Hello
I would like to have opinion on assignment of guarantees.
Supplier : X
Purchasing agent: Y
Y's Bank : ABC
Buyer: Z
If the beneficiary of an advance payment guarantee (Y) assigns it favouring the Bank (ABC), can the bank treat this as "acceptable security" to issue a back-to-back guarantee favouring the actual buyer (Z).
Note:
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The guarantee specifically provides for assignment favouring ABC and also assigns the rights & benefits under the APG to the ABC
The guarantee is governed as per URDG 458
What are the risks involved for ABC in accepting the assignment?
Thanking you in advance!
Assignment of Guarantee
Assignment of Guarantee
Vinod,
Your query is far too broad for me to answer.
All I can say that is if a bank is considering taking an assignment of the right to make demand under an ‘inward’ demand guarantee as ‘security’ for an ‘outward’ demand guarantee it in turn will issue, that bank needs to make sure that in the event of a complying demand under the outward guarantee it will automatically be able and entitled to make demand under the inward guarantee.
Regards, Jeremy
Your query is far too broad for me to answer.
All I can say that is if a bank is considering taking an assignment of the right to make demand under an ‘inward’ demand guarantee as ‘security’ for an ‘outward’ demand guarantee it in turn will issue, that bank needs to make sure that in the event of a complying demand under the outward guarantee it will automatically be able and entitled to make demand under the inward guarantee.
Regards, Jeremy
Assignment of Guarantee
Thanks Jeremy!
However, since the bank is only an assignee and entitled to claim despite not being a party to the purchase/sale contract, how will the legal framework consider this.
i.e Legally (Gtee is subject to URDG 458) is the assignee allowed to claim? Remember there is no link between the inward and outward guarantee
However, since the bank is only an assignee and entitled to claim despite not being a party to the purchase/sale contract, how will the legal framework consider this.
i.e Legally (Gtee is subject to URDG 458) is the assignee allowed to claim? Remember there is no link between the inward and outward guarantee
Assignment of Guarantee
Sorry, Vinod, time simply does not permit me to respond.
Assignment of Guarantee
Any other expert comments especially on the risks involved for ABC in accepting such an assignment....Please post your thoughts!
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AbdulkaderBazara
- Posts: 256
- Joined: Fri Apr 05, 2019 5:15 pm
Assignment of Guarantee
Since no one else have volunteered to give you a reply, I will give it a try.
Assumptions made here:
Supplier X bank issued APG in favour of Purchasing Agent (Y).
Purchasing Agent assigned the proceeds of the APG to ABC Bank and requests it to issue APG in favour of Buyer (z).
The amount of APG in favour of Buyer (z) is equal to or less than the APG in favour of the Purchasing Agent (Y).
The expiry date of APG in favour of Buyer (z) is earlier than the APG in favour of Purchasing Agent (Y) i.e. to allow enough time to call under the APG in favour of Buyer (z).
Governing Law for both APG's is the same.
Other terms and conditions of both APG's are identical.
ABC Bank has no right to draw under the APG in favour of Purchasing Agent (Y) but has an irrevocable assignment of proceeds acknowledged by Supplier X Bank.
If the above assumptions are correct and there is no assignment of the right to demand as explained by Jeremy, then, in my opinion, ABC Bank will take relational and performance risk of the Purchasing Agent (Y). In my opinion, the assignment of proceeds may not be considered or treated similar to a counter-guarantee; however, it certainly have value to ABC bank and may give it comfort based on which it may decided to issue the APG in favour of the Buyer (z) i.e. after evaluating the risk stated above and such risk mitigation steps are in place. The Assignment of Proceeds is an effective security only when the Purchasing Agent (Y), a known company to ABC, makes a call under the APG, proceeds are received by ABC and no attachments or offset of rights are made against such proceeds.
Best Regards
Abdulkader
[edited 11/20/2007 5:38:01 AM]
Assumptions made here:
Supplier X bank issued APG in favour of Purchasing Agent (Y).
Purchasing Agent assigned the proceeds of the APG to ABC Bank and requests it to issue APG in favour of Buyer (z).
The amount of APG in favour of Buyer (z) is equal to or less than the APG in favour of the Purchasing Agent (Y).
The expiry date of APG in favour of Buyer (z) is earlier than the APG in favour of Purchasing Agent (Y) i.e. to allow enough time to call under the APG in favour of Buyer (z).
Governing Law for both APG's is the same.
Other terms and conditions of both APG's are identical.
ABC Bank has no right to draw under the APG in favour of Purchasing Agent (Y) but has an irrevocable assignment of proceeds acknowledged by Supplier X Bank.
If the above assumptions are correct and there is no assignment of the right to demand as explained by Jeremy, then, in my opinion, ABC Bank will take relational and performance risk of the Purchasing Agent (Y). In my opinion, the assignment of proceeds may not be considered or treated similar to a counter-guarantee; however, it certainly have value to ABC bank and may give it comfort based on which it may decided to issue the APG in favour of the Buyer (z) i.e. after evaluating the risk stated above and such risk mitigation steps are in place. The Assignment of Proceeds is an effective security only when the Purchasing Agent (Y), a known company to ABC, makes a call under the APG, proceeds are received by ABC and no attachments or offset of rights are made against such proceeds.
Best Regards
Abdulkader
[edited 11/20/2007 5:38:01 AM]
Assignment of Guarantee
Thanks Abdulkader!
However, your assumption on assignment will include rights to claim as well. i.e the issuing bank assigns the proceeds as well as the rights to claim
In which case my query is:- ABC bank despite not being a party to the actual contract, can the bank claim proceeds?
if it claims, in event of a dispute between the seller and purchasing agent how are they secured.
However, your assumption on assignment will include rights to claim as well. i.e the issuing bank assigns the proceeds as well as the rights to claim
In which case my query is:- ABC bank despite not being a party to the actual contract, can the bank claim proceeds?
if it claims, in event of a dispute between the seller and purchasing agent how are they secured.
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AbdulkaderBazara
- Posts: 256
- Joined: Fri Apr 05, 2019 5:15 pm
Assignment of Guarantee
I will give it another try.
If we are including assignment of the benefit of the guarantee then we are referring to a different ball game. According to "A User's Handbook to the URDG' by Dr. George Affaki, paragraph 81 on page 65, from the time the assignment enters into effect, only the assignee is entitled to act as beneficiary under the guarantee. This is in regards, among other things, presentation of statement of breach etc. In addition in paragraph 82 on the same page it states that the rights and duties of the new beneficiary under the assigned guarantee are matters for the governing law to regulate.
Now let's look at the APG in hand and consider that ABC Bank is made the new beneficiary of the guarantee, based on what will ABC makes a claim under the guarantee? What would be the statement of breach? Can ABC state that the supplier did not supply the goods in accordance to the contract and therefore, it is making a claim under the guarantee? This in my opinion would probably be difficult as ABC Bank is not a party to the underlying contract and therefore, I assume it will not for a fact know whether the supplier has performed according to the underlying contract or not.
If however, the guarantee were to cover a financial obligation for which the performance required is payment into an account with ABC Bank, then ABC would have a control over the transaction and would also know of any default in payments due; thus it could safely issue a statement of breach by stating that payment due to the account was not made and remains unpaid.
As this is not the case in the situation you have brought up, you need to find other ways to link the 1st APG to the 2nd APG whereby a claim under the 2nd APG automatically triggers a claim under the 1st APG. In other words, you may need to amend the 1st APG to make it act as a counter-guarantee for the issuance of the 2nd APG. Furthermore, if a statement like, "we have been informed by Buyer z that Supplier x have not supplied goods for value ………….. in accordance with contract number ……… dated ………… and therefore this amount is due for payment", will do as statement for breach which will induce a call under the guarantee, then it may help provided the 1st APG is amended to incorporate this wording and the 2nd APG calls for statement from Buyer z referred to in the 1st APG for honoring any demand for payment.
I'm not sure whether this is feasible in the arrangement you have indicated.
Best Regards
Abdulkader
[edited 11/23/2007 6:12:17 AM]
If we are including assignment of the benefit of the guarantee then we are referring to a different ball game. According to "A User's Handbook to the URDG' by Dr. George Affaki, paragraph 81 on page 65, from the time the assignment enters into effect, only the assignee is entitled to act as beneficiary under the guarantee. This is in regards, among other things, presentation of statement of breach etc. In addition in paragraph 82 on the same page it states that the rights and duties of the new beneficiary under the assigned guarantee are matters for the governing law to regulate.
Now let's look at the APG in hand and consider that ABC Bank is made the new beneficiary of the guarantee, based on what will ABC makes a claim under the guarantee? What would be the statement of breach? Can ABC state that the supplier did not supply the goods in accordance to the contract and therefore, it is making a claim under the guarantee? This in my opinion would probably be difficult as ABC Bank is not a party to the underlying contract and therefore, I assume it will not for a fact know whether the supplier has performed according to the underlying contract or not.
If however, the guarantee were to cover a financial obligation for which the performance required is payment into an account with ABC Bank, then ABC would have a control over the transaction and would also know of any default in payments due; thus it could safely issue a statement of breach by stating that payment due to the account was not made and remains unpaid.
As this is not the case in the situation you have brought up, you need to find other ways to link the 1st APG to the 2nd APG whereby a claim under the 2nd APG automatically triggers a claim under the 1st APG. In other words, you may need to amend the 1st APG to make it act as a counter-guarantee for the issuance of the 2nd APG. Furthermore, if a statement like, "we have been informed by Buyer z that Supplier x have not supplied goods for value ………….. in accordance with contract number ……… dated ………… and therefore this amount is due for payment", will do as statement for breach which will induce a call under the guarantee, then it may help provided the 1st APG is amended to incorporate this wording and the 2nd APG calls for statement from Buyer z referred to in the 1st APG for honoring any demand for payment.
I'm not sure whether this is feasible in the arrangement you have indicated.
Best Regards
Abdulkader
[edited 11/23/2007 6:12:17 AM]
Assignment of Guarantee
Thanks Abdul Kader for your inputs.
Atleast I am on track now. Once I have a legal opinion as well on this, I shall share this in the forum here.
Atleast I am on track now. Once I have a legal opinion as well on this, I shall share this in the forum here.