Article

by Jim Barnes

Eight annotated standby letter of credit forms are now available at www.iiblp.org. They are entitled:

1. Model Standby Incorporating Annexed Form of Payment Demand with Statement

2. Model Standby Providing for Extension and Incorporating Annexed Form of Payment Demand with Alternative Non-Extension Statement

3. Model Standby Providing for Reduction and Incorporating Annexed Form of Reduction Demand

4. Model Standby Providing for Transfer and Incorporating Annexed Form of Transfer Demand

5. Simplified Demand Only Standby

6. Model Counter Standby with Annexed Form of Local Bank Undertaking

7. Model Standby Requiring Confirmation

8. Model Confirmation of Standby

Each form includes extensive endnotes providing explanation and alternative wording. All eight forms, including their endnotes, are freely useable by businesses, banks, and law firms that draft or review standbys. Some banks and non-bank users (e.g., corporate treasury and credit departments) have already started using the forms by referring other parties to them as being generally acceptable, or by taking them and modifying them to suit their particular needs and posting them as their standard forms of independent undertaking.

These forms are intended to help private and public applicants and beneficiaries, including their regulators, develop workable and appropriate texts for standbys and to improve the quality (e.g., the certainty and completeness) of what customers ask banks to issue. Banks may wish to refer customers, whether applicants or beneficiaries, to these annotated forms with a view to educating customers and their counsel about structures and texts of undertakings that are intended to be independent.

The forms strive for neutrality and balance between the usual preferences of applicants and beneficiaries. In some cases, notably in the treatment of standbys that provide for automatic extension, an issuer may prefer an "inhouse" text, and the applicant or beneficiary or both may prefer a text not provided in any form or any endnote. The form providing for transfer may seem unusual, because it assumes that the beneficiary insists on a clear right to demand transfer and covers discretionary transfers and assignments of proceeds in the endnotes. Similarly, the confirmed standby forms, like the counter standby form, assume that the beneficiary requires a standalone undertaking from an approved bank. Alternative structures that may seem more familiar are covered in the endnotes (and may be more fully shown in future ISP98 standby forms at www.iiblp.org).

Structure

These forms are generally structured as undertakings to pay against a presentation of documents, notably a demand for payment with a statement that the applicant is obligated to pay the amount demanded under an identified agreement (and that the L/C proceeds will be applied against that obligation). That structure is emphasized by annexing the form of document to be presented (and by eliminating recitals in the standby text that refer to the underlying obligation other than by referring to the annexed form of document to be presented).

These forms thus provide for certainty about where and how a document is to be presented, as well as the content of the document, and they provide for certainty as to the duration and the amount available under the undertaking. Equally important, these forms exclude non-documentary conditions from the standby text, so they avoid raising questions as to whether parts of the standby text should be disregarded or whether non-documentary conditions in the text should be enforced with the possible effect of impairing the independence of the undertaking.

US standby practice

There is no tradition in the US for issuing standbys that include guarantee or performance bond terminology or that fail to incorporate ISP98 (or the UCP), and even if there were, the US Uniform Commercial Code codifies the law of letters of credit with statutory rules on determining independence and disregarding non-documentary conditions. Accordingly, there has not been a case in decades in which a US court agonized over whether a bank's undertaking to honour was or was not "independent" of the underlying obligation, or whether its enforcement required proof of facts extrinsic to the undertaking (leaving aside the fraud exception to independence). However, outside the US it has been and still is another story. It is outside the US that these ISP98 forms might help avoid serious difficulty in determining whether an undertaking should is independent and whether its non-documentary terms should be disregarded.

Outside the US

"Is it a demand guarantee?" This was the title of a December 2004 DCInsight article by Georges Affaki, in which he noted then that in France there had been over 300 decisions dealing solely with whether an undertaking should be characterized as independent (suretyship or independent guarantee). The article describes this type of litigation as a European "sport" inducing drafters of guarantee texts to burden and lengthen them with meticulous details as to their character. It concludes with recommendations to incorporate the URDG and to use published URDG templates (then ICC publication no. 503).

The English courts have been asked repeatedly to characterize undertakings that are ambiguous as to their intended independence. I deduce from the many English cases that, among other factors, incorporation of ICC rules (ISP, UCP, or URDG) is very helpful in establishing independence, that the identity of the obligor as a bank is critical and that the inclusion somewhere of an undertaking to pay against a demand is also critical.

This year I read the opinion in Wuhan Guoyu Logistics Group Co Ltd v. Emporiki Bank of Greece SA, [2012] EWHC 1715 (Comm), which cited many English court opinions and listed many factors to be considered. The trial court in Wuhan held that a Greek bank "Payment Guarantee" payable on first demand was not independent (i.e., was a guarantee and not a demand bond). At the time, I thought the opinion courageous and correct and that it might even lead to an improvement in the drafting of undertakings that are intended to be treated under English law as independent. I applauded the trial judge's conclusion that the bank's undertaking should have been clearer and "terser".

That opinion, however, was recently reversed in favour of a test using fewer factors to determine the independence of bank issued cross-border undertakings (Wuhan Guoyu Logistics Group Co Ltd v. Emporiki Bank of Greece SA, [2012] EWCA 1629(Comm)). I can't quarrel with the result on appeal given English law precedent and its pronounced tendency to order banks to pay and not exploit unnecessary and confusing language found in their cross-border guarantees. I can, however, predict that bank undertakings issued outside the US will continue to confuse users and courts alike and will test not only the limits of independence, but also the existence and scope of the interpretive rules on the enforcement or disregard of nondocumentary conditions.

Perhaps the Wuhan case will be taken further, in which case it would be interesting to see how England's highest court would relate the Emporiki Bank Payment Guarantee in Wuhan with the Kookmin Bank Advance Payment Bonds in Rainy Sky S.A. v. Kookmin Bank, [2011] UKSC 50. The Supreme Court opinion in Rainy Sky was the subject of a March 2012 DCInsight article by Roger Fayers, in which he fairly describes the opinion as interpreting a bank's cross-border undertaking by considering the underlying contract as well as the ambiguous text of the bank's undertaking.

Rainy Sky was apparently argued on the "common ground" that resort to extrinsic evidence was permitted. There was no mention of the possibility that the Kookmin Bank undertaking, which called for a demand and a statement that the amount claimed is due to the beneficiary, might qualify as independent.

I'm not surprised at the confusion in the courts, just at the foolishness and waste associated with undertakings that do not incorporate ICC rules, do not simply undertake to pay against the presentation of specified documents, but do add guarantee-type wording.

Jim Barnes is senior counsel at Baker & McKenzie LLP, Chicago, Illinois. He is one of the drafters of the IIBLP's ISP98 Standby forms and was Vice Chair of the ISP Working Group that drafted ISP98 under the auspices of the IIBLP and with the participation of the ICC Banking Commission, BAFT-IFSA and others. His e-mail is james.barnes@bakermckenzie.com