SINCE THE DISCUSSION FORUM IS NOT WITNESSING FRESH QUERIES, WE WOULD LIKE TO POST THE FOLLOWING FRESH ONE, WHICH WE HAVE ENCOUNTERED RECENTLY. WE ARE POSTING IT AS RECEIVED.
Dear Hatem:
I have received a guarantee in swift format MT 760 from a bank in
Austria which does not state that it shall be governed by rules URDG 458 and
also requires commercial and transport documents and not only the demand by
default.
Instead, it state:
This guarantee is governed by and shall be construed in accordance with the laws and regulations of Austria.
We have requested the issuing bank to insert that the guarantee must be governed by URDG 458 but they say no.
XXXXXXX
I enclose text of the guarantee.
Thanks a lot for your kind ooperation.
QUOTE
To (beneficiary): AAA CO.
Payment Guarantee No. 123456.
Ladies And Gentlemen:
We understand from our clients, messrs. (applicant name), that they have contracted a deal with you concerning the supply of (no.)containers (goods) during a total period of 10 months. This payment-condition has to be covered by a bank guarantee.
Acting upon instructions received from our clients, we, the (issuing bank name), herewith undertake irrevocably to transfer to you upon your first written demand, amounts up to a total sum of USD (amount) altogether, should our clients fail to prove to us by means of the respective bank settlement note that they have already transferred to you the invoice value of the above goods.
Your demand (referring to our guarantee number) has to be sent to us, for identification purposes in written form (letter by registered mail or courier-service) together with the confirmation of bank ABC, branch XYZ (the same bank who is advising the L/G) that your signatures appearing on your written demand are legally binding on you. In addition, the claim has to be accompanied by copies of your unpaid invoice as well as of the respective transport document. As transport document will only be regarded: FCR/FCT/DUPLICATE OF INTERNATIONAL RAILWAY CONSIGNMENT NOTE/CMR/BILL OF LADING/AIRWAY BILL (the issuance date of the respective transport document will be considered as date of shipment).
A demand under this guarantee can not be addressed to us before the 46th day as from the issuance date of the respective transport document (provided with 'shipped on board') and our guarantee will expire automatically on the (maturity) if a demand as outlined above has not arrived at our premises on or before that date.
Any charges arising in connection with this guarantee in your country are to be borne by you. Your claims and rights resulting from this guarantee are not assignable.
This guarantee is governed by and shall be construed in accordance with the laws and regulations of Austria.
Issuing bank name and address)
Unquote
This message is the operative instrument, no mail confirmation will follow.
Please advice beneficiary as soon as possible.
Thank you in advance and best regards.
--
Handling Inward Guatantees
-
hatemshehab
- Posts: 220
- Joined: Fri Apr 05, 2019 5:19 pm
Handling Inward Guatantees
Hatem,
Firstly, I suspect that a lot of the correspondence on the discussion forum is generated by banks etc having free short term trials of DC-PRO. I imagine therefore that at the moment there are not many ‘free trialers’. Too bad for those of us who enjoy the cut and thrust of (documentary) debate.
Secondly, as to your member’s query:
1. On the face of it the Saudi bank is not being asked to issue (or 'join-in') the guarantee; merely to pass it on, without any engagement on its part. Therefore, in the absence of any indication of fraud or other illegality, I am surprised the Saudi bank is concerning itself with the guarantee's terms -even if the beneficiary is an account holding customer of theirs- given the Saudi bank does not -on the face of it- have any role with respect to a demand (other than possibly passing it on, unchecked).
2. The fact that the guarantee is not stated to be subject to URDG is quite unremarkable. In our experience the vast majority (about '99%') are not subject to URDG. Also, under URDG the guarantee would be subject to Austrian law anyway (Article 27).
3. The guarantee requires COPY commercial invoice and transport documents, not originals, to accompany any demand. For a ‘trade debt’ guarantee this is quite unremarkable.
Overall, it would seem your member, or at least the enquirer, could do with some demand guarantees ‘training’.
Finally, thank you for taking the time to give me your views regarding the subjunctive tense.
Best regards, Jeremy
Firstly, I suspect that a lot of the correspondence on the discussion forum is generated by banks etc having free short term trials of DC-PRO. I imagine therefore that at the moment there are not many ‘free trialers’. Too bad for those of us who enjoy the cut and thrust of (documentary) debate.
Secondly, as to your member’s query:
1. On the face of it the Saudi bank is not being asked to issue (or 'join-in') the guarantee; merely to pass it on, without any engagement on its part. Therefore, in the absence of any indication of fraud or other illegality, I am surprised the Saudi bank is concerning itself with the guarantee's terms -even if the beneficiary is an account holding customer of theirs- given the Saudi bank does not -on the face of it- have any role with respect to a demand (other than possibly passing it on, unchecked).
2. The fact that the guarantee is not stated to be subject to URDG is quite unremarkable. In our experience the vast majority (about '99%') are not subject to URDG. Also, under URDG the guarantee would be subject to Austrian law anyway (Article 27).
3. The guarantee requires COPY commercial invoice and transport documents, not originals, to accompany any demand. For a ‘trade debt’ guarantee this is quite unremarkable.
Overall, it would seem your member, or at least the enquirer, could do with some demand guarantees ‘training’.
Finally, thank you for taking the time to give me your views regarding the subjunctive tense.
Best regards, Jeremy
Handling Inward Guatantees
We would like to make some comments based on the terms of the banker's guarantee as quoted below:
QUOTE
"we, the (issuing bank name), herewith undertake irrevocably to transfer to you upon your first written demand, amounts up to a total sum of USD (amount) altogether, should our clients fail to prove to us by means of the respective bank settlement note that they have already transferred to you the invoice value of the above goods.
Your demand (referring to our guarantee number) has to be sent to us, for identification purposes in written form (letter by registered mail or courier-service) together with the confirmation of bank ABC, branch XYZ (the same bank who is advising the L/G) that your signatures appearing on your written demand are legally binding on you. In addition, the claim has to be accompanied by copies of your unpaid invoice as well as of the respective transport document. As transport document will only be regarded: FCR/FCT/DUPLICATE OF INTERNATIONAL RAILWAY CONSIGNMENT NOTE/CMR/BILL OF LADING/AIRWAY BILL (the issuance date of the respective transport document will be considered as date of shipment).
A demand under this guarantee can not be addressed to us before the 46th day as from the issuance date of the respective transport document (provided with 'shipped on board') and our guarantee will expire automatically on the (maturity) if a demand as outlined above has not arrived at our premises on or before that date".
UNQUOTE
(1) Although this banker’s guarantee (B/G) is not subject to the URDG, the principle of a banker’s guarantee is however reflected in Article 20 of the URDG - to require a SIMPLE payment demand from the beneficiary. There is no need to provide documentary proofs of the payment default, as required in this particular B/G.
(2) This B/G requires many other things that are not required by the URDG, such as:
(a) The Guarantor (Issuing Bank) must be convinced that the Principal has not yet made any payment. If the Principal diappears, such as due to “undeclared” bankruptcy, avoidance of serious legal liabilities or other reasons, then it may be difficult for the Guarantor to find out this fact based on which the payment demand is to be met. There is a similar case in Canada. Recently the workers of a restaurant in Canada cannot file claims for unemployment compensation from the Canadian Government because they don’t have letters of termination of employment (which are required for making such claims) from the owners who have disappeared suddenly due to financial troubles, leaving a lot of debts behind them.
(b) The last paragraph is confusing and inconsitent.
QUOTE
A demand under this guarantee can not be addressed to us before the 46th day as from the issuance date of the respective transport document (provided with 'shipped on board') and our guarantee will expire automatically on the (maturity) if a demand as outlined above has not arrived at our premises on or before that date".
UNQUOTE
However, for discussion sake, we take it to mean that it appears that the 21 days “stale transport document” concept from UCP 500 Article 43 is introduced into this B/G. This Article is intended to protect the buyer from delays in receipt of the ORIGINAL transport documents, which should be important to avoid damages due to the perishable nature of the goods and to avoid demurrage. For a B/G, the buyer should have already received the goods well before the payment default after the credit/grace period, which varies from 30 days to 180 days. So by the time the payment is defaulted, the issue of COPIES of “stale transport document” has no meaning at all.
(c) The Guarantor considers FCR/FCT ( non transport documents as regarded by the ICC Banking Commission) as valid transport documents. "Air waybill" is worded as "airway bill". The banker from the Guarantor seem not understanding the meaning of these Articles in the UCP as well as the URDG, and training is needed as already commented by Jeremy.
(d) The B/G will expire automatically if copies of transport documents presented are over 46 days after the shipment date(s). In other words, the B/G works like installment shipments in Article 41 of the UCP 500. The B/G should not automatically expire solely due to presentation of copies of “stale transport documents” which should be deemed as “discrepant” (not meeting the terms of the B/G) documents. Such a "discrepancy" should not be a valid reason to make the B/G expired or invalid for future demands as it has no material impact to the underlying transaction since the goods are already received by the buyer well in advance of the payment default.
(3) We do not understand why “46 days” is chosen as the deadline for presentation of payment demand where copies of transport documents are involved. 46-21 = 25 days. Does this imply that the payment credit term is 25 days?
DISCLAIMERS:
The opinions, comments and/or advices expressed here are solely for discussion or debating purposes. They may change with time, for example, when new perspectives are taken or after new developments or changes in trade customs and practices are seen in the respective fields. You should not rely on or act accordingly to such opinions, comments and/or advices and should seek professional opinions from your own lawyers, experts and/or consultants. We do not assume any liability or responsibility for any damages, losses or consequences of whatever nature, whether directly or indirectly related to or caused by our opinions, comments and/or advices.
http://www.tolee.com
[edited 12/27/01 5:41:59 PM]
QUOTE
"we, the (issuing bank name), herewith undertake irrevocably to transfer to you upon your first written demand, amounts up to a total sum of USD (amount) altogether, should our clients fail to prove to us by means of the respective bank settlement note that they have already transferred to you the invoice value of the above goods.
Your demand (referring to our guarantee number) has to be sent to us, for identification purposes in written form (letter by registered mail or courier-service) together with the confirmation of bank ABC, branch XYZ (the same bank who is advising the L/G) that your signatures appearing on your written demand are legally binding on you. In addition, the claim has to be accompanied by copies of your unpaid invoice as well as of the respective transport document. As transport document will only be regarded: FCR/FCT/DUPLICATE OF INTERNATIONAL RAILWAY CONSIGNMENT NOTE/CMR/BILL OF LADING/AIRWAY BILL (the issuance date of the respective transport document will be considered as date of shipment).
A demand under this guarantee can not be addressed to us before the 46th day as from the issuance date of the respective transport document (provided with 'shipped on board') and our guarantee will expire automatically on the (maturity) if a demand as outlined above has not arrived at our premises on or before that date".
UNQUOTE
(1) Although this banker’s guarantee (B/G) is not subject to the URDG, the principle of a banker’s guarantee is however reflected in Article 20 of the URDG - to require a SIMPLE payment demand from the beneficiary. There is no need to provide documentary proofs of the payment default, as required in this particular B/G.
(2) This B/G requires many other things that are not required by the URDG, such as:
(a) The Guarantor (Issuing Bank) must be convinced that the Principal has not yet made any payment. If the Principal diappears, such as due to “undeclared” bankruptcy, avoidance of serious legal liabilities or other reasons, then it may be difficult for the Guarantor to find out this fact based on which the payment demand is to be met. There is a similar case in Canada. Recently the workers of a restaurant in Canada cannot file claims for unemployment compensation from the Canadian Government because they don’t have letters of termination of employment (which are required for making such claims) from the owners who have disappeared suddenly due to financial troubles, leaving a lot of debts behind them.
(b) The last paragraph is confusing and inconsitent.
QUOTE
A demand under this guarantee can not be addressed to us before the 46th day as from the issuance date of the respective transport document (provided with 'shipped on board') and our guarantee will expire automatically on the (maturity) if a demand as outlined above has not arrived at our premises on or before that date".
UNQUOTE
However, for discussion sake, we take it to mean that it appears that the 21 days “stale transport document” concept from UCP 500 Article 43 is introduced into this B/G. This Article is intended to protect the buyer from delays in receipt of the ORIGINAL transport documents, which should be important to avoid damages due to the perishable nature of the goods and to avoid demurrage. For a B/G, the buyer should have already received the goods well before the payment default after the credit/grace period, which varies from 30 days to 180 days. So by the time the payment is defaulted, the issue of COPIES of “stale transport document” has no meaning at all.
(c) The Guarantor considers FCR/FCT ( non transport documents as regarded by the ICC Banking Commission) as valid transport documents. "Air waybill" is worded as "airway bill". The banker from the Guarantor seem not understanding the meaning of these Articles in the UCP as well as the URDG, and training is needed as already commented by Jeremy.
(d) The B/G will expire automatically if copies of transport documents presented are over 46 days after the shipment date(s). In other words, the B/G works like installment shipments in Article 41 of the UCP 500. The B/G should not automatically expire solely due to presentation of copies of “stale transport documents” which should be deemed as “discrepant” (not meeting the terms of the B/G) documents. Such a "discrepancy" should not be a valid reason to make the B/G expired or invalid for future demands as it has no material impact to the underlying transaction since the goods are already received by the buyer well in advance of the payment default.
(3) We do not understand why “46 days” is chosen as the deadline for presentation of payment demand where copies of transport documents are involved. 46-21 = 25 days. Does this imply that the payment credit term is 25 days?
DISCLAIMERS:
The opinions, comments and/or advices expressed here are solely for discussion or debating purposes. They may change with time, for example, when new perspectives are taken or after new developments or changes in trade customs and practices are seen in the respective fields. You should not rely on or act accordingly to such opinions, comments and/or advices and should seek professional opinions from your own lawyers, experts and/or consultants. We do not assume any liability or responsibility for any damages, losses or consequences of whatever nature, whether directly or indirectly related to or caused by our opinions, comments and/or advices.
http://www.tolee.com
[edited 12/27/01 5:41:59 PM]
-
hatemshehab
- Posts: 220
- Joined: Fri Apr 05, 2019 5:19 pm
Handling Inward Guatantees
Dear Jeremy,
Your note is valid regarding the free-trial subscribers who provide wood to our fire to keep it alive.
As for the bank guarantee, although the advising bank could pass the guarantee as it is without bothering himself with the terms and conditions thereof, I do believe that the bank should give the advice to the beneficiary regarding this instrument at least from a duty of care point of view. If we go deeply into the analysis of this guarantee we will notice a number of things that really needs clarification from the issuing bank. My remarks are as follows:
1. URDG is optional and the guarantee can be subject to the laws of the country of the issuing bank.
2. If at a time the bank is required to issue or join-in a guarantee based on the one you quoted then there should be many reasons for the second issuing bank to abstain?
3. The payment mechanism of this to-be-advised guarantee is not accurate because:
· The guarantee qualifies itself as a demand guarantee but in reality it is conditional.
· The guarantee states "should our clients fail to prove to us by means of the respective bank settlement note that they have already transferred to you the invoice value" this is dangerous as the proof of default should be the responsibility of the beneficiary not the applicant. Therefore we agree hundred percent with the comment of Mr. Lee on this phrase.
· Another ambiguity lies in the phrase "your demand to be sent to us for identification purposes in written form" what is the purpose of this identification? What does it mean? What if the bank could not identify this demand? The advising bank is required to confirm the correctness of the beneficiary’s signatures and that they are binding on them, then why would the issuing bank insert this when in reality he is not in a position to identify the correctness of these signatures?
· “Copies of your unpaid invoice” should read “copy of the invoice” because this does not specify how many copies and how would the bank make sure that this invoice is paid or not. What constitute an “unpaid copy”? Should it be stamped “unpaid”? Should contain a statement that it is “unpaid invoice”?
· The statement “as transport document will only be regarded …” is ambiguous. It could be construed as a condition that payment will be made only against these types of documents irrespective of the payment claim under the guarantee, therefore it is a conditional guarantee and not available on first demand. Further, what does duplicate mean is it a copy or a second original?
· What is the purpose of the phrase “transport document provided with shipped on board”? It could pose a danger to the payment mechanism of the guarantee; because it is a condition and secondly what if CMR or RWB does not show shipped on board but dispatch for transportation or received for transportation? In this case what is the fate of the claim under this guarantee?
· We agree with Mr. Lee that the banker in the issuing bank is not familiar with transport documents in addition he is mixing the UCP 500 within the components of a demand guarantee to make a new recipe.
[edited 12/22/01 6:34:50 AM]
Your note is valid regarding the free-trial subscribers who provide wood to our fire to keep it alive.
As for the bank guarantee, although the advising bank could pass the guarantee as it is without bothering himself with the terms and conditions thereof, I do believe that the bank should give the advice to the beneficiary regarding this instrument at least from a duty of care point of view. If we go deeply into the analysis of this guarantee we will notice a number of things that really needs clarification from the issuing bank. My remarks are as follows:
1. URDG is optional and the guarantee can be subject to the laws of the country of the issuing bank.
2. If at a time the bank is required to issue or join-in a guarantee based on the one you quoted then there should be many reasons for the second issuing bank to abstain?
3. The payment mechanism of this to-be-advised guarantee is not accurate because:
· The guarantee qualifies itself as a demand guarantee but in reality it is conditional.
· The guarantee states "should our clients fail to prove to us by means of the respective bank settlement note that they have already transferred to you the invoice value" this is dangerous as the proof of default should be the responsibility of the beneficiary not the applicant. Therefore we agree hundred percent with the comment of Mr. Lee on this phrase.
· Another ambiguity lies in the phrase "your demand to be sent to us for identification purposes in written form" what is the purpose of this identification? What does it mean? What if the bank could not identify this demand? The advising bank is required to confirm the correctness of the beneficiary’s signatures and that they are binding on them, then why would the issuing bank insert this when in reality he is not in a position to identify the correctness of these signatures?
· “Copies of your unpaid invoice” should read “copy of the invoice” because this does not specify how many copies and how would the bank make sure that this invoice is paid or not. What constitute an “unpaid copy”? Should it be stamped “unpaid”? Should contain a statement that it is “unpaid invoice”?
· The statement “as transport document will only be regarded …” is ambiguous. It could be construed as a condition that payment will be made only against these types of documents irrespective of the payment claim under the guarantee, therefore it is a conditional guarantee and not available on first demand. Further, what does duplicate mean is it a copy or a second original?
· What is the purpose of the phrase “transport document provided with shipped on board”? It could pose a danger to the payment mechanism of the guarantee; because it is a condition and secondly what if CMR or RWB does not show shipped on board but dispatch for transportation or received for transportation? In this case what is the fate of the claim under this guarantee?
· We agree with Mr. Lee that the banker in the issuing bank is not familiar with transport documents in addition he is mixing the UCP 500 within the components of a demand guarantee to make a new recipe.
[edited 12/22/01 6:34:50 AM]
Handling Inward Guatantees
Hatem,
My personal views, without responsibility, are:
1. Generally, in my experience, standards different to those applied to credits are applied to guarantees. It is quite common for banks to issue technically defective guarantees, the wording of which has already been agreed between the parties to the underlying transaction, and to ‘lay-off’ the resultant technical risk with the principal. This may be what has happened here.
2. I do not accept the ‘advising’ bank has any ‘duty of care’ to bring to the beneficiary’s attention any technical defects in the guarantee text. My own bank certainly would not. It must be borne in mind that for the purposes of the transaction, the ‘advising’ bank’s ‘customer’ is legally the guarantee issuing bank, not any a/c holding beneficiary.
3. If I were asked to agree to the issue of a guarantee in the above text I would, at the very least, require amendments or the ‘laying-off’ of the technical risks in the absence of such amendments.
4A. You say the guarantee is ‘conditional’. If you mean by this that supporting documentation has to accompany a demand, then this does not make the guarantee any less a demand guarantee, as incidentally sub-Article 2a of URDG recognises. Providing a complying presentation is made the issuing bank is obliged to make payment (subject to the 'payment already made by the principal' caveat); therefore the instrument is a ‘demand guarantee’. Perhaps the prevalence of the ‘simple demand guarantee’ in the Middle East, where the beneficiary does not even have to substantiate (i.e. make a statement of default in) their demand, is causing the confusion?
4B. There is no doubt in my mind that the words "should our clients fail to prove to us by means of the respective bank settlement note that they have already transferred to you the invoice value" refer to the principal being able to demonstrate they have already paid the monies in respect of which a demand is being made. This is not something I personally would include in a guarantee. Nonetheless, the fact is that should a demand be made and the principal be able to demonstrate they have made payment of the 'trade debt' I would at least query this with the beneficiary before paying the demand. Ultimately, I would withhold payment, on the basis of fraud, if I were confident the beneficiary had already received the monies.
4C. I believe the words ‘for identification purposes’ relate to the requirement for the beneficiary’s signature(s) to be authenticated. This is a common (at least in W. Europe) guarantee requirement, borne out of the fact that where a guarantee is not subject to URDG (as is, with few exceptions, normally the case) there is not any URDG Article 11 type protection. On receipt of a demand the issuing bank will verify the authenticating bank’s signatures, either from its records or, if it cannot, by authenticated teletransmission for example.
4D. ‘unpaid invoice’: I agree this is less than ideal.
4E. I agree the words “transport document provided with shipped on board” do not seem appropriate.
5. Overall, based on my own experience (both as a guarantees processing clerk and as deputy manager of a guarantees processing office), I find the guarantee text unremarkable and would not be at all surprised to receive it from another (particularly European) bank.
Regards, Jeremy
My personal views, without responsibility, are:
1. Generally, in my experience, standards different to those applied to credits are applied to guarantees. It is quite common for banks to issue technically defective guarantees, the wording of which has already been agreed between the parties to the underlying transaction, and to ‘lay-off’ the resultant technical risk with the principal. This may be what has happened here.
2. I do not accept the ‘advising’ bank has any ‘duty of care’ to bring to the beneficiary’s attention any technical defects in the guarantee text. My own bank certainly would not. It must be borne in mind that for the purposes of the transaction, the ‘advising’ bank’s ‘customer’ is legally the guarantee issuing bank, not any a/c holding beneficiary.
3. If I were asked to agree to the issue of a guarantee in the above text I would, at the very least, require amendments or the ‘laying-off’ of the technical risks in the absence of such amendments.
4A. You say the guarantee is ‘conditional’. If you mean by this that supporting documentation has to accompany a demand, then this does not make the guarantee any less a demand guarantee, as incidentally sub-Article 2a of URDG recognises. Providing a complying presentation is made the issuing bank is obliged to make payment (subject to the 'payment already made by the principal' caveat); therefore the instrument is a ‘demand guarantee’. Perhaps the prevalence of the ‘simple demand guarantee’ in the Middle East, where the beneficiary does not even have to substantiate (i.e. make a statement of default in) their demand, is causing the confusion?
4B. There is no doubt in my mind that the words "should our clients fail to prove to us by means of the respective bank settlement note that they have already transferred to you the invoice value" refer to the principal being able to demonstrate they have already paid the monies in respect of which a demand is being made. This is not something I personally would include in a guarantee. Nonetheless, the fact is that should a demand be made and the principal be able to demonstrate they have made payment of the 'trade debt' I would at least query this with the beneficiary before paying the demand. Ultimately, I would withhold payment, on the basis of fraud, if I were confident the beneficiary had already received the monies.
4C. I believe the words ‘for identification purposes’ relate to the requirement for the beneficiary’s signature(s) to be authenticated. This is a common (at least in W. Europe) guarantee requirement, borne out of the fact that where a guarantee is not subject to URDG (as is, with few exceptions, normally the case) there is not any URDG Article 11 type protection. On receipt of a demand the issuing bank will verify the authenticating bank’s signatures, either from its records or, if it cannot, by authenticated teletransmission for example.
4D. ‘unpaid invoice’: I agree this is less than ideal.
4E. I agree the words “transport document provided with shipped on board” do not seem appropriate.
5. Overall, based on my own experience (both as a guarantees processing clerk and as deputy manager of a guarantees processing office), I find the guarantee text unremarkable and would not be at all surprised to receive it from another (particularly European) bank.
Regards, Jeremy
-
hatemshehab
- Posts: 220
- Joined: Fri Apr 05, 2019 5:19 pm
Handling Inward Guatantees
Dear Jeremy,
1. I take on board your comment that it is common to issue “technically defective guarantees”. Although there is no statistics on this issue but given the concept of fair trade and the good intensions of the two parties (principal & beneficiary) I would assume that they may be willing to workout the deal with this type of guarantee. From my personal banking experience we used to solicit amendments to ensure that the defect is no more in place. Of course, if the beneficiary is not so keen to accommodate our advice then, at his peril, the guarantee will be advised as received.
2. The above approach although might on the face of it appear not so risky advising the guarantee, however the stress on the layoff of technical risk knocks my memory on “duty of care” again.
How do you tell if someone or some company owes you a duty to act in a responsible manner? In a general sense, no matter what activity a person participates in, that person owes a duty to act as a reasonable and prudent person would act if that reasonable and prudent person were in a similar position.
In everyday situations, common sense typically tells us how to behave and handle ourselves. Our common and business sense tells us what duties we owe to our customers; we have a duty to behave responsibly. However, in certain situations, ones in which everyday people do not typically find themselves in, the duty is more difficult to define. For instance, while we all know that we have a duty to drive our cars with care, it is not so clear what duty a surgeon owes to his patient in the operating room. That is, it is not within the common understanding of non-medically trained individuals what a reasonable doctor is or is not supposed to do. In such specialized situations, the professional (i.e., doctor, lawyer, airplane pilot, banker, or any other person with special training beyond that of the average person) will be held to a "standard of care," if you like, or a duty, which is measured, not by what the untrained person thinks is reasonable, (because the untrained person really has no idea, it is not within their common sense or business sense) but instead by what other professionals would do in similar situations. There are different types of duties depending on the characteristics of the situation.
The existence or nonexistence of “the duty of care” is not an easy task as this matter is more of lawyer’s job than a humble banker like you and me (although I respect your interpretation and do not undermine your knowledge) because there might be a number of factors that might play an important part in this matter. The moment we come to a conclusion that “duty of care” is existent then we could establish that the party could bring an action for negligence. Therefore a number of things could be considered in view of this process like; neighbour, proximity, policy and reasonableness.
To appreciate the legal application of duty of care the following extract from LJ Parker's speech in Jones v Wright NLJ May 19 1991 p 636 is illuminating:
“The rule that you are to love your neighbour becomes in law, you must not injure your neighbour, and the lawyers question Who is my neighbour? receives a restricted reply. You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour?. The answer seems to be - persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being affected when I am directing my mind to the acts or omissions which are called in question.”
The word “reasonable” leaves much to the discretion of the judge, who in cases of negligence sits alone and consider factors in breach of duty of care like the magnitude of risk.
If we are aware and can foresee that our customer (the beneficiary) might be affected by this defective guarantee then with such a close and direct relations with our customer shouldn’t there be sufficient relationship proximity to solicit an amendment to this defective guarantee? In fact the very fact that we consider the guarantee as defective entails that there is a certain degree of duty of care in this transaction, even if it is not legally clear. Lets call “standard of care”.
The problems with words like reasonable, foreseeability, proximity is that they are a result of a subjective interpretation by the judges themselves and therefore the best thing is to exercise minimal prudence, which stems from an unequivocal intension to serve the beneficiary and provide an added value service to his relationship with bank.
In Court
In a courtroom situation 'expert' witnesses may be called to elaborate on industry norms, current industry sound common practice, and best practice in relation to your activity/incident.
The 'experts' may be asked what a reasonable person/banker would have done given the same situation you found yourself in.
If you, or a staff member, have acted in a manner that, in any way, contributed to an incident, and those actions cannot be justified as a sound common practice, as a minimum, it could be argued that you did not fulfill your obligations in relation to the law.
3. When I say a conditional guarantee, I do not mean the statement of default that have to substantiate the demand but the additional requirement that are to be provided to trigger the payment and such guarantee. In the Middle East we construe a demand guarantee as that available upon first written demand from the beneficiary to pay the amount of the guarantee. This demand might be pre-worded in the guarantee itself or simply referred to as “upon first written demand”. Generally the default statement is included in the letter of claim. But if you consider the wording of the guarantee, the payment cannot be triggered by a statement of default only as there are other documentary requirements for that such as transport documents showing on board notation, the demand should be not be made before the 46th day as from the issuance date of the respective transport document, “Copies of your unpaid invoice”, let alone other ambiguous statements like: "your demand to be sent to us for identification purposes in written form", "should our clients fail to prove to us by means of the respective bank settlement note that they have already transferred to you the invoice value".
4. Jeremy, in this forum we try to pin point the “best practices”, exchange views, however the final decision remains for the respective practitioner on how to deal with these maters. It will be the bank’s decision to deal with such defective guarantee in a manner suitable to it. Agree that practically one might find himself in a situation where he has to trespass certain guidelines but one should remember that this should be done at one’s own peril.
A quote from Sun Tzu the great author of “The Art of War” may help in this context “If you know your enemy and know yourself, you need not fear the results of a hundred battles. If you know yourself but not your enemy, for every victory gained you will suffer a defeat.”
1. I take on board your comment that it is common to issue “technically defective guarantees”. Although there is no statistics on this issue but given the concept of fair trade and the good intensions of the two parties (principal & beneficiary) I would assume that they may be willing to workout the deal with this type of guarantee. From my personal banking experience we used to solicit amendments to ensure that the defect is no more in place. Of course, if the beneficiary is not so keen to accommodate our advice then, at his peril, the guarantee will be advised as received.
2. The above approach although might on the face of it appear not so risky advising the guarantee, however the stress on the layoff of technical risk knocks my memory on “duty of care” again.
How do you tell if someone or some company owes you a duty to act in a responsible manner? In a general sense, no matter what activity a person participates in, that person owes a duty to act as a reasonable and prudent person would act if that reasonable and prudent person were in a similar position.
In everyday situations, common sense typically tells us how to behave and handle ourselves. Our common and business sense tells us what duties we owe to our customers; we have a duty to behave responsibly. However, in certain situations, ones in which everyday people do not typically find themselves in, the duty is more difficult to define. For instance, while we all know that we have a duty to drive our cars with care, it is not so clear what duty a surgeon owes to his patient in the operating room. That is, it is not within the common understanding of non-medically trained individuals what a reasonable doctor is or is not supposed to do. In such specialized situations, the professional (i.e., doctor, lawyer, airplane pilot, banker, or any other person with special training beyond that of the average person) will be held to a "standard of care," if you like, or a duty, which is measured, not by what the untrained person thinks is reasonable, (because the untrained person really has no idea, it is not within their common sense or business sense) but instead by what other professionals would do in similar situations. There are different types of duties depending on the characteristics of the situation.
The existence or nonexistence of “the duty of care” is not an easy task as this matter is more of lawyer’s job than a humble banker like you and me (although I respect your interpretation and do not undermine your knowledge) because there might be a number of factors that might play an important part in this matter. The moment we come to a conclusion that “duty of care” is existent then we could establish that the party could bring an action for negligence. Therefore a number of things could be considered in view of this process like; neighbour, proximity, policy and reasonableness.
To appreciate the legal application of duty of care the following extract from LJ Parker's speech in Jones v Wright NLJ May 19 1991 p 636 is illuminating:
“The rule that you are to love your neighbour becomes in law, you must not injure your neighbour, and the lawyers question Who is my neighbour? receives a restricted reply. You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour?. The answer seems to be - persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being affected when I am directing my mind to the acts or omissions which are called in question.”
The word “reasonable” leaves much to the discretion of the judge, who in cases of negligence sits alone and consider factors in breach of duty of care like the magnitude of risk.
If we are aware and can foresee that our customer (the beneficiary) might be affected by this defective guarantee then with such a close and direct relations with our customer shouldn’t there be sufficient relationship proximity to solicit an amendment to this defective guarantee? In fact the very fact that we consider the guarantee as defective entails that there is a certain degree of duty of care in this transaction, even if it is not legally clear. Lets call “standard of care”.
The problems with words like reasonable, foreseeability, proximity is that they are a result of a subjective interpretation by the judges themselves and therefore the best thing is to exercise minimal prudence, which stems from an unequivocal intension to serve the beneficiary and provide an added value service to his relationship with bank.
In Court
In a courtroom situation 'expert' witnesses may be called to elaborate on industry norms, current industry sound common practice, and best practice in relation to your activity/incident.
The 'experts' may be asked what a reasonable person/banker would have done given the same situation you found yourself in.
If you, or a staff member, have acted in a manner that, in any way, contributed to an incident, and those actions cannot be justified as a sound common practice, as a minimum, it could be argued that you did not fulfill your obligations in relation to the law.
3. When I say a conditional guarantee, I do not mean the statement of default that have to substantiate the demand but the additional requirement that are to be provided to trigger the payment and such guarantee. In the Middle East we construe a demand guarantee as that available upon first written demand from the beneficiary to pay the amount of the guarantee. This demand might be pre-worded in the guarantee itself or simply referred to as “upon first written demand”. Generally the default statement is included in the letter of claim. But if you consider the wording of the guarantee, the payment cannot be triggered by a statement of default only as there are other documentary requirements for that such as transport documents showing on board notation, the demand should be not be made before the 46th day as from the issuance date of the respective transport document, “Copies of your unpaid invoice”, let alone other ambiguous statements like: "your demand to be sent to us for identification purposes in written form", "should our clients fail to prove to us by means of the respective bank settlement note that they have already transferred to you the invoice value".
4. Jeremy, in this forum we try to pin point the “best practices”, exchange views, however the final decision remains for the respective practitioner on how to deal with these maters. It will be the bank’s decision to deal with such defective guarantee in a manner suitable to it. Agree that practically one might find himself in a situation where he has to trespass certain guidelines but one should remember that this should be done at one’s own peril.
A quote from Sun Tzu the great author of “The Art of War” may help in this context “If you know your enemy and know yourself, you need not fear the results of a hundred battles. If you know yourself but not your enemy, for every victory gained you will suffer a defeat.”
Handling Inward Guatantees
We are glad that Hatem quotes the Art of War by Sun Tzu. We are always trying to practice his teaching: “The best strategy is to make your enemy surrender without waging a war”. That means one may use other means other than war or war like actions to win over your enemy, such as diplomatic approach to avoid lost of lives and the risk of war in which one may lose, just like a soccer game, as the ball is round.
SIMILARITY BETWEEN AN ADVISING BANK AND A PHARMACIST
To us there is an analogy between an advising bank in a banker’s guarantee (B/G) and a pharmacist preparing a doctor’s prescription.
Can the pharmacist defend himself in a court of law saying: “I am sorry that the patient died of wrong medication according to the expert's report. However, I am not the one who issues the prescription. Hence I should have no responsibility to check whether
(1) The dosage is abnormal.
(2) These two kinds of pills should not be taken together at the same time by the same patient.
(3) Although the patient is my client for many years and
(4) I know that he is allergic to that kind of medicine.
I just act as a post office and prepare the prescription strictly accordingly to the prescription issued by the doctor and nothing more!”
We do not think the court would accept such defence.
In Canada, a drug store charges a pharmacist fee of CAD10 on top of the cost of the medicine to be paid by the patient himself as this is not covered by the government medical benefits.
The patient gets a computer printout from the drug store providing all the details about the nature of the medicine. For example, it lists out the right dosage for different age groups, whether it is suitable for pregnant woman, whether it will have side effects for certain people, whether you should operative machinery or drive a car after taking the medicine, what are the symptoms of allergy, keeping it away out of reach of children as it is poisonous, and it should not be taken with which kind of medicine, you should not have alcohol or alcoholic drinks during the period, so on and so forth.
Sometimes it is as lengthy as a standard DC and headed with a red warning “Please read this important message before you take the drugs described hereunder”.
In Canadian legislations, a pharmacist has the duty of care to check for the apparent (for a stranger/walk-in customer) suitability of the prescription to the patient. And a drug store must have a licensed pharmacist to stand by during operating hours. To avoid being sued for negligence, which is common in North America as lawyers favour the “contingence fees” practice, we have a long list of computer print out to make sure that everything needed to be told is told to the customer. If he chooses not to read it, it is his own fault.
As already pointed out by Hatem, it is difficult to draw the line of responsibility precisely, particularly by a layman. However, the advising bank should at least check for the apparent workability of the B/G before it advises the B/G. To give an example of apparent workability, the special terms and conditions of the B/G as quoted by Hatem are good examples.
http://www.tolee.com
[edited 12/31/01 3:53:43 PM]
SIMILARITY BETWEEN AN ADVISING BANK AND A PHARMACIST
To us there is an analogy between an advising bank in a banker’s guarantee (B/G) and a pharmacist preparing a doctor’s prescription.
Can the pharmacist defend himself in a court of law saying: “I am sorry that the patient died of wrong medication according to the expert's report. However, I am not the one who issues the prescription. Hence I should have no responsibility to check whether
(1) The dosage is abnormal.
(2) These two kinds of pills should not be taken together at the same time by the same patient.
(3) Although the patient is my client for many years and
(4) I know that he is allergic to that kind of medicine.
I just act as a post office and prepare the prescription strictly accordingly to the prescription issued by the doctor and nothing more!”
We do not think the court would accept such defence.
In Canada, a drug store charges a pharmacist fee of CAD10 on top of the cost of the medicine to be paid by the patient himself as this is not covered by the government medical benefits.
The patient gets a computer printout from the drug store providing all the details about the nature of the medicine. For example, it lists out the right dosage for different age groups, whether it is suitable for pregnant woman, whether it will have side effects for certain people, whether you should operative machinery or drive a car after taking the medicine, what are the symptoms of allergy, keeping it away out of reach of children as it is poisonous, and it should not be taken with which kind of medicine, you should not have alcohol or alcoholic drinks during the period, so on and so forth.
Sometimes it is as lengthy as a standard DC and headed with a red warning “Please read this important message before you take the drugs described hereunder”.
In Canadian legislations, a pharmacist has the duty of care to check for the apparent (for a stranger/walk-in customer) suitability of the prescription to the patient. And a drug store must have a licensed pharmacist to stand by during operating hours. To avoid being sued for negligence, which is common in North America as lawyers favour the “contingence fees” practice, we have a long list of computer print out to make sure that everything needed to be told is told to the customer. If he chooses not to read it, it is his own fault.
As already pointed out by Hatem, it is difficult to draw the line of responsibility precisely, particularly by a layman. However, the advising bank should at least check for the apparent workability of the B/G before it advises the B/G. To give an example of apparent workability, the special terms and conditions of the B/G as quoted by Hatem are good examples.
http://www.tolee.com
[edited 12/31/01 3:53:43 PM]
Handling Inward Guatantees
Hatem,
I have read your detailed, constructive and conciliatory thoughts with interest.
Regarding your point 2, I can find little with which to disagree in principle. Where we would seem to diverge is how those principles should be applied to the situation under discussion, namely the advising of an apparently technically defective guarantee. Time, I regret, does not permit me to provide a detailed explanation but, in essence, it revolves around who is the party on whose behalf one is acting (the ‘customer’) for the purpose of the transaction, which I believe to be the advising bank, not the beneficiary (even if the beneficiary holds an a/c with the advising bank).
Nonetheless, I do recognise a court might not share my inexpert views and that it indeed might hold that, in this particular situation, a bank has a duty of care of the nature you describe, for the reasons you give, to a beneficiary. To cover this type of possibility, my own bank’s covering letter in this situation makes clear we do not accept any responsibility for, among other things, the contents of the document we have been asked to forward.
Regarding your point 3, I believe -with the greatest of respect- that the ‘Middle Eastern’ view of what constitutes a first demand guarantee is erroneously restrictive. I would adduce sub-Article 2a of URDG to support this contention:
‘…… a demand guarantee …… means any guarantee, bond or other payment undertaking …… for the payment of money on presentation in conformity with the terms of the undertaking of a written demand for payment and SUCH OTHER DOCUMENT(S) (for example, a certificate by an architect or engineer, a judgment or an arbitral award) as may be specified in the Guarantee ……’. [emphasis added]
I also -with one exception- do not regard the other features of the guarantee that you mention (the 46 day period, the need for the demand to be in writing and authenticated) as making the guarantee any less a demand guarantee. To me, they are simply ‘terms of the undertaking’ which need to be met in the event of a demand being made.
The exception is the term "should our clients fail to prove to us by means of the respective bank settlement note that they have already transferred to you the invoice value". This would seem to suggest that the issuing bank might be intending to refer to its principal, on receipt of a demand, to see if it can produce the ‘respective bank settlement note’. However as I’ve already said, in practice, where a principal can clearly demonstrate it has already settled a trade debt (e.g. it has made a payment through the guarantor to the beneficiary quoting contract details contained in the guarantee), I would expect a guarantor to withhold payment anyway. Therefore, I would not regard this provision as fatally undermining the value of the instrument to the beneficiary (not that I would be concerned if it did!).
In conclusion, I believe a demand guarantee is simply another form of independent documentary undertaking and therefore take the view that -mostly- what one can do with a documentary credit or, more relevantly, standby credit (a demand guarantee in credit form) one can do with a demand guarantee.
T.O.,
Many thanks for your information on the pharmaceutical practices of Canada. Should I ever visit the country I shall be fully prepared.
Regards, and ‘season’s greetings’ to all.
Jeremy.
[edited 12/31/01 2:22:27 PM]
I have read your detailed, constructive and conciliatory thoughts with interest.
Regarding your point 2, I can find little with which to disagree in principle. Where we would seem to diverge is how those principles should be applied to the situation under discussion, namely the advising of an apparently technically defective guarantee. Time, I regret, does not permit me to provide a detailed explanation but, in essence, it revolves around who is the party on whose behalf one is acting (the ‘customer’) for the purpose of the transaction, which I believe to be the advising bank, not the beneficiary (even if the beneficiary holds an a/c with the advising bank).
Nonetheless, I do recognise a court might not share my inexpert views and that it indeed might hold that, in this particular situation, a bank has a duty of care of the nature you describe, for the reasons you give, to a beneficiary. To cover this type of possibility, my own bank’s covering letter in this situation makes clear we do not accept any responsibility for, among other things, the contents of the document we have been asked to forward.
Regarding your point 3, I believe -with the greatest of respect- that the ‘Middle Eastern’ view of what constitutes a first demand guarantee is erroneously restrictive. I would adduce sub-Article 2a of URDG to support this contention:
‘…… a demand guarantee …… means any guarantee, bond or other payment undertaking …… for the payment of money on presentation in conformity with the terms of the undertaking of a written demand for payment and SUCH OTHER DOCUMENT(S) (for example, a certificate by an architect or engineer, a judgment or an arbitral award) as may be specified in the Guarantee ……’. [emphasis added]
I also -with one exception- do not regard the other features of the guarantee that you mention (the 46 day period, the need for the demand to be in writing and authenticated) as making the guarantee any less a demand guarantee. To me, they are simply ‘terms of the undertaking’ which need to be met in the event of a demand being made.
The exception is the term "should our clients fail to prove to us by means of the respective bank settlement note that they have already transferred to you the invoice value". This would seem to suggest that the issuing bank might be intending to refer to its principal, on receipt of a demand, to see if it can produce the ‘respective bank settlement note’. However as I’ve already said, in practice, where a principal can clearly demonstrate it has already settled a trade debt (e.g. it has made a payment through the guarantor to the beneficiary quoting contract details contained in the guarantee), I would expect a guarantor to withhold payment anyway. Therefore, I would not regard this provision as fatally undermining the value of the instrument to the beneficiary (not that I would be concerned if it did!).
In conclusion, I believe a demand guarantee is simply another form of independent documentary undertaking and therefore take the view that -mostly- what one can do with a documentary credit or, more relevantly, standby credit (a demand guarantee in credit form) one can do with a demand guarantee.
T.O.,
Many thanks for your information on the pharmaceutical practices of Canada. Should I ever visit the country I shall be fully prepared.
Regards, and ‘season’s greetings’ to all.
Jeremy.
[edited 12/31/01 2:22:27 PM]
Handling Inward Guatantees
ONE-YEAR IN RETROSPECTION
After one year of disagreeing with Jeremy on various hot issues, now we have found out the reasons behind this. It is not because we live in different parts of the Universe, as Jeremy has thought. In fact it is because Jeremy is a DC technician also working as a manager in a British bank. As a banker, it is only natural that he would be more inclined to protect the interests of and the risks exposed by his bank. By protecting his bank, he is also at the same time protecting himself, although he may not be fully aware of this. He wishes to sleep well and eat well, as we all do.
We are DC consultant and expert and are hence more neutral and independent, which is what we are required by the rules of the Academy of Experts in England of which we are an Accredited Member. There is simply no choice here. Hence we have to look after the interests of the banks as well as that of the beneficiaries and the applicants.
Business–wise, they can be all our customers. If our opinions are favoring one party, we may lose the business from another party. Our training business comes mostly from banks and banking institutes whilst our consultancy business comes more from the beneficiaries and applicants. Of course a bank would also invite us as a court experts when it sues another bank or its client.
We of course understand all the problems and risks faced by the banks and the competitive environment, as well as threats to staff in down sizing due to merging and e-commerce that would require less headcounts. Although we highly sympathize with our banker friends, however, these are not good excuses for not taking their duty of care and due diligence towards their customers or clients, whatever you would like to call them.
Unless Jeremy retires we can anticipate continuous “agreement to disagree” in 2002.
Hatem has left the banking business in Jordan and is now working in a training institute in Saudi Arabia. Hence he is more neutral and independent, although he has a strong banking background.
We would like to share words of wisdom originated from one of the Kung Fu novels:”If one day you become invincible, you would be very lonely then”. Loneliness is not a nice feeling at all. That is why in this novel, that invincible Kung Fu Master is named “Lonely and Looking for A Defeat”.
Frankly we do enjoy the entanglements with Jeremy. This is what discussion is for. The decision is for an individual viewer to make for himself.
Happy New Year to All of You.
http://www.tolee.com
[edited 12/31/01 4:51:45 PM]
After one year of disagreeing with Jeremy on various hot issues, now we have found out the reasons behind this. It is not because we live in different parts of the Universe, as Jeremy has thought. In fact it is because Jeremy is a DC technician also working as a manager in a British bank. As a banker, it is only natural that he would be more inclined to protect the interests of and the risks exposed by his bank. By protecting his bank, he is also at the same time protecting himself, although he may not be fully aware of this. He wishes to sleep well and eat well, as we all do.
We are DC consultant and expert and are hence more neutral and independent, which is what we are required by the rules of the Academy of Experts in England of which we are an Accredited Member. There is simply no choice here. Hence we have to look after the interests of the banks as well as that of the beneficiaries and the applicants.
Business–wise, they can be all our customers. If our opinions are favoring one party, we may lose the business from another party. Our training business comes mostly from banks and banking institutes whilst our consultancy business comes more from the beneficiaries and applicants. Of course a bank would also invite us as a court experts when it sues another bank or its client.
We of course understand all the problems and risks faced by the banks and the competitive environment, as well as threats to staff in down sizing due to merging and e-commerce that would require less headcounts. Although we highly sympathize with our banker friends, however, these are not good excuses for not taking their duty of care and due diligence towards their customers or clients, whatever you would like to call them.
Unless Jeremy retires we can anticipate continuous “agreement to disagree” in 2002.
Hatem has left the banking business in Jordan and is now working in a training institute in Saudi Arabia. Hence he is more neutral and independent, although he has a strong banking background.
We would like to share words of wisdom originated from one of the Kung Fu novels:”If one day you become invincible, you would be very lonely then”. Loneliness is not a nice feeling at all. That is why in this novel, that invincible Kung Fu Master is named “Lonely and Looking for A Defeat”.
Frankly we do enjoy the entanglements with Jeremy. This is what discussion is for. The decision is for an individual viewer to make for himself.
Happy New Year to All of You.
http://www.tolee.com
[edited 12/31/01 4:51:45 PM]