provide responses to some of the questions he raises.

Non-documentary conditions

With regard to article 7, "Non-Documentary Conditions", I should point to some of the considerations that led to this article's inclusion in URDG 758. With today's automated processes, applicants/instructing parties have often found ways to bypass system controls and to add a term or two that generally would not have been included had the guarantor had an opportunity to review the guarantee in detail as he did when it was the norm to receive a paper application and then have a banker transcribe it. In addition, guarantors have often either a) acquiesced to applicants' demands; or b) not provided sufficient employee training to prevent inclusion of some odd, nonstandard language in the guarantee. The questions for the URDG drafters were whether the beneficiary should be responsible for all language included in the guarantee and should the rules compel them to provide a response to every non-documentary condition or, alternatively, should they hold a guarantor accountable for an unclear issuance of the guarantee? The majority vote by ICC Banking Commission members and the Drafting Group was for the latter. The Drafting Group drew inspiration from and is aligned with UCP 600 sub-article 14 (h) and ISP98 Rule 4.11. This approach is the only way to have a truly independent guarantee.

Duty to notify

With regard to articles 9, 16 and 23, it should be noted that articles 16 and 23 impose on the guarantor some duty to notify an instructing party of its actions (or non-actions). Since there was no reasonably valid way to impose a strict time limit or a penalty for not notifying an applicant/instructing party, the words "should" or "shall" were the most appropriate words to compel the guarantor to perform its duty to notify.

Beneficiary's supporting statement

Concerning article 15 - the need for a beneficiary's supporting statement - this rule came to symbolize the revision of URDG 458, and its main intention is to avert a frivolous, improper or fraudulent demand for payment by requiring the beneficiary to provide a simple sup porting statement indicating the reason for its drawing. The rule provides a default best practice and is meant to be a protection against hidden surprises rather than an arduous duty for the beneficiary. If guarantors follow article 8 or use the URDG model forms, which expressly provide for inclusion of the required supporting statement or for the clear deletion of it by deleting URDG 758 sub-articles 15 (a) and (b), then there can be no surprises. This rule was written with the best of intentions; there have been instances in which a beneficiary was not entitled to draw in accordance with the terms of an underlying relationship/ contract, but the undertaking's silence on this point permitted a drawing (see the US case of Prairie State Bank v. Universal Bonding Insurance Co. 24 Kan. App. 2d 740). The best practices provided in article 8 for drafting a guarantee should generally avoid any legal confrontations and, when followed, should offer protection to the issuer and its client.

N.D. George asks whether a demand guarantee can be used to support a "positive performance" instead of a "breach". While the URDG is widely used to warranty a payment obligation in case of a default, there is nothing in the URDG that prevents their use as a primary payment obligation similar to that of a commercial letter of credit. (Note, remember to exclude the requirement for a supporting statement in URDG sub-article 15 (a) when using a guarantee as a primary payment obligation.) As N.D. George points out, where possible URDG 758 was aligned with UCP 600, and this URDG revision took into consideration some commodity industry practices.

Other articles

Sub-article 19 (c) (i) says the guarantor will accept the document as presented if its content appears to fulfil the function of the document ... "[emphasis added]. N.D. George says the language should have said "must accept" instead of "will accept". "Will", as used in the rules, has the same effect as "must" and ensures that the guarantor will act accordingly.

Reconciling sub-articles 19 (c) (i) and 17 (e) (ii): as with any set of rules, each article/rule must be read as a whole and in conjunction with other articles. One of the nuances in sub-article 17 (e) (ii) is the use of the wording "other documents required by the guarantee". This wording orders examiners to ensure that the dollar amounts on the supporting statement and any "required" document do not indicate an amount(s) that, in total, is less than the amount being demanded. It does not obligate examiners to review other, non-required documents for this information.

Sub-article 28 (a) was intended to hold guarantors harmless from acts such as documents being lost in the mail or mutilated by a courier service, etc. There will be occasions when a guarantee calls for an original, perhaps negotiable document( s), and 28 (a) is meant to hold guarantors harmless for consequences of loss of documents outside of their control.

N.D. George raises an interesting point with respect to sub-article 28 (b). In his first comment, "'guarantor' is the person who 'issues' the instrument and not 'transmits'", I appreciate the view. However, sub-article 4 (a) it states: "a. A guarantee is issued when it leaves the control of the guarantor". In essence a guarantor issues, but what solidifies the issuance is the "transmitting" (an example of "leaving the control") of the guarantee. Perhaps in the next URDG revision we will find a way to more express our intent more effectively. Against his second comment that: "guarantor ought to know what it is signing...responsibility for its own creation", we considered that employees who issue guarantees cannot always be well-versed in every industry practice and may make an honest error in transcribing a difficult or cumbersome technical term. Moreover, when attempting to translate an application requirement from one's native language to another language, typing and other mistakes may occur. This article was meant to provide some protection in those rare instances when these kinds of honest mistakes occur.

My thanks to N.D. George for his valuable article and for providing his insights in a well reasoned review.

Why use URDG 758?

Some have asked why they should use URDG when they already have UCP, ISP98 and, to a lesser extent, the UNCITRAL Convention from which to choose.

My response is simple: URDG is the correct and best set of rules to govern a guarantee and "what do your clients desire?" As a banker, I tried not to limit the choices I provided my clients and my employer (remember that under URDG, it is accept able for a guarantor to issue an under taking on its own behalf and on behalf of its subsidiary/sister organizations).

The majority of demand guarantees conclude amicably and, in these cases, any set of rules would serve. However, should a challenge arise, one of the URDG's key strengths is their default provisions concerning governing laws and jurisdiction in the event of legal challenges. These provisions, not found in UCP or ISP, can reduce litigation by years and significantly reduce legal fees. Both the beneficiary and the issuer/guarantor can benefit from having courts in their home country decide any legal question.

Additionally, the URDG benefited by having worldwide input into the drafting process from banks and corporations. I believe URDG 758 has benefits for all parties. Specifically, the new rules -

- align, where feasible, URDG with UCP 600 to foster a uniformity of approach and assist the training of employees;

- acknowledge a common practice whereby an independent under taking's stated applicant may differ from the instructing party that requested and then assured the applicant's obligation to the guarantor in the guarantor's application agreement , i.e., where a parent organization assures/guarantees a subsidiary or sister organization, etc. This practice, defined for the first time in any set of rules, will foster an understanding concerning from whom an issuer/guarantor will accept instructions in areas such as amendment requests and/or instructions to waive discrepancies and from whom the guarantor will demand reimbursement for its fees and/or any payments;

- defines what constitutes paper and electronic documents and provides a practical, single set of rules for both;

- takes account of industry practices, for example a guarantor using its own records to automatically reduce a guarantee balance;

- allows the guarantor to retain the original drawing documents it received under its guarantee while forwarding copies to a counter-guarantor;

- ensures payment or rejection of the guarantee within five business days from its receipt;

- helps reduce fraud by defaulting to a rule requiring that each demand clearly reflect the grounds for its drawing;

- provides protection to the beneficiary when there is a force majeure event (unlike the UCP) while avoiding open-ended extension lengths, similar to ISP98;

- provides ready-to-use model guarantee formats;

- bases the date of expiration on a full banking day rather than on the hours the issuer/guarantor is at work;

- imposes a duty to provide information to applicants/instructing parties;

- provides clearly defined rules for extend or pay drawing requests and, unlike other rules, imposes time limits (a maximum of 30 calendar days) on issuers/guarantors to make the decision to extend or pay;

- provides a default in the event an issuer/guarantor is either prohibited from, or unable to pay in the currency of the guarantee.

Glenn Ransier was the former Global Trade Products Operations Manager for American Express Bank Ltd and was a member of the URDG Drafting Group and the Demand Guarantee Task Force. More insights into URDG 758 can be obtained from his upcoming book, A Drafter's Notes to URDG 758, which can be ordered from his website www.loc.cc. His e-mail address is glennransier@loc.cc