ICC Digital Library Forum

Most of the issues raised in this forum are related to DC’s so I thought of giving some attention to letters of guarantee too.

We received a proposal for issuance of a performance bond (demand/unconditional), containing the following clause: “This guarantee may be assigned or otherwise transferred by you to any assignee of the … contract”.

As letters of guarantee are not negotiable instruments they cannot be transferable. This feature however applies to transferable DC’s only if made subject to Article 48.

The assignment of the bond is possible provided it clearly refers to an irrevocable & unconditional assignment of all rights and benefits of the beneficiary which means that his right to perform under the LG (e.g. extension request or demand for payment) is taken over by the assignee at the time of the assignment. Such assignment is different from an assignment of proceeds. In addition, although the bond is separate from the underlying contract, the issuing bank will have to be provided with an evidence of the contract assignment duly executed by the two parties.

Your thoughts pls.

Dimitri

Interesting question.

Under what set of rules (if any) would you be working?

Have you thought about issuing a "Performance Standby" subject to ISP98 ? Rule 6 provides for transfers

Judith

Judith,

The bond is made subject to the rules and regulations of Saudi Arabia and is based on a counter-gtee to be issued by an int’l bank. Fyi, bonds favouring gov’t dept’s / ministries are governed by local rules only. A similar market practice is followed for bonds favouring private beneficiaries too.

When I drew the comparison between an LG and a DC I had in mind standbys subject to ISP98 too. However, this is not the case here as explained above.

Dimitri

Dmitri,

We are -in principle- quite happy to issue demand guarantees and standby L/Cs that are stated to be ‘transferable’ or ‘assignable’ provided the provisions relating to transfer/assignment meet certain criteria. We certainly would not want to see evidence of the contract of assignment duly executed by the two parties.

You may find the recent case of Standard Bank London Ltd. v Canara Bank [2002] EWHC 1032 (Comm) (22 May 2002), a report of which is available on www.bailii.org, of interest. The financing bank assignee gained greater rights under the guarantee than the trading co assignor.

Jeremy

P.S. The provision you quote would not meet our criteria. I consider Rules 6.02 - 03 of ISP98 generally set out a good basis for transfer/assignment provisions in guarantees and standbys.
[edited 10/2/03 3:05:46 PM]

Jeremy,

Under which rules are you issuing your bonds? I’ve seen a booklet on contract guarantees and bonds of a major UK bank that contains various examples of simple demand as well as conditional LG texts. One of the clauses states: “This guarantee is personal to you and is not assignable.”

Dimitri

Dimitri,

It is rare for us to issue demand guarantees under any ‘rules’, e.g. URDG. With respect to law, regarding:
1. ‘indirect’ guarantees, usually our counter-guarantee is expressed to be subject to the guarantor’s jurisdiction’s law or is silent on this matter and the guarantee expressed to be subject to the guarantor’s jurisdiction’s law or silent on this matter.
2. ‘direct’ guarantee transactions, our guarantee is usually expressed to be subject to English or another jurisdiction’s law or is silent on the matter.

Jeremy

[edited 10/5/03 12:17:17 PM]

I agree that national laws form the legal foundation of LG’s and despite the fact that ICC has developed URDG 458 replacing URCG 325, it does not seem that it is very widely used. International practice appears to continue with national rules and regulations.

Jeremy,

If both the counter-gtee and the guarantee are silent on choice of law, in case of dispute would the governing law more likely be (especially if the underlying contract of sale is made subject to the governing law of the country where the bond was issued) that of the bank that issued the guarantee? I guess complications would arise if the two instruments are made subject to two different jurisdictions.

Dimitri

Dimitri

I would anticipate that URDG usage would increase substantially with the adoption of the URDG by the World Bank, even if it remains a very small proportion of total guarantees business. Having said that, I believe we have yet to see any URDG subject World Bank texts.

The English courts construe the counter-guarantee as being subject to the law of the guarantor, unless the c-g states otherwise. See Turkiye Is Bankasi AS v Bank of China (date of judgement 9 Sep 92; care- there is also related later ‘fraud exception’ litigation) & Wahda Bank v Arab Bank plc (date of judgement 7 Nov 95). The law of the underlying contract would not be a factor, given the independence of a demand guarantee from it.

An English court would not, as a matter of principle, refuse jurisdiction of a case where the contract (whether of guarantee or of sale) was subject to a foreign law (e.g. Turkiye Is Bankasi AS v Bank of China) and examples abound of this.

Jeremy

Jeremy,

In an article published in the DC Insight Vol. 4, No. 4/Autumn 1998, entitled “What is the governing law of a counter-guarantee?” and reported by Roger Fayers, reference is made to the Attock Cement Co. v Romanian Bank for Foreign Trade case. Here the Court of Appeal held that where a performance bond is issued in connection with the underlying contract, it (the performance bond) is not, or in any case is not necessarily, infected with the proper law of the commercial contract. Doesn’t the inclusion of the words “not necessarily” leave room for the “doctrine of infection” to be applied?

Dimitri

Dimitri,

No idea. I'll have to read the case & get back to you some time next week.

Jeremy