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( Source of the document: ICC Digital Library )
A few months ago, we received a demand request from our Saudi correspondent bank which had issued a local guarantee in favor of a Saudi public entity beneficiary under our counter-guarantee to it. Most guarantees to Saudi beneficiaries have to be issued via a local bank under our counter-guarantee.
There seemed to be some problems between the Saudi beneficiary and the Korean contractor, and although in most cases the guarantees are extended rather than called for payment, in this particular instance negotiations between the two parties did not seem to go very well.
The Saudi bank that had issued the local guarantee in favour of the Saudi beneficiary sent our bank two demands for payment under two separate counter-guarantees issued by our bank. One was within the expiry date of the counter guarantee and was duly paid.
However, the other request for payment from the Saudi correspondent was somewhat problematic. The expiry date of the counter-guarantee had elapsed even before the demand for payment was made. The correspondent acknowledged that the expiry date of our counter-guarantee had expired; nonetheless, the demand for payment was sent to our bank under the counter-guarantee. We were told by other bankers that in Saudi Arabia, sometimes a guarantee is called even though the expiry date of the guarantee has expired.
We sent a message to our Saudi correspondent asking for the legal basis on which it was making the demand for payment. We also did some research on this issue of claiming after the expiry date. After some effort, I was lucky to find an article on point in the International Financial Law Review of September 1986. The writer was a legal counsel of a bank in Bahrain, and he wrote a very clear article on claiming of payment in these circumstances.
Although there were many interesting developments regarding this issue, the conclusion was that due to the good offices of the Saudi Arabian Monetary Authority, the practice of claiming payment beyond the expiry date was largely discouraged.
We did not receive any further demand for payment from our Saudi correspondent.
Although it may not be the same situation, we were asked by our Indian correspondent to give it an open-ended expiry date in our counter-guarantee on which they were issuing a local guarantee in favour of a public entity beneficiary. The local guarantee had a fixed date expiry date, and we asked why we needed to provide a counter-guarantee with an open-ended expiry date.
Our Indian correspondent informed us that in India a public entity beneficiary can claim payment under the local guarantee beyond the expiry date. Although we did not receive the relevant Indian statute on the issue, I still find it puzzling that anyone, even a public entity beneficiary, can claim in similar circumstances.
It appears that this is not the case in Saudi Arabia at the present time.
Chang-Soon Thomas SongAttorney at Law (Arizona)First Expert, International Dispute Resolution (Letters of Credit), Korea Exchange Bank, SeoulE-mail: email@example.com and Thomas.Song@azbar.org
E-mail: firstname.lastname@example.org and Thomas.Song@azbar.org
We banking people who operate in the area of international business are frequently not understood by our customers. This is especially the case with exporters when we cannot meet their expectations, which are to always obtain rapid and secure payments, just the opposite of importers' expectations.
Our worst moment is when we have to explain that the reason for not meeting customers' needs is a certain article or a paragraph of some ICC rules they do not know, or that they prefer to ignore. Many customers respond that the ICC rules are just banking rules that should not apply to them.
The solution to such a common problem is to explain the rules and make customers understand that they are not just for bankers but are there to protect customers as well. There is still a lot to be done. How should we respond?
Organizing seminars to educate customers seems the easiest solution. but we should be careful when doing so:
1. Sessions should be short. Customers' employees do not have an endless amount of time.
2. Find the right level for those attending. Usually, company directors are not those in charge of reviewing and preparing documents for a letter of credit.
3. Avoid being too technical. We have to be understood and the customers' language is not the same as ours.
Nevertheless, we are not always able to arrange these events. Fortunately, we can also use our websites.
Some banks already include educational trade finance material on these sites. But that is not enough. For this to be effective, it needs to be made widely known, since customers usually do not spend much time surfing on their bank's website.
Another important action, especially with demand guarantees under the new URDG 758, is to promote the use of the approved model forms included in the same book as the ICC rules.
Staff working in legal departments tend to be very scrupulous when drafting this sort of guarantee, and they frequently clash with staff working in the commercial branch of the company, who may look at details and clauses as excessive and a barrier to doing business. By promoting the model forms, we should be able to increase the level of understanding between these two approaches.
How can we further encourage customers to accept the model forms? One solution is to apply cheaper fees for using them. For example, if we issue a guarantee subject to URDG 758, and the client accepts to use the model form, the price could be lower than that for drafting a tailored guarantee. These different fees would be logical, since with the latter the legal department of the issuing bank needs time to prepare it. And time is money.
But these solutions are going to be only valid for today's clients. Where are our future customers now? Probably in schools and universities. Consequently, we have to also focus on them. In my country, partnerships between universities and business are already pending. And banks, in their own interest, should work with these institutions to introduce the basic concepts of trade finance operations and the ICC rules in professional courses, in MBA programs and in postgraduate courses at business schools.
In this way, we can ensure that our future customers will arrive with some knowledge of the reciprocal needs of banks and business in trade finance.
Xavier ForntProfesor de la Escuela Superior de Comercio InternacionalBarcelonaE-mail: email@example.com