Article

by Jim Barnes

This article focuses on counterundertakings and the potential risks of their establishing liabilities beyond their terms and conditions or their incorporated ICC rules.

ISBP Model Counter Standby

The ISP98 model counter standby (available at www.iiblp.org)1 recites at the outset: "At the request and for the account of [name and address of applicant] ('Applicant'), we [name and address of issuer at place of issuance] ('Issuer') issue this irrevocable standby letter of credit number [reference number] ('Counter Standby') in favour of [name and address of beneficiary] ('Beneficiary') in the maximum aggregate amount of [currency/amount]. This is a counter standby letter of credit supporting Beneficiary's issuance of its separate [local bank] undertaking in the form of the Annexed Local Undertaking ... ".

The ISP98 counter standby form includes an annex that provides the wording of the local bank undertaking, including the following: "On the application of [counter standby applicant's name and address], [counter standby issuer's name and address] has issued to us a standby letter of credit supporting our issuance of this undertaking to you."

The ISP98 counter standby form refers to the local bank undertaking in specifying what the local bank as beneficiary must include in its statement when drawing under the counter standby. The form does not include an instruction, or an express request, that the beneficiary issue its local bank undertaking, although a request for such issuance might be implied.

URDG 758 Model

Counter-Guarantee

The URDG 758 model counter-guarantee in ICC Publication 758 recites at the outset: "Please issue under our responsibility in favour of the Beneficiary your guarantee in the following wording:".

The URDG 758 form of counterguarantee includes wording for the local bank undertaking. The form indicates that the applicant for the counterguarantee should be named the "Applicant" for the local bank guarantee and that the guarantee should require presentation of a document mentioning the applicant's breach of an underlying obligation. (This form does not otherwise indicate who is the counter-guarantor's applicant.)

URDG 458 Model

Counter-Guarantee

ICC Publication 631 provides a guide to URDG 458 includes five ICC model forms entitled "INSTRUCTIONS TO A CORRESPONDENT BANK FOR THE ISSUE OF A [TENDER/ PERFORMANCE, ETC.] GUARANTEE AGAINST A COUNTER-GUARANTEE". Each URDG 458 form recites at the outset: "At the request of ____________ please issue on our responsibility in favour of ____________ your guarantee in the following wording:"

Each URDG 458 form includes wording for the local bank guarantee that identifies a "Principal" and the underlying obligation of the Principal to the beneficiary of the local bank guarantee. That wording also includes the following: "At the request of the Principal, we (name of bank) hereby irrevocably undertake to pay you ... ".

Each URDG 458 form, after describing the requested local bank guarantee, states: "In consideration of your issuing your guarantee as above we hereby give you our irrevocable counterguarantee ... ".

The URDG 458 model forms, like the rules, have been superseded by the newer, and improved, URDG 758 rules and forms. They are mentioned here and discussed below because some counterundertakings, whether or not issued subject to URDG 458, include some of their worrisome features. In this regard, the concerns discussed below depend more on wording than incorporated rules, and no incorporated ICC rules, not even ISP98 Rule 4.21 (Request to Issue Separate Undertaking),2 can completely offset wording that establishes a new underlying obligation of the issuer or applicant or both to reimburse or indemnify a local bank outside the terms and conditions of the counter-undertaking.

Risks to issuer and applicant to reimburse or indemnify the local bank

There is a risk that applicable law might characterize a request to issue a guarantee as establishing implied reimbursement/indemnification obligations outside the terms and conditions of the counter-undertaking accompanying the request. That might lead to a characterization of the counterundertaking as support for these implied obligations of the issuer (or applicant), so that even if the counter-undertaking expired, the local bank could claim unexpired legal rights of reimbursement/ indemnity. The text of the accompanying counter-undertaking, including incorporated practice rules, will affect the extent of the risk. So, with these risks in mind, both the issuer of the counterundertaking and the issuer's applicant should review the issuer's communications to the local bank and the applicant's authorization of those communications.

Undesirable wording

I view the inclusion of "under our responsibility" wording in the URDG 458 and 758 forms as undesirable. These words were presumably based on URDG 458 sub-article 2 (a) (ii). URDG 758 was improved in this regard and presumably did not intend to provide for any additional or unqualified "responsibility" of a bank issuing a counter-guarantee.

I view as undesirable a request that the local guarantee recite that it is issued at the request or for the account of the applicant for the counter-undertaking. As indicated in ISP98 Form 6, the requested or expected undertaking should be worded to indicate that it results from and relies on the counter-undertaking. It may be necessary to include in the counter-undertaking or separate interbank communication wording that obligates the issuer or applicant to pay the local bank's charges or to indemnify against foreign laws. If such obligations are to be stated rather than left to incorporated rules such as URDG 758 articles 31 and 32, UCP 600 article 37 or ISP98 Rule 8.02, then it would be desirable to limit these exceptions by adding an express provision, such as appears in ISP Rule 4.21 (Request to Issue Separate Undertaking).

L/C bankers appreciate that counterundertakings issued subject to ICC rules are independent and are expected to provide for certainty of the rights and obligations of the two banks involved, leaving it to the commercial parties to resolve any uncertainties in the effect on them of the inter-bank arrangement when they resolve disputes between themselves based on their underlying relationship.

The practice of banks worldwide for many years has been to treat the terms and conditions of counter-undertakings as the exclusive basis for determining the rights and obligations of the bank issuer and the local bank beneficiary. The risks and undesirable wording discussed above have not increased, to my knowledge, and should not increase, the liabilities of issuers of counterundertakings or their applicants. Proper application of the L/C independence principle should offset these risks.

Accordingly, I write this, not to predict or encourage disputes, but to encourage better drafting of counter-undertakings, including their descriptions of the local bank undertakings they intend to support.

Jim Barnes is Senior Counsel at Baker & McKenzie LLP, Chicago, Illinois. His e-mail is
james.barnes@bakermckenzie.com

1. Eight ISP98 standby forms with extensive endnotes were released in 2012 by the Institute of International Banking and Practice and are available as Word documents on its website at www.iiblp.org. They were the subject of my January-March 2013 DCInsight article on improving the drafting of undertakings to achieve independence. They include the ISP98 Form 6 Model Counter Standby with Annexed Form of Local Bank Undertaking, which is available at www.iiblp.org by clicking on ISP Forms and then "ISP98 Model Form 6-Counter Standby".

2. SP98 Rule 4.21 (Request to Issue Separate Undertaking): "If a standby requests that the beneficiary of the standby issue its own separate undertaking to another (whether or not the standby recites the text of that undertaking): a. the beneficiary receives no rights other than its rights to draw under the standby even if the issuer pays a fee to the beneficiary for issuing the separate undertaking); ... " [This rule 4.21 is the clearest of the ICC rules on the point that the issuer of a counter-undertaking is liable solely on its counter-undertaking and has no separate liability for requesting (which would include, "instructing", "ordering", "authorizing", etc.) the beneficiary to issue an undertaking].