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ISDGP International Standard Demand Guarantee Practices



Acknowledgements



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Preface. Guarantees are routinely segregated into two categories: independent guarantees such as: “Demand Guarantees” and dependent or accessory guarantees such as: “Surety Guarantees”.



Demand guarantees Demand guarantees are “Independent Guarantees” and are also known as “First Demand Guarantees”. They are undertakings (similar to a one-sided contract) which support any type of underlying contract, agreement, and/or deal made between two parties. While they support the underlying contract, the demand guarantee represents a separate and distinct obligation between the guarantor (issuer) and a beneficiary. They are most often issued in irrevocable form, and require that a guarantor make a payment only in the event that a beneficiary presents a complying documentary demand. The beneficiary’s demand under a guarantee most often represents that the underlying contract between the beneficiary and the guarantor’s customer has not concluded in accordance with the contract’s terms. Most often the guarantor is issuing its guarantee at the request and on behalf of its customer. However, where allowed by local law and regulations, a guarantor can issue a demand guarantee on its own behalf in support of an agreement they have entered into with another party (e.g. Guarantor is leasing space from a rental company and issues a guarantee in support of their rent payments). Those who do not regularly have a need for this type of undertaking may not be aware that its function is to Provide a completely separate and distinct independent undertaking from the guarantor to a beneficiary, generally in support of an underlying contract between two different parties, e.g. a buyer and a seller, a lender and a borrower, etc.; and, pay the beneficiary a fixed amount/sum of money provided that the beneficiary has made a complying demand e.g. in accordance with a demand guarantee’s terms, including the rules which apply when incorporated therein (typically, the rules used are the globally accepted Uniform Rules for Demand Guarantees, ICC Publication 758 commonly referred to as: URDG 758). Most often, demand guarantees will enhance and add an additional level of security to an existing sales contract or other agreement. Given the wide range of underlying contracts and agreements, the terminology used in the underlying relationship differs from an “applicant” or a “beneficiary” and may vary significantly. When a demand guarantee makes reference to an underlying contract therein, the demand guarantee remains its own independent, documentary obligation from the guarantor to the beneficiary. Any reference(s) to an underlying contract/agreement in a demand guarantee does not incorporate that contract/agreement’s terms into the demand guarantee. For example, should an underlying contract between a buyer and seller mandate that any litigation under it must be brought before courts in New York State, USA and be subject to New York law, this condition would not automatically apply to the demand guarantee unless the demand guarantee had incorporated this same condition. Demand guarantees follow the “independence principle” and thus, any amendment/change to an underlying contract or cancellation thereof does not affect the guarantor’s obligations stated in a demand guarantee. Many will agree that the demand guarantee is favourable to the beneficiary in that often, the beneficiary’s demand/claim/drawing need only state in what respect the applicant is in breach of a contract’s terms in order to receive payment, without



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requiring proof of the alleged breach. The issuer of the demand guarantee will not look beyond the information stated in the documents required for presentation to determine if payment is to be made.



Surety guarantees Surety guarantees are also known as “Accessory Guarantees” or “Secondary Guarantees” or “Suretyship Guarantees” or “Surety Bonds”, etc. and are unlike a typical demand guarantee undertaking. While a demand guarantee is an independent undertaking, separate from any contract on which it may be based, a surety guarantee is a “dependent” guarantee. At times, dependent guarantees may appear to incorporate terms which are similar to an independent undertaking yet they remain very different types of guarantees. Unlike an independent guarantee, a surety generally mandates that the guarantor who issued it look beyond the statements and/or documents in any demand for payment it receives and decide upon and/or investigate facts and/or arbitrate disputes to determine whether the facts of the demand or any supporting documents are correct and accurate, based on general relevant industry practice, etc. before making payment to a beneficiary. Also, unlike a demand guarantee, a surety will typically fail the Independence Principle as generally the guarantor has a right to assert the underlying applicant’s/debtor’s defences. Where a demand guarantee requires only a complying documentary demand/presentation to warrant a guarantor’s payment, a Surety’s guarantor will require more concrete proof that the presentation’s content is correct and that the underlying contract has been breached and the beneficiary has the right to receive a payment. Often these dependent guarantees incorporate all or parts of the underlying agreement and they are not subject to any international rule sets. Instead, they are frequently made subject to the laws of the issuer’s country. The beneficiary may be at a disadvantage in these type of guarantees as they must prove their right to claim and that they are entitled to a payment and proving this right will most often come at a cost. For avoidance of doubt, the ISDGP does not pertain to dependent or Surety type guarantees.



Standby letters of credit A standby letter of credit is also an independent undertaking and is very similar to a demand guarantee with the most significant differences being tied to the default provisions in the rule set which governs it. Standby letters of credit are most often issued subject to either: International Standby Practices (ISP) – current is ISP98 or; The Uniform Customs and Practices (UCP) – latest revision is UCP 600. While a standby letter of credit is similar to a demand guarantee, certain practice and terminology could lead to different approaches and conclusions. The two types of undertakings should not be confused with one another.



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Table of Contents Preface. .............................................................................................................................................2 Demand guarantees ..................................................................................................................................................................... 2 Surety guarantees ........................................................................................................................................................................ 3 Standby letters of credit ............................................................................................................................................................... 3



Introduction ......................................................................................................................................7 SWIFT ................................................................................................................................................7 URDG 758 ..................................................................................................................................................................................... 7 Definitions .................................................................................................................................................................................... 8 Other terms relative to guarantee practice:............................................................................................................................... 12



General issuance considerations....................................................................................................... 13 Not immediately available for a demand ................................................................................................................................... 14 Request for a delayed demand/payment ................................................................................................................................... 15 Title of a guarantee .................................................................................................................................................................... 15 Excluding URDG article(s)........................................................................................................................................................... 15 Provide clear demand requirements .......................................................................................................................................... 15 Partial demand and multiple demands; amount of demands .................................................................................................... 16 Date formats .............................................................................................................................................................................. 16 Use of generic terms to describe an issuer of a document ......................................................................................................... 17 Expiry dates, periods or events................................................................................................................................................... 17 Allowing electronic presentations: ............................................................................................................................................. 19 Authorised languages for documents: ....................................................................................................................................... 19 Governing law considerations .................................................................................................................................................... 19 Subrogation................................................................................................................................................................................ 20 Jurisdiction ................................................................................................................................................................................. 20 Arbitration.................................................................................................................................................................................. 20 Documents v goods, services or performance and the Four Corner rule .................................................................................... 20 Understanding and avoiding non-documentary conditions ....................................................................................................... 21 Variation of amount of guarantee ............................................................................................................................................. 21 Requesting an advising party ..................................................................................................................................................... 22



Guarantee issuance - leaving the control of the guarantor ................................................................ 22 Advising a guarantee or amendment ................................................................................................ 23 Using different advising parties ................................................................................................................................................. 24 Delays in advising ....................................................................................................................................................................... 24



Amendments ................................................................................................................................... 24 Receipt of a presentation ................................................................................................................. 26 Incomplete presentations e.g. presentations with less than all required documents ................................................................ 26 Paper and non-paper presentations........................................................................................................................................... 26 Identifying a presentation .......................................................................................................................................................... 27



Requirements for demand ............................................................................................................... 27 Supporting statement(s) ............................................................................................................................................................ 27 Form of demand ......................................................................................................................................................................... 27 Demand and document dates .................................................................................................................................................... 28 Corrected Presentations, including demands ............................................................................................................................. 28



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Examination .................................................................................................................................... 28 Examinations based on the Four Corner rule ............................................................................................................................. 28 Including non-required information in a document ................................................................................................................... 29 Document signatories ................................................................................................................................................................ 29 Presentations which include non-required documents .............................................................................................................. 29 Recalculations ............................................................................................................................................................................ 29 Visaed, legalized documents ...................................................................................................................................................... 29 Strict compliance ........................................................................................................................................................................ 29 Typographical errors .................................................................................................................................................................. 30 Company names......................................................................................................................................................................... 30 Punctuation marks in a document ............................................................................................................................................. 30 First class and well known .......................................................................................................................................................... 31 Document issuers ....................................................................................................................................................................... 31 Beneficiary name change ........................................................................................................................................................... 31 Copy(ies) of a document(s)......................................................................................................................................................... 31 Copies of invoices ....................................................................................................................................................................... 31 Copies of receipt of transport documents .................................................................................................................................. 32 Beneficiary’s bank signatures or authentication of beneficiary signatures ................................................................................ 32 Multiple demands in a single presentation ................................................................................................................................ 32



Timeline for examination of demand; payment ................................................................................ 33 Examination timeline ................................................................................................................................................................. 33 Paying a complying demand ...................................................................................................................................................... 33 Demands under counter-guarantees ......................................................................................................................................... 33



Payment currency ............................................................................................................................ 33 Extend or pay demand considerations .............................................................................................. 34 Interest ....................................................................................................................................................................................... 34 Examination and suspension ...................................................................................................................................................... 34 Repeating a demand under suspension ..................................................................................................................................... 34 Hold for value; similar ................................................................................................................................................................ 35 Suspension period by counter-guarantor ................................................................................................................................... 36 Beneficiary extend or pay rights:................................................................................................................................................ 37 Missing notification for suspension period ................................................................................................................................. 37 Different decisions from guarantors .......................................................................................................................................... 37



Non-complying demand, waiver and notice ...................................................................................... 38 Notification Party ....................................................................................................................................................................... 38 The word: reject ......................................................................................................................................................................... 38 Corrections to a presentation ..................................................................................................................................................... 38



Reduction and expiry of a guarantee ................................................................................................ 39 Payment reductions ................................................................................................................................................................... 39 Authorizations to reduce or cancel............................................................................................................................................. 39 Closing, terminating a guarantee at expiry ................................................................................................................................ 39 Extension of expiry based on beneficiary approval only ............................................................................................................. 40 Overrides to URDG 758 Article 25: Reduction and termination ................................................................................................. 40



Guarantees which contain a self-extension provision – evergreen clause........................................... 40 Non-extension notifications ....................................................................................................................................................... 41 Non-standard evergreen term.................................................................................................................................................... 42



Liability for charges .......................................................................................................................... 42 Transfers under a guarantee ............................................................................................................ 42 Transfer meaning ....................................................................................................................................................................... 42



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Transfer amount ........................................................................................................................................................................ 43 Guarantor’s obligation to transfer ............................................................................................................................................. 43 Increased risks relative to a transfer .......................................................................................................................................... 43 Processing transfers against guarantees with amendments ..................................................................................................... 43 Assumption of rights and obligations......................................................................................................................................... 44 Documents issued by the beneficiary ......................................................................................................................................... 44



Assignment of proceeds ................................................................................................................... 44 Other guarantee considerations or special situations ........................................................................ 45 Documents to be issued or countersigned by an applicant ........................................................................................................ 45 Guarantees with multiple beneficiaries...................................................................................................................................... 45 Guarantees with multiple instructing parties ............................................................................................................................. 46 Guarantor payment without a document presentation ............................................................................................................. 46



Presentation of original guarantees or lost, stolen, destroyed originals ............................................. 47 Precedents....................................................................................................................................... 48 Fraud ............................................................................................................................................... 48 Fraud and document examination ............................................................................................................................................. 48



Guarantee types: ............................................................................................................................. 49 Requests from a counter-guarantor to issue in a guarantor’s format ....................................................................................... 49 Advance payment guarantees: .................................................................................................................................................. 49 Counter-guarantee considerations............................................................................................................................................. 50



Syndication and similar clause considerations................................................................................... 51 Participation Considerations ............................................................................................................ 52 Sanction clauses............................................................................................................................... 52



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Introduction 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16



The International Standard Demand Guarantee Practice (ISDGP) should be deemed a companion document to the URDG 758 (URDG). It expounds and complements those rules by providing insights and by defining best practice. In accordance with the URDG Article 2 definition for a “Complying Presentation”, the ISDGP apply only to demand guarantees and counter-guarantees (collectively: guarantees) and details the current ‘international standard demand guarantee practice” referred therein. ISDGP should not be incorporated into any guarantee. The international standard demand guarantee practice documented in this publication is consistent with URDG 758 and makes reference to certain Official Opinions of the International Chamber of Commerce (ICC) Banking Commission. ISDGP explains how the practice is to be applied to the rules articulated in URDG 758, understanding that no rule set can anticipate all the terms which may be incorporated into a guarantee nor all the documents that need to accompany a demand/drawing presentation. The collection of ISDGP is not an exhaustive categorization. Other international standard demand guarantee practice under the URDG may be identified on a case-by-case basis and apply where their relevance and their international and widespread character are evidenced. Local practice, however widespread in the relevant country, should not be held as ISDGP.



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Throughout this guide, the terms: “guarantee” reflect “demand guarantee”, and will include counterguarantees unless otherwise stated.



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Additionally, the term: “guarantor”, will include counter-guarantors unless otherwise stated. Other terms defined in the URDG shall have the same meaning when used in ISDGP.



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SWIFT



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URDG 758



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URDG 758 promulgates a clear set of internationally recognized rules which help all parties and courts recognize what type of guarantee is being issued and avoids many misunderstandings e.g. where local practice differs between a beneficiary, a guarantor, etc.



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* References to SWIFT in this document refer to the: Society For Worldwide Interbank Financial Telecommunications in their capacity as the dominant global provider of secure financial messaging services. SWIFT is the trade name of S.W.I.F.T. SCRL. The following are registered trademarks of SWIFT: the SWIFT logo, SWIFT, SWIFTNet, Accord, Sibos, 3SKey, Innotribe, the Standards Forum logo, MyStandards, and SWIFT Institute.



SWIFT* participants are expected to adhere to SWIFT’s rules as published in SWIFT’s manuals and which are updated from time to time. SWIFT may elect to enforce and/or validate certain rules which apply to the transmission of messages/data when using the SWIFT network. It must be noted that SWIFT’s network rules governing the transmission of messages/data do not govern or otherwise modify or override the guarantee terms nor do they override the rules that govern a guarantee. For any SWIFT message delivered and properly authenticated (as defined by SWIFT), any non-adherence to SWIFT’s requirements do not have any effect on a guarantor or counter-guarantor which utilize the SWIFT network as far as a guarantee or URDG 758 is concerned.



The Uniform Rules for Demand Guarantees (URDG) is an international rule set which when incorporated into a demand guarantee or an amendment thereto will govern it. The current revision is URDG 758 which entered into effect on July 1, 2010.



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43 44 45 46 47 48 49 50 51



Use of URDG 758 will automatically incorporate all the default positions, e.g. partial demands permitted, etc. into the guarantee. The URDG 758 rules apply unless the guarantee modifies or excludes them. Deleting the applicability of an article without clearly replacing it, could create unintended outcomes.



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Definitions



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The definitions for the below terms supplement Article 2 of the URDG.



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Applicant



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The applicant and instructing party definitions need to be read in conjunction. The applicant always maintains a relationship with the beneficiary via the underlying relationship and often they are also the “instructing party” as defined in URDG Article 2. It is important to note that while the applicant has entered into a contract with the beneficiary, there may be cases where the applicant may not have the means to procure the issuance of a guarantee through the guarantor. In such an event, the applicant will normally work with another party, the “instructing party” (“IP”) to induce a guarantor to issue its guarantee on behalf of the applicant.



62 63 64 65 66 67 68



The term “applicant” is generally not found in an underlying contract. Rather, the contract will use terms such as: requesting entity, principal, contractor, seller, supplier, builder, exporter in performance related guarantees – bidder, tenderer in bid bonds - buyer, or debtor, borrower in financial guarantees etc. As the guarantee is separate and distinct from an underlying contract, for the purpose of URDG and ISDGP, that party would be considered as the “applicant”.



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Once the guarantor has established a relationship with the instructing party, the application either forms the whole of a repayment agreement [or when acting solely as a request, it is a part of a master agreement], or a separate and distinct contract/agreement between the guarantor, the instructing party and where necessary, the applicant. It is the form completed by the instructing party and (and/or an applicant where applicable], to request the issuance of a demand guarantee or counter-guarantee. It defines the rights and obligations of each party in relation to the issuance, amendment and any reimbursement of a demand paid by a guarantor. When signed/agreed to by a guarantor and an instructing party (and possibly also with an applicant or otherwise approved by the applicant), it forms the essence of the relationship between them. The beneficiary stated in any guarantee or counterguarantee is not a party to and is not bound by the application.



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Authenticated



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For the purposes of ISDGP, the term: “authentication” relates to a type of verification needed to assure that an electronic document and/or an electronic record and/or data set can recognize a sender’s or user’s identity and is complete and unaltered using a set of identifying credentials. The authentication



The rules are not laws and mandatory governing law will automatically override any URDG 758 practice. However, it is hoped that law will remain responsive to commercial realities and to international custom and guarantee practice. This guide provides clarifications and best practices for guarantees subject to URDG 758.



Application



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83 84 85 86 87 88 89 90 91 92



process is technology neutral and will be predicated upon the technology being used and the level of authentication needed should be clearly defined in a guarantee. For example, a requirement for a signed document enhances the authentication requirements. Authentication requires the receiver to: “verify the apparent identity of the sender” while “signed” requires: “…an electronic signature that can be authenticated…”. Another example, is when a guarantee indicates a requirement for a presentation to be received via email or fax and should the email or fax meet requirements 1-4 below, it would be deemed: “authenticated”. However, a guarantee may also indicate that the email or fax must be tested/verified in some defined manner thus requiring an additional level of authentication. URDG 758 recognize that electronic documents and data transfer are common in many parts of the world and make the distinction that not all documents require a signature.



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However, where electronic documents are allowed by a URDG 758 demand guarantee, the guarantor or counter-guarantor must receive the electronic documents in a manner in which they can:



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1. Identify the party sending the electronic document/data; 2. Ensure that it is readable by them; 3. Confirm with reasonable certainty that the document/data transmission was complete and unaltered; and 4. Ascertain the date of sending and/or receipt of the data. Beneficiary



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The beneficiary acquires the rights and benefits pursuant to a demand guarantee upon the issuance of the guarantee by the guarantor. Thereafter, the beneficiary has the right to accept or reject amendments, to demand and receive a payment against the presentation of a complying demand, etc.



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The term “beneficiary” is generally not found in an underlying contract. Rather, the contract will use contracted terms such as: seller, buyer, employer, owner, or lender.



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Business day



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Business day should not be confused with calendar days. Additionally, this definition takes into account only days when guarantors are open for business for the acts of processing demand guarantees. Guarantors may be required to be open on other days to perform other business. Holidays in the guarantor’s or counter-guarantor’s country are not business days to them. Each guarantor and/or counter-guarantor will follow the business days in accordance with its own local laws and practices. Where a branch of a guarantor is acting as guarantor, the law applicable to that branch will determine what a business day is.



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URDG 758 does not determine relative business hours. Unless a guarantee indicates a guarantor’s business hours, a business day is considered a standard 24 hour period e.g. 12.01 am to 12 am.



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Charges



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The definition does not include any charges that may be due to a beneficiary and/or an applicant and/or an instructing party. In addition, charges are only due to a party for action(s) specifically authorized by the guarantor, counter-guarantor or an advising party. In the latter case, ultimately, the instructing party is responsible for any charges where authorized actions have occurred. Where possible, it is a recommended best practice to agree to charges, in advance. In any event, charges for authorized actions are due, without delay, unless otherwise pre-agreed.



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Complying presentation



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This definition is meant to be broad in its scope and is not limited to “demands” only. It includes all presentations (including demands), such as, for example, those relative to a beneficiary’s agreement to an amendment and/or a beneficiary or a guarantor or an instructing party’s request to an amendment e.g. increase a demand guarantee’s amount, an expiry event presentation, a beneficiary’s partial or full release of a guarantee, etc. whether or not such presentation contains a demand.



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The hierarchy defined in URDG 758 Article 2 definition of “complying presentation” extends to other international standard demand guarantee practices as determined, for example, by this publication and by the ICC in its Official Opinions and/or relevant DOCDEX decisions.



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Counter-guarantee



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This definition acknowledges that multiple counter-guarantees may be issued, as may be necessary to support a local guarantor to issue its own local guarantee to the beneficiary. However, a counterguarantee subject to URDG 758 does not mandate an issuance only of a local demand guarantee. Rather, a counter-guarantee subject to URDG 758 can support the local issuance of a surety guarantee, or a standby letter of credit or a local guarantee. The governing rules or laws may differ between the local issuance and the counter-guarantee. However, URDG 758 Article 1 b. does provide a default position for counter-guarantees which are silent e.g. not subject to a rule set to automatically become subject to URDG 758 if the counter-guarantor requests the issuance of a local demand guarantee subject to URDG 758. References in a counter-guarantee which is silent as to its governing rule set but indicates that it is subject to a particular law and/or jurisdiction and which does not specifically exclude URDG 758 does not override the default position noted in URDG 758 Article 1 b. and the counter-guarantee will become subject to URDG 758 with the understanding that the counter-guarantee’s stated governing law or jurisdiction will be applicable to the counter-guarantee. Notwithstanding that backstop, it is recommended that all the guarantees and counter-guarantees in a connected chain expressly state they are subject to URDG.



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Counter-guarantor



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When a counter-guarantee subject to URDG is issued, the counter-guarantor undertakes a primary obligation in accordance with the terms and conditions relative to the counter-guarantee it issued. The counter-guarantee is employed to support the issuance of a local guarantee or of a further counterguarantee in the chain. Each counter-guarantee and any local guarantee remains separate and distinct. Under a counter-guarantee, complying demands are received from the counter-guarantee’s beneficiary, which in the case of a single counter-guarantee is the guarantor requested to issue its own local demand guarantee. In the case of multiple counter-guarantees, the beneficiary would be the counter-guarantor which had issued its own counter-guarantee.



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Demand



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This is to be read in conjunction with the definition of “signed”. A demand is limited in scope to a “signed” document that is demanding payment under a demand guarantee or counter-guarantee.



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A demand is sometimes referred to as a “claim” or a “drawing”.



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Document



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URDG 758 acknowledges that documents may be in paper or electronic form unless restricted in the relevant guarantee.



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Guarantor



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Any person, bank, corporation, etc. may issue a guarantee or counter-guarantee for any purpose or underlying relationship, provided that local laws allow such party to perform this act.



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A guarantor may issue for its own account. For example, a guarantor could issue a guarantee on its own behalf to support: a) Rent payments due under a lease agreement, b) Construction or renovations for real estate it owns, c) a new line of credit for a newly established branch or subsidiary, etc.



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Guarantor’s own records



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This is limited in scope to allow the guarantor only the ability to review incoming and outgoing amounts for accounts they hold for a beneficiary, instructing party, an applicant, etc. provided the credit and debit make reference to the demand guarantee in some manner. For example, under an Advance Payment guarantee, a guarantor may be required to view an instructing party’s or an applicant’s account to determine whether the required incoming funds were received to allow the guarantee to become effective and/or available to receive demands.



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When incoming and/or outgoing payments are expected to be made through accounts held with the guarantor then the guarantor is expected to verify whether or not the event has occurred.



180 181 182 183



Guarantor’s own records should not be broadly interpreted as also covering other flows or acts albeit they might be done by or on behalf of the guarantor, such as the issue of a documentary credit or the occurrence of an event of default in a loan of which the guarantor is also a lender. Likewise, amounts debited or credited with branches in different countries are not considered a guarantor’s own records.



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Instructing party



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This must be read in conjunction with the above “applicant” definition. When different from the applicant, the “instructing party” is used to reflect the concept that a guarantor can issue the guarantee naming a party as an ‘applicant’ other than the guarantor’s actual customer. In this regard, it should be noted that the interaction between an applicant and its instructing party is outside the scope of URDG 758 except in relation to URDG 758 Article 1 c.



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Following the issuance of a demand guarantee, the guarantor is expected to follow the instructions of the instructing party only, unless the guarantor, the instructing party and the applicant have agreed otherwise.



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When the counter-guarantor requests the issuance of another counter-guarantee or a local guarantee, the counter-guarantor is acting on the behalf of its instructing party in requesting that the beneficiary of the counter-guarantee issue its own undertaking. The beneficiary of the counter-guarantee (local guarantor) will make its issuance and reimbursement decisions based on the request of the counterguarantor.



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Presentation



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This definition is wide ranging in scope and refers to any presentation for whatsoever purpose e.g. documents to be examined, notices of amendment acceptance, etc. whether the presentation is made in electronic or paper format under any URDG 758 related Guarantee.



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Presenter



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A presenter may or may not be the demand guarantee’s stated applicant or beneficiary. A third party making a presentation on behalf of the applicant or the beneficiary does not have to be legally associated with a beneficiary or an applicant. A presenter could be an insurance company, a freight forwarder, a subsidiary company, an agent, etc. that presents any document under a URDG related guarantee. The party presenting on behalf of another does not make that presenting party a party to a guarantee.



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Other terms relative to guarantee practice:



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Claim



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This is most often used as a replacement or substitute for a “demand” e.g. a claim for payment versus a demand for payment”. While not incorrect, the word “claim” can also be associated with other guarantee aspects such as a claim for reimbursement, a claim for fees, a claim for an extension, etc. When using the term: “claim” it is a best practice not to simply use the word in isolation but rather, to further associate the word with the relative guarantee claim type being requested against a guarantee.



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Confirmation or similar undertaking



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Confirmations of guarantees are not common practice. A confirmation represents a separate, independent undertaking by the confirming party, in addition to the issuer’s undertaking, to pay when a complying demand/ presentation is made. URDG 758 rules do not address confirmations.



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Discrepancy



222 223



This is a commonly accepted term used when a presentation’s content is deemed as non-complying to a guarantee’s terms or conditions



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Four Corner rule



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For the purposes of URDG 758 Article 19 a., this rule requires that all information be derived solely from the content contained within the boundaries of the four corners of a document without going outside the document’s contents to verify any facts, statements or signatures, etc. The same concept applies to a digital document.



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Independence Principle



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With relation to a demand guarantee, the independence principle refers to the fact that an undertaking remains separate and distinct from any contract or agreement on which it is based. Undertakings stand on their own terms and conditions.



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Irrevocable



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In accordance with URDG 758, demand guarantees are irrevocable. As stated in URDG 758, Article 4 b.: “A guarantee is irrevocable on issue even if it does not state this”. As an irrevocable undertaking, a



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guarantee’s terms cannot be changed, amended, modified or cancelled without the express consent of the guarantor and the beneficiary to the demand guarantee or the counter-guarantor and the beneficiary of the counter-guarantee.



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Issuer or Issuing Bank or Issuing Party



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This means the issuer of a guarantee (whether it is by a bank or another party) or counter-guarantee. These terms are commonly used in place of a “guarantor” or “counter-guarantor”.



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Local guarantee



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This means a guarantee issued in favour of the beneficiary which is a party to the underlying contract by the guarantor/beneficiary of a counter-guarantee, resulting from the request for a counter-issuance via the instructing party’s application to the counter-guarantor.



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Unconditional



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Unconditional is an ambiguous term and is technically incorrect where demand guarantees are concerned. Every guarantee contains conditions including as a minimum: demand requirements and an expiry date or event, etc. which must be complied with. Therefore, the word “unconditional” means all the terms and conditions as provided in the four corners of a guarantee and it, and any similar word or term, will be disregarded when inserted into a guarantee unless the term is otherwise defined in the guarantee.



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The terms: “Without Delay”, “Immediately”



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Although these terms are used in URDG 758, they remain undefined terms. While there are no specific rules relating to timing as to whether a notification must occur prior to a step or action (e.g. advising, presentation of a demand, etc.) to be taken by a guarantor under a guarantee, there is often damage to underlying customer relationships relative to these issues. It is important to note that URDG 758 does not impose any penalties relative to a late or non-notification. It relies on each relationship to decide the approach it will take with regards to notifications. As an undefined term, the notifications can occur on or after an event has occurred, e.g. after a demand has been paid. While notifications are made by guarantors to keep an instructing party informed, a guarantor cannot delay making a payment for a complying presentation to await instructions from the instructing party. While URDG 758 does not provide specificity for these terms, an ICC Official Opinion or a court or other legal proceeding can deem a substantial delay as excessive.



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URDG 758 does not require a reply (by the instructing or other party) to any notification provided by a guarantor, for example: a notification informing the instructing party that a complying demand has been presented. However, a guarantor may request a reply in certain other instances.



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General issuance considerations



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Clear data content and requirements in a guarantee are the linchpin of a successful guarantee transaction. URDG Article 8 states the minimum considerations for every type of guarantee, no matter the type of underlying contract/agreement which it may be supporting. In addition, data elements should be added, relative to the type of underlying deal which a guarantee is supporting. However, the list of recommended terms in URDG 758 Article 8 is not a prerequisite failing which the guarantee would be invalid. The parties should adapt the terms of the guarantee to their needs Note: URDG 758 provides certain guarantee formats.



276 277 278



If allowing presentation of a demand and/or any supporting documents in electronic form, guarantors should ensure that they reference the data transmission methodology and the transmission system needed to send and receive these presentations.



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Once a guarantee is issued and has left the control of the guarantor, its terms govern even if a guarantor erred for all or part of its issuance. It can only be changed via an amendment with the consent of the guarantor(s) and the beneficiary (or beneficiaries) or the counter-guarantor and the beneficiary to it.



282 283 284 285 286 287 288



It is the responsibility of the instructing party to insert only the necessary, applicable terms and reference numbers of the underlying contract into their application/request for an issuance of a demand guarantee. A guarantor is not expected to review, interpret or otherwise understand any underlying contract or agreement which a guarantee may be supporting. To this end, any inclusion in a guarantee similar to: “The terms used in this guarantee have the same meaning as in the contract/agreement” without inserting the definitions from the contract/agreement into the guarantee is very bad practice.



289 290 291 292



In accordance with URDG 758 Articles 15 and Article 4 c., a beneficiary is permitted to present a demand from the time when the guarantee leaves the guarantor’s control assuming the beneficiary is in a position to provide the guarantee’s required statement(s) and any other documentary requirements on the day they have presented their demand.



293 294



In many cases, a reference to an underlying contract is stated. This is used for the purposes of reference only and does not create a link between the guarantee and the contract in the content of URDG 758.



295 296



When imprecise, a guarantee’s terms could appear to be deemed either a Suretyship or a demand guarantee. Some examples of ambiguous terms and/or bad practice are:



297 298 299 300 301 302 303 304



a. This guarantee affirms contract number XXX (underlying contract is separate and distinct from a demand guarantee so it cannot affirm a contract’s content); b. The guarantor undertakes jointly and severally with the applicant to “XXX” (demand guarantees are a guarantor’s independent undertaking); c. This guarantee is a dependent guarantee (demand guarantees are independent undertakings); or d. Etc.



305 306 307 308 309 310



Even where a country has established governing laws and regulations defining the two types of guarantees (e.g. current examples exist in the following countries: United States, France, Egypt, and China), leaving ambiguity as to the type of guarantee being issued, is not a desired outcome. Local law may provide a default position for certain situations such as when a guarantor is a natural person or a consumer, and where silent, the outcome will be made upon a court’s judgment, arbitration or similar legal proceeding.



311 312 313 314



Not immediately available for a demand Article 4 c. URDG 758 does not specifically address guarantees which are not immediately available for presentation of a demand. However, a guarantee’s conditions govern its issuance. Should a guarantee not be immediately available to receive a demand upon its issuance, its terms must provide a clear



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reference as to how and/or when it will be available and the availability must be in a manner which can be determined from a presentation or by the guarantor’s own records.



317 318 319 320 321 322 323 324 325 326 327 328 329 330



Request for a delayed demand/payment



331



Title of a guarantee



332 333 334 335 336



Demand guarantees are seen in practice under a broad variety of titles, for example, Performance Bond, Guaranty/Guarantee, undertaking, etc. The reference in the guarantee to URDG 758 is an affirmation of the parties’ intent to have an independent, on demand guarantee. The legal nature of the guarantee does not lie in its title but rather in its terms. To avoid confusion or ambiguity, a demand guarantee should not contain terms that may cause the basic independence principle to be in doubt.



337 338 339 340 341 342 343 344 345 346 347



Excluding URDG article(s)



348 349 350 351 352 353



Provide clear demand requirements



354



Bad examples include:



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Certain guarantees may contain a condition similar to: a) This guarantee is available at sight but not earlier than XX days from a bill of lading date*; or b) Payment of a demand cannot be made earlier than XX days from a bill of lading date* (*and presumably a guarantee would require presentation of a copy of a bill of lading to evidence this otherwise it would be deemed a non-documentary condition). When a guarantee contains a clause similar to the above examples, it is poor issuance as URDG 758 Article 20 b. discusses that payment is due when the guarantor determines that the presentation is complying. Therefore, as payment is not due, the presentation is not in accordance with the guarantee’s terms. URDG 758 does not contemplate future dated payments and as such, these types of clauses will be deemed to mean that a presentation should not occur prior to when a payment is actually due e.g. in the above examples not prior to the XX days from the bill of lading (or other required document) date. Any early presentation will be deemed non-compliant for that reason



As previously noted herein, when excluding or modifying a URDG article either by explicit reference to the rule or implicitly by means of a provision that in some ways departs from that rule (Note: Article 15 a. or b. requires an explicit exclusion), it is a best practice to replace the excluded article(s) with the intended replacement. If an article is explicitly excluded and the guarantee remains silent regarding that rule, then as possible, the parties will consider that the opposite of that article’s default position is intended in cases where an opposite can be readily determined. For example, if a guarantee indicates that it is subject to URDG 758 except for Article 17 b. and is otherwise silent, the presumption is that partial demands will not be allowed and only one complying demand will be allowed.



Each guarantee should provide the reason(s) a beneficiary’s demand/supporting statement must state in order to draw or otherwise make a demand on the guarantee. The instructing party and the beneficiary should ensure that the demand requirements are in line with the underlying contract, which the guarantee is being issued to support, understanding that the guarantor issues the guarantee solely based on the completed application.



a. “The guarantor undertakes to pay upon receipt of a complying demand if the applicant fails to perform” (Note: Should provide the types of allowable performance failures);



357 358 359 360 361 362 363 364 365 366 367 368



b. “The amount of this guarantee will be automatically reduced with the reasonable financial value of any delivery or performance by the applicant under the Contract, sufficiently proven by a (photo)copy of the relative invoice and (photo)copy of the transport document” (Note: Poor drafting, e.g. who would determine “reasonableness” or the applicant’s “performance”); and/or c. “The guarantee shall remain in force and effect from the date hereof till the time the Beneficiary has recouped all outstanding obligations with respect to the performance of the Contract” (Note: Not determinable from a guarantor’s own records). Despite the instructions noted in URDG 758 Article 1 a., the only accepted manner in which Article 15 a. or 15 b. can be excluded, is by express exclusion in a demand guarantee using the words such as: the statement required by Article 15 (a. or b.) is excluded. If not expressly excluded, Articles 15 a. and 15 b. remain in force.



369 370 371 372 373 374



Article 15 a. should be varied or excluded in a guarantee in cases where an applicant’s default is not expected. For example, there will be instances such as guarantees where the instructing party will require the beneficiary to be a financial institution, and have that beneficiary/financial institution provide a line of credit to a third (3rd) party and should that 3rd party fail to repay the beneficiary/financial institution in accordance with the line of credit’s terms then, in these cases, the demand will not require a statement that an applicant defaulted but rather that the 3rd party defaulted.



375 376 377 378 379 380 381 382 383



Partial demand and multiple demands; amount of demands



384 385 386 387 388 389 390 391 392 393 394



Date formats



395 396 397 398



As stated in URDG Article 3. e. the term “within” when used to define a period excludes the first date mentioned but includes the last date mentioned. For example, if shipment must occur within April 16, 2020 to May 1, 2020 then the shipment must occur during the period of April 17th to May 1s t both dates inclusive (see example): Shipment within 16 April 2020 and 1 May 2020



It is recommended to always allow partial demands and URDG 758 Article 17 a. makes this the default position should a guarantee remain silent. This allows a beneficiary to demand only an amount that is actually due to them. It is also a recommended best practice for each demand guarantee application to specifically request information related to whether multiple demands are allowable. However, Article 17 b. makes this the default position when a guarantee is silent. When the URDG 758 position is overridden, only a single complying demand will be paid even when a guarantee states that partial demands are allowed.



Guarantors should be aware that numeric date formats in different countries may produce an unintended result, e.g. 4/5/2020 can mean 4th May or 5th April. It is recommended to write dates in numeric and in word form e.g. 12th of March 2019. When a guarantee’s condition indicates that an action must occur by a certain start/end date, or within a set period of time, there is often confusion as to whether a period should begin on said start date or perhaps start the day after the stated start date, or if a period of time is cited, does the period include the start and end dates, etc.? URDG 758 Article 3. d., clarifies these positions by stating that the exact words of a guarantee will govern the actual dates. For example, when a guarantee states that a shipment must be made before January 1st, 2020 then the shipment must be made by December 31, 2019 as the term “before” excludes the date mentioned.



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399 400 401 402 403 404 405 406 407 408 409 410 411



Use of generic terms to describe an issuer of a document



412 413 414 415 416 417 418 419 420



Expiry dates, periods or events



Generic terms used to describe an issuer of a document add no value and are often misunderstood. For example, a “first class” bank “well-known”; “international bank” is subjective and does not mean what these labels entail in terms of solvency or credit worthiness. It is a best practice for guarantors to state the document function e.g. law firm/office, inspection company, etc. and/or to request an actual company name when defining their guarantee’s documentary requirements understanding that when using a particular company, its license may be revoked or expired, its name may change or it may merge or become insolvent. If one of the latter events should occur, it is a best practice for the beneficiary to inform the instructing party and/or the applicant and the instructing party will promptly provide an amendment, prior to any demand. In accordance with URDG 758 Article 3 f., whenever generic terms are used, they will exclude issuance by the guarantee’s stated applicant and beneficiary only. All other issuing parties/companies/individuals will be accepted.



It is recommended to provide the time of day in which a guarantee will expire. Indicating an expiry date without indicating a time of day for the expiry will allow the beneficiary to make a presentation until the end of a guarantor’s “business day” as defined in URDG 758 Article 2. The expiry cited in the demand guarantee may also include the hour of the day in which a guarantee will expire and in such cases, the standard definition of a “business day” will be overridden by the guarantee’s explicit terms. Guarantees must have a clear expiry date and/or expiry event. Clauses similar to: "This guarantee will expire upon Final Acceptance";



421 422 423 424 425 426



"This guarantee is valid until completion of the contract"; and/or "This guarantee is valid until released by the beneficiary" are considered non-documentary conditions and not expiry events. Since they do not specify any document to indicate compliance with these conditions then accordingly, URDG 758 Article 7 applies and requires that they should be disregarded unless the condition can be determined from the guarantor’s own records or from an index specified in the guarantee.



427 428 429 430 431 432 433 434 435 436 437 438 439 440



More complex clauses are also often unclear and when unclear, they must be avoided: a. “This guarantee expires 30 days after the last contractual delivery date” (Note: Date cannot be determined from a guarantor’s own records); or b. “This bank guarantee shall expire on MM/DD/YY (the expiry date) following which it shall be returned to the Guarantor for cancellation but, in any case this bank guarantee shall, save in respect of a demand made on or before the Expiry date, become null and void whether returned or not” (Note: In accordance with Article 25 b. a guarantee need not be returned to be cancelled. While this statement appears to be aligned with Article 25 b. it adds confusion as it is appears to want the guarantee returned while indicating that is will be “null and void” even if it is not returned.); or c. “The present guarantee is valid until the respective contract between You and the Tenderer is signed, while not exceeding the tender offer validity period. The validity period of the Tender offer starts from the day of its opening” (Note: The opening date of the tender is unknown and the guarantee does not require a document relative to the tender’s date).



441 442 443 444



Flexibility is provided so that a specific maximum expiry date can be applied in conjunction with an expiry event and allow the earlier of the two to govern when a demand guarantee expires. For example, a demand guarantee may state: “It is a condition of this demand guarantee that it shall expire upon the earlier of:



445 446 447



a) The guarantor’s receipt of a letter from the beneficiary indicating that the applicant has successfully completed all contracted requirements; or b) The date (insert date)”.



448



When including multiple expiry possibilities clarity is critical. For example, should a guarantee state:



449 450 451 452 453 454 455 456



“Expiry is as follows: a) If the applicant is the successful bidder, then upon our receipt of copies of XXX documents; or b) If the applicant is not the successful bidder upon the earlier of (i) Our receipt of a copy of the beneficiary’s notification to the applicant of the result of the bidding process or (ii) Twenty eight days after the end of the bid validity i.e. (25 January 2012)”. In such an example, a demand could be received indicating that the “applicant is the successful bidder” after the guarantee was closed due to the provision cited in b (ii).



457 458 459 460 461



A better example would be: “This guarantee will expire upon the earlier of: a) If the applicant is the successful bidder, upon our receipt of copies of XXX documents which must be presented no later than b) (ii) below; or b) If the applicant is not the successful bidder, upon either:



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(i)



If a guarantee’s terms clearly allow or otherwise provide that the presentation of a document from the applicant which is allegedly countersigned by the beneficiary providing a statement similar to: the project was completed or the loan was repaid, etc. allows a guarantee to close, then presentation of the required document will allow the guarantor to close the guarantee, prior to any stated expiry date or period. It is recommended that each demand guarantee specifically state the exact and full address where all demands/presentations must be presented.



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Pursuant to Article 14a.i. of the URDG, a presentation at any place other than the place of issue or the one specified in the guarantee is discrepant even if that place is branch or a representative office of the issuer.



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Allowing electronic presentations:



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Authorised languages for documents:



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Governing law considerations



(ii)



Our receipt of a copy of the beneficiary’s notification to the applicant of the result of the bidding process indicating that their bid was not selected; or Twenty eight days after the end of the latest bid date which is, (25 January 20XX)”. A fixed expiry date.



In the current global environment, many banks and other parties are seeking to automate processes and reduce paper. There is a variety of technologies which exist to accomplish this in effective ways. However, not all technologies are compatible with each other. The best practices require clarity in each demand guarantee, and to specifically state the name/type of system/technology to be used and any electronic address where said data will be received. For example, if a presentation allows for an authenticated SWIFT message, the demand guarantee would request the delivery of any demand and supporting statement by SWIFT, and would include the guarantor’s SWIFT address and the authenticated SWIFT message content and/or message type that should be used. If a demand guarantee did not prohibit the use of a different SWIFT message type, any authenticated SWIFT message could be used. Conversely, if a bank has provided access to a beneficiary using its own proprietary bank system, the name of the system would be included in the demand guarantee.



In accordance with URDG 758 Article 8 j., it is a recommended best practice to include the language or languages in which a document must be issued and a guarantor should take into account that third party companies, persons, etc. are not expected to issue their documents in languages which are not native to their country or locale. URDG 758 Article 14 g. reflects that an applicant or a beneficiary must, unless otherwise allowed, present its documents in the language of the demand guarantee. However, this does not apply to documents issued by any other party. Insertion of a statement similar to: “All presentations must be made in the English language and/or provide an English translation should it be issued in another language” is a best practice.



Unless explicitly modified, a demand guarantee subject to URDG 758 Article 34 defaults to the governing law of the location of the guarantor’s branch or office that issued the guarantee whereas a counterguarantee defaults to the governing law of the location of the counter-guarantor’s branch or office that issued it. Each guarantee and counter-guarantee is separate and independent of each other.



504 505 506 507 508 509 510



When a guarantor or counter-guarantor issues a demand guarantee which did not specifically indicate a governing law (or jurisdiction) and instead, it relies on URDG 758 Article 34, it remains set throughout the lifecycle of a guarantee unless otherwise amended and agreed to. In instances where a guarantor or counter-guarantor relocate its premises to a different location where the governing laws differ from those of the issuance location during the lifecycle of a guarantee, then, an amendment would be needed to adjust the governing law from the place of issuance to the place where the guarantor or counterguarantor relocated.



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Subrogation



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Jurisdiction



523 524 525 526 527 528 529



When a guarantor or counter-guarantor issues a demand guarantee which did not specifically indicate a governing jurisdiction and instead, it relies on URDG 758 Article 35, it remains set throughout the lifecycle of a guarantee unless otherwise amended and agreed to. In instances where a guarantor or counter-guarantor relocate its premises to a different location where the governing jurisdiction differ from those of the issuance location during the lifecycle of a guarantee, then, an amendment would be needed to adjust the governing jurisdiction from the place of issuance to the place where the guarantor or counter-guarantor relocated.



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Arbitration



536 537 538



Documents v goods, services or performance and the Four Corner rule



539 540 541



However, in limited instances, the Four Corner rule is overridden in situations where a guarantee requires a determination from the “guarantor’s own records” as described in URDG 758 Articles 7 and 13 b.



URDG 758 does not address the legal doctrine relative to a subrogation of rights, e.g. whereby one party is entitled to enforce another party’s rights for its own benefits after it has paid. For example, a guarantor that has paid the beneficiary may, subject to the applicable law, be able to claim against the applicant, as a subrogee, in the beneficiary’ right against the applicant under the underlying relationship.



Unless explicitly modified, a demand guarantee subject to URDG 758 Article 35 defaults to the jurisdiction of the country of the location of the guarantor’s branch or office that issued the guarantee whereas the jurisdiction for any counter-guarantee defaults to the country of the location of the counter-guarantor’s branch or office that issued the counter-guarantee. Each guarantee and counterguarantee is separate and independent of each other.



In addition, a guarantee subject to URDG 758 may provide for arbitration if a condition to this effect is so provided in the guarantee. An arbitration agreement in the underlying relationships between the guarantor and the applicant and/or the applicant and the beneficiary does not automatically apply to the guarantee. An arbitration agreement in the guarantee does not automatically apply to the counterguarantee and vice versa.



All payment decisions will be made solely on the basis of the documents, based on the Four Corner rule. URDG 758 Article 5 a. enforces the independent nature of a guarantee.



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Understanding and avoiding non-documentary conditions



547 548 549 550



Stating ambiguous, unclear or unnecessary conditions in a guarantee without stipulating a documentary requirement generally leads to confusion and unsatisfactory consequences for one party or another and is strongly discouraged. Parties to the guarantee will disregard these conditions (consider them as not stated), when they are not directly tied to a specific documentary requirement, unless:



551 552 553 554 555 556



a. it is a reference to a specific calendar date; or b. the completion or lapse of a stated period that can be determined e.g. expiry is 90 days after the underlying contract date cannot be determined unless a guarantee incorporates the contract date; or c. an indication that the condition will be satisfied from the guarantor’s own records or a specific index indicated in the Guarantee.



557 558 559 560 561 562 563 564 565 566 567 568 569 570 571 572 573 574 575



Adding data to a guarantee which does not require some form of documentary proof are considered unnecessary and, as such, URDG 758 Article 7 reflects that these data elements will be disregarded unless they refer to expiry periods or an aspect defined in URDG 758 Article 2’s definition for a guarantor’s own records.



Variation of amount of guarantee The majority of demand guarantees will be issued for a fixed, set value upon their issuance. This is the recommended best practice. However, underlying contract amounts, from time to time, have a need to vary their amounts to account for situations such as estimated labour costs, possible interest, unit price adjustments not known in advance because of: changes needed, based on the mineral contents of a shipment of scrap metals, and (when in energy business) prices do not set until the time of shipment, based on the then current price stated in an index, etc., and the demand guarantees which support these types of contracts, are often required to mirror the contract’s amount terms. URDG 758 Article 13 reflects best practice to either: a) require a document such as: in the case of a metal shipment, an analysis report against which a unit price can be revalued, predicated upon the mineral contents stated in the report, or a screen print of a Bloomberg or Reuter’s page, reflecting the set price of a particular energy commodity on a given date or range of dates, etc.; or b) use a guarantor’s own records, which is a defined term in URDG 758 Article 2 or from a published index which is stated in a demand guarantee, against which a guarantor can perform their own verification and/or calculations.



576 577



Terms and conditions within a guarantee, such as automatic reductions of amounts or automatic extension clause are not considered non-documentary conditions.



578 579 580 581 582 583 584 585



Where there is a conflict between: a) a guarantee’s stated amount which adjusts based upon a defined event stated in a guarantee and b) a generalized tolerance e.g. 10% more or less, then the higher of the two amounts will govern. For example, if a guarantee stated: Amount $500,000. 10% more or less but included a reference similar to: “The amount of this guarantee will automatically fluctuate/change/adjust to cover any increase or decrease according to the Platt’s 3 day average pricing after the date of loading on board (Note: this presumes that a copy of a transport document is indicating that an on board date is a requirement for payment under a guarantee. However, if the demand guarantee does not require an on board date, this is a non-documentary condition.)”. In such cases,



586 587



then the guarantee’s amount will not be limited to 10% more but rather, it will adjust in accordance with the Platt’s pricing.



588 589 590 591



Requesting an advising party



592 593 594 595



If the chosen advising party is not a correspondent of the guarantor, the guarantee may still be routed to that party by utilizing a first advising party, which is a correspondent of the guarantor with instructions for that first advising party to advise the guarantee through the second advising party that is the instructing party’s chosen advising party.



596 597



Otherwise, the guarantor will contact the instructing party indicating that they will choose the advising party.



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It is a best practice to use an advising party to help assure a beneficiary that a guarantee is apparently authentic.



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Guarantee issuance - leaving the control of the guarantor



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The concept referred to in URDG 758 Article 4 a.: “when it leaves the control of the guarantor” was used to create clarity that the mere creation of a demand guarantee or an amendment thereto does not mean that it is issued. The essential outcome is irrevocability: a guarantee is only irrevocable when it is “issued”. The logic is similar to the writing of a check (cheque), in advance of sending the check or handing the check to a person or an establishment to settle a payment obligation. When a check is completed, but retained and not dispensed by its creator, it can be cancelled by its creator by simply destroying it or marking it as “cancelled” or “void”, etc.



608 609 610 611 612



With the introduction of automation, the concept of issuance has caused certain confusion. For example, when a guarantor creates a guarantee in paper form and gives it to their outside legal counsel in anticipation of a contract’s closing, should the contract fail to close, for whatever reason, the guarantee, never having been issued and still within the guarantor’s control, could be closed by the guarantor, without anyone’s approval.



613 614 615 616 617



However, with automation, an instructing party might receive an electronic copy of the guarantee, and forward that copy onwards to a beneficiary, or another entity, despite the guarantee not yet leaving the guarantor’s control. It must be noted that an e-copy of a guarantee, is not the original undertaking and no one should rely solely on a copy of a guarantee as confirmation that the undertaking was issued and left the guarantor’s control.



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A copy of a guarantee is not proof of itself that the original guarantee has left the control of a guarantor unless the guarantor or an advising party is the sending party denoting that the guarantee is issued, or similar statement.



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Copies of digital guarantees such as those issued via the SWIFT network should be validated by a bank or other party known to the requestor. The nature of a SWIFT message is that it must be actually transmitted, in an authenticated form, to a receiver and the receiver’s confirmation will provide reasonable proof that the party sending the message has actually sent it. Whereas, a copy of a



If the request (application) for the issuance of a guarantee or an amendment indicates an advising party that the guarantor maintains some form of correspondent relationship with, then the guarantor will generally follow the instructions contained therein.



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typewritten guarantee does not represent the original nor would it provide absolute proof that an original was issued and left the guarantor’s control.



627 628 629 630 631 632 633 634



For avoidance of doubt, pursuant to Article 4(a) of the URDG, if the guarantor provides instructions to a party, generally another bank, to hold the guarantee on its behalf, then the party receiving the guarantor’s instructions is to be deemed as an agent of the guarantor for the purpose of demand guarantees under URDG 758, and the guarantee is not issued until it is actually released to the beneficiary since, it is only at that moment in time that it leaves the control of the guarantor acting through its agent, provided the applicable law so provides and that the agent so accepts to act on the guarantor’s instructions. It is a good practice that an agent which is not willing to act upon the guarantor’s instructions would so inform the guarantor without delay.



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In accordance with URDG 758 Articles 15 and Article 4 c., a beneficiary is permitted to present a demand as soon as a guarantee leaves the guarantor’s control assuming the beneficiary is in a position to provide the guarantee’s required supporting statement(s) and any other documentary requirements on the day they have presented their demand.



639



Advising a guarantee or amendment



640



This section is to be read in conjunction with URDG 758 Article 10.



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The fact that a party is requested to advise a guarantee, does not mean that the party must act accordingly. An advising party has no legal obligation to perform this service, unless it has otherwise agreed to do so. However, when the advising party is not prepared to advise a guarantee, sound international practice requires it to inform, without delay, the party from whom it received that guarantee (sending party).



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An advising party must take reasonable means to affirm a guarantee’s apparent authenticity and that it was received from the named guarantor or party sending it. A second advising party needs to affirm that the guarantee it received is apparently authentic and that it was received from the sending party (first advising party).



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Should an advising party fail to authenticate (as defined in URDG Article 2 and supplemented under “Authenticated” in the Definitions section) an incoming guarantee e.g. due to any advising party’s inability to establish the identity of the party sending the guarantee, the validity of a signature, its content as readable and/or there is reasonable certainty that the document/data transmission was not complete and/or unaltered, an advising party may elect, at its discretion, to advise a guarantee provided that the receiving party (second advising party, beneficiary, etc.) is informed of the relevant advising party's inability to authenticate a guarantee, while simultaneously seeking to obtain authentication from the sending (e.g. issuing, first advising, etc.) party.



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The advising party electing to advise a guarantee must then advise the guarantee’s details to the beneficiary or to another advising party, at their option. In doing so, the advising party must not change, nor insert additional or remove any terms and/or conditions from the guarantee. This is what is meant in Article 10 a. in requiring the advice accurately to reflect the terms and conditions of the guarantee as received by the advising party.



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In accordance with URDG 758 Article 10 c., there is no duty for any advising party to review a guarantee’s content for effectiveness, coherence, enforceability, conflicting terms, etc., or to address the credit standing of the guarantor.



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A bank-to-bank type of instruction contained in a guarantee, which is not meant for a beneficiary, is not considered a guarantee term or condition and can be advised without notification to the beneficiary or changed without agreement from the beneficiary. Examples include but are not limited to: Authorization to debit a counter-guarantor’s account; instructions on how to forward a guarantee, etc.



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Once accurately advised, the advising party is not obligated to assume any other duties under a guarantee, including that of examining a demand or a presentation.



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Using different advising parties



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Where a demand guarantee was advised by a party which no longer continues its involvement as an advising party, then upon their providing their notification electing not to advise an amendment(s), or upon the guarantor’s own discretion, the guarantor may either:



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There are a number of reasons why it is not always possible to continue to route all messages using the same parties throughout the lifetime of a guarantee e.g. bank mergers, closure, etc. However, wherever possible, it is a recommended best practice to use the same advising parties throughout the lifetime of a guarantee.



a) Route a copy of the demand guarantee and all previous amendments to a new advising party with a request for them to become the new advising party and will from then on route the new and any future amendments onwards; or b) Send future amendments directly to the beneficiary indicating that the advising party is no longer acting in the capacity as an advising party.



Delays in advising A guarantor is not responsible for any delay outside of its own actions or inactions that may have been caused by any advising party, or a beneficiary or anyone else. Rather, the instructing party ultimately bears the responsibility for the requested service, in all cases. For example, the instructing party requests that the demand guarantee be advised to the beneficiary through the beneficiary’s bank – EEE Bank. EEE Bank receives the demand guarantee but delays advising it, or refuses to advise it to the beneficiary, or decides to deliver it to the beneficiary using another, second advising party. In these examples, any resulting delay becomes the instructing party’s responsibility. The result would be the same if the guarantor chose to use an advising party, unless an instructing party or counter-guarantor prohibited them from doing so.



696



Amendments



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This section should be read in conjunction with URDG 758 Article 11.



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Any change made to an existing guarantee term is deemed an amendment, in spite of any other title given to it. While most amendments originate with the instructing party, a guarantor may elect to make an amendment on its own, for instance in cases which relate to its compliance policy.



701 702 703 704 705



A demand guarantee, being an irrevocable undertaking can only be amended if the guarantor and the beneficiary, as parties to the guarantee, and/or the counter-guarantor and the beneficiary, as parties to the counter-guarantee, agree to the proposed amendment regardless of the terms of the amendment, including where the amendment purports to be immediately binding, or to become binding failing rejection within a set period of time, or where the amendment is to the beneficiary’s advantage such as



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an amendment to the guarantee deleting a condition for payment. The guarantor’s or counterguarantor’s agreement is enforceable when it leaves the guarantor’s or counter-guarantor’s control. However, the beneficiary must also agree to it for an amendment to be binding on it.



709 710 711 712



As an exception to the above, there are instances where a guarantee will provide for an automatic amendment in its terms, e.g. reduction clauses, automatic extensions of an expiry date, etc. As the term is part of the guarantee, these changes are automatic and thus they do not require an amendment thereto nor a beneficiary’s agreement.



713 714 715 716 717 718



Pursuant to Article 11(b) of the URDG, a beneficiary has no time limits to make their decision to accept or reject an amendment unless the guarantee expressly provides otherwise. A beneficiary can accept or reject a whole amendment in any order that they prefer e.g. Amendments 1 and 3 can be accepted while Amendment 2 remains outstanding pending the beneficiary’s notification of their acceptance or rejection. Moreover, the acceptance by the beneficiary of an amendment does not compel that beneficiary to accept a similar amendment in the future.



719 720 721 722 723 724 725 726



In accordance with URDG 758 Article 11 c., a guarantor can presume a beneficiary’s acceptance of an amendment(s) if a presentation is made which is in compliance with “only” the amended demand guarantee terms. For example, if an amendment is made which extends a guarantee’s expiry date and a presentation is received after the initial expiry date, but before the new expiry date and it otherwise complies with the guarantee’s requirements, a guarantor can assume the beneficiary has accepted the amendment as the presentation would otherwise be rejected, i.e. the demand guarantee would have expired if the beneficiary had not accepted the amendment. Since the presentation only complied with the amended guarantee, the amendment is deemed accepted.



727 728 729 730 731 732



If a demand complies with both the amended and un-amended guarantee then the original, unamended guarantee remains in effect. For example, a guarantee is issued for USD 100,000.00 and allows partial drawings. It is later amended to reduce the guarantee’s value by USD 25,000.00 for a new total value of USD 75,000.00. The beneficiary presents a demand for USD 75,000.00 without specifically accepting or rejecting the reduction amendment. In this example, the beneficiary may still present a demand for the remaining USD 25,000.00



733 734 735 736



In accordance with URDG 758 Article 11 e., any attempt by a beneficiary to change an amendment or to partially accept its terms, will automatically be deemed a rejection of the entire amendment by the beneficiary. In such a case, the best practice for a guarantor is to inform the beneficiary and the instructing party that the whole amendment is rejected.



737 738



In accordance with URDG 758 Article 11 f. an amendment cannot mandate or otherwise demand that a beneficiary provide its response to it within a certain time frame.



739 740 741 742 743 744 745



When a demand guarantee provides an automatic extension clause often referred to as an “evergreen clause” (Refer to section titled: Guarantees which contain a self-extension provision – evergreen clause (DG to number the paragraphs to facilitate cross references of this type)) or self-extension clause which allows a guarantor to send a notification to cancel a guarantee within XX days before its then current expiry date or event, this notification will not be deemed as an amendment as the guarantee’s conditions have allowed this to occur and therefore these notifications do not require the beneficiary’s consent.



746



Receipt of a presentation



747



Incomplete presentations e.g. presentations with less than all required documents



748 749 750 751 752 753 754 755



URDG 758 Article 14 must be read in conjunction with URDG 758 Article 20 a. which states, in part,: “if the presentation indicates that it is to be completed later, it need not be examined until it is completed”. Otherwise, it should be deemed a complete presentation and examined accordingly. The URDG require that any presentation which contains a demand for payment must be received in full unless the presenter indicates that it is not complete. As long as the presentation indicated is incomplete, it need not be examined or rejected by the Guarantor. If it is not completed before expiry, the presentation is deemed not to be made and therefore, no refusal notification is needed.



756 757 758



Paper and non-paper presentations



759 760 761 762 763 764 765



Where a paper presentation is required, a guarantor should not dictate the delivery method, e.g. All presentations under this demand guarantee must be made by a specific courier company or by registered mail”, etc. In accordance with URDG Article 14 d., cases where a demand guarantee makes such a requirement but does not expressly prohibit the use of other modes of delivery then the beneficiary may, at its option, make its presentation in any manner it deems necessary to ensure that the presentation is received by the guarantor at the place and by the time indicated in URDG 758 Article 14 a.



766 767 768 769 770 771 772 773



As per the provisions of URDG 758 Article 14 c., where an electronic document is required or allowed and a guarantee does not state the data processing system and/or the technology needed for the presentation, the document may be delivered via any system/technology which allows the document to be authenticated by the guarantor (Note: “authenticated” is a defined term) or in paper form. Where a guarantee requires a presentation via an authenticated SWIFT message, then any authenticated SWIFT message format is acceptable , if it is delivered to the correct recipient on or before any required due date. Conversely, a paper document can always be delivered to the guarantor if the guarantee does not indicate whether a presentation is to be made in electronic or paper form. .



774 775 776 777 778 779



Electronic documents are typically data transmissions. Once the data are sent and subsequently received by a guarantor within the guarantee’s validity date, and are complete and unaltered and it can reasonable be assumed that it was sent by the party purporting to send it to the recipient, the requirement for their presentation is satisfied in full. However, should the guarantee have required the use of a specific format, only that format shall be used for transmission regardless of whether the use of another format permits to understand the transmitted record or data.



780 781 782



Guarantees with requirements for paper documents may use expressions such as XX originals and XX copies or full set of originals, etc. These expressions do not translate to electronic presentations and will be disregarded if they are used (refer to URDG 758 Article 3.c.).



Where a demand guarantee is silent with regards to presentations in either electronic or paper form, the presentation must be in paper form (refer URDG 758 Article 14. e.).



26



783 784 785 786 787 788 789



Identifying a presentation



790



Requirements for demand



791 792 793 794 795 796 797 798 799 800 801 802 803



Supporting statement(s)



As noted in URDG Article 14 f. when a presentation is made under a demand guarantee, it must reference the demand guarantee number or provide such clear reference to the demand guarantee, that it enables the guarantor to readily identify the demand guarantee, to which the presentation relates. Absent the identification of the guarantee’s reference number, the time for examination shall not start until such identification is made and nor will the guarantee validity be extended as a result. There is no late payment, loss or damage claims allowed for failing this requirement.



As noted in URDG 758 Article 15 a., a supporting statement can be inserted within the text of the demand or can be provided in a separate document. A demand and any separate supporting statement must be signed by the beneficiary and must state the respect in which the applicant is in breach of its obligations. When the demand and the supporting statement are combined, the document requires a single signature. Unless the guarantee requires specific terms to be used in the statement, the beneficiary has the discretion to use terms provided they convey the nature of the underlying breach. The best practice is for each demand guarantee to clearly provide the specific allowable statement(s). URDG 758 Article 15 does not provide any guidance or limitations for the amount of detail needed in the supporting statement nor does it mandate any statement content requirements. When the guarantee is silent, any reason in the supporting statement that describes the nature of the breach and is within the context of a guarantee is deemed allowable. The beneficiary’s supporting statement can indicate the breach in generic terms such as:



804 805 806 807 808 809 810 811 812 813 814 815



It is the instructing party’s responsibility to provide the guarantor with clear instructions as to any specific terms to be required in the guarantee for the statement.



816 817 818 819 820



However, where a counter-guarantee is silent, the beneficiary of the counter-guarantee (i.e. the guarantor) does not need to provide a statement of breach. Rather, the beneficiary of the counterguarantee simply need to indicate that a complying demand was received against its local guarantee. Upon providing that statement, the guarantor is deemed to have received a complying demand under its guarantee.



821 822 823



Form of demand



824 825



A) Applicant did not perform under contract [insert contract reference number, the relevant contract paragraph number] and/or applicant did not complete or correctly execute any (include specific obligations under the contract]; B) Applicant failed to pay or repay an amount when due; C) Applicant delivered improper materials or services; D) The applicant failed to complete the contracted work on time or in accordance with the contract; E) The applicant’s equipment or performance is defective; or F) Etc.



Demands must be issued by the beneficiary and may be issued in any form with or without a title or otherwise including the word “demand” in its title. The minimum requirements are: a. Per the definition of “demand” in URDG 758 Article 2, it must be an original and signed by the beneficiary.



826 827 828 829 830 831 832 833 834 835 836 837 838



(Note: “signed” is a defined term in Article 2 of the URDG.) b. it will be dated and, in accordance with URDG 758 Article 15 d., the date must be on or after the date the beneficiary is entitled to present the demand. c. A simple statement that fulfils the function that it is a demand for payment and indicating the specific currency and amount demanded. The amount being demanded may be written in numbers and/or in words. Where a demand includes numbers and words then the amounts must agree or a demand will be deemed non-complying for this reason.



Demand and document dates When these are related only to a demand or its supporting statement(s), the date of either cannot be earlier than when the beneficiary is entitled to present a demand. For example, if a demand guarantee requires: 1. A beneficiary’s demand to state that invoice amount(s) are past due in excess of 90 days; and 2. Copies of the relative dated invoice(s)



839 840 841 842



and should a single presentation containing a demand and multiple invoices be made then, in this example, the demand date cannot be earlier than the 91st day from the latest invoice “due” date or in instances where an invoice is silent as to its due date or the due date cannot otherwise be determined by the invoice alone, then the 91st day from the latest invoice date.



843 844



Using the same example, a demand or any required document cannot bear a date in the future. It must be dated on or before the date it is presented to a guarantor.



845 846 847 848 849 850 851



Corrected Presentations, including demands



852



Examination



853 854 855 856



Some of the requirements under this heading are not directly addressed by URDG 758. However, it does directly pertain to the “international standard demand guarantee practice” referred to under the definition of “complying presentation” defined in URDG 758 Article 2 and supplemented in the “Definitions” section of this document.



857 858 859 860 861 862 863 864



Examinations based on the Four Corner rule



When a beneficiary makes a demand that is not in compliance with the guarantee, the Beneficiary is allowed to correct the presentation and to re-present it within the guarantee validity period. It will not be considered as a second presentation but rather, a re-presentation of the first presentation. Consequently, if a guarantee limits a beneficiary to a single presentation, and that presentation is noncomplying with a guarantee’s terms, the beneficiary can correct the presentation (if possible) if the representation occurs within the guarantee’s validity period.



All guarantors must examine documents in accordance with international (and not local or individual) standard demand guarantee practices and all examinations are based on the Four Corner rule, meaning that guarantors will review each document of the presentation solely against the terms of its demand guarantee without relying on other resources or verifying any facts, other than those specifically described in the demand guarantee or from the guarantor’s own records (defined in URDG 758 Article 2 and 13 b.). However, data in each document presented must not conflict with the guarantee or any other part of that presentation (URDG 758 Article 19 b.).



28



865 866 867 868 869 870 871 872 873 874 875



Including non-required information in a document



876 877 878 879 880 881 882



Document signatories



883 884 885 886



Presentations which include non-required documents



887 888 889 890 891 892 893 894 895 896 897



Recalculations



898 899 900 901



Visaed, legalized documents



902 903 904 905 906



Strict compliance



In accordance with the terms of URDG 758 Article 7 which must be read in conjunction with URDG 758 Article 19 b., should a beneficiary include information/data in its presentation which are not required in a guarantee and should that information conflict with the terms contained in the guarantee, then this would be deemed a non-complying demand. For example, if a guarantee stated a non-documentary condition such as: “This guarantee covers contract 12345”, it is to be disregarded, unless, per Article 19 b. a beneficiary’s presentation indicates a different contract number in a document or statement required in a guarantee, e.g. beneficiary’s statement states that this presentation is in accordance with the terms of contract number 55555. Since the guarantee reflects the contract as “12345” any reference by a beneficiary to another contract cannot be disregarded and will be deemed as noncomplying for this reason.



Where a guarantee requires a signed document from anyone e.g. beneficiary, an authorized signatory, etc. a guarantor will ensure that it is signed but they will not verify the signature in any manner (refer to URDG 758 Article 27 a.). Where electronic signatures are required, the recipient of the document must be able to authenticate the signature (See the definition of "signed" in URDG 758 Article 2.), however, without having to ascertain the authority of the signatory as further provided in Article 27(a) of the URDG.



If a presentation is made containing a document that is not required by a demand guarantee then any non-required document will be disregarded (refer URDG Article 19. d.) for the purposes of a URDG 758 examination and may be returned to the presenter.



In accordance with URDG 758 Article 19. e., a guarantor is not obligated, in any manner, to recalculate any amounts or quantities on invoices or any other document unless a guarantee is issued with specific requirements as defined in URDG 758 Article 13. b. When a guarantee provides a specific index and the ability to determine the calculation method/formula then a guarantor will perform the calculations for variations to the amount of a guarantee (Article 13). Once a guarantor has determined the variation and has ascertained the guarantee’s value any presentation must be in accordance with the guarantees stated value and, if not, a presentation may be refused for this reason. Where a guarantee does not otherwise provide specific requirements as defined in URDG 758 Article 13, a guarantor cannot consider a presentation as non-complying if it elected to perform a calculation outside of its examination requirements.



There is no universal requirement for the form or format of a visa or for the data content relative to a legalized document. URDG 758 Article 19. f., allows a very broad interpretation for guarantors to accept any label, mark, stamp, etc. that appears to satisfy this requirement.



URDG 758 Article 2 definition of “complying presentation” does not require document examiners to apply/follow strict compliance when examining a presentation. In accordance with URDG 758 Article 19 b., “documents must be examined in context and need not be identical to but shall not conflict with, data in that document, any other required document or the guarantee”. The concepts of “context” and



907 908 909 910 911 912 913 914 915



“conflict” refer to individual situations. A difference does not automatically make a document noncomplying. All examination processes must also occur in context even in situations where a guarantee provides the statement(s) in quotes or require a specific format(s). An examination does not require rigid fulfilment of precise wording in all cases. Some judgement and common sense is required when examining a presentation. For example, should a guarantee require a beneficiary statement attesting that: “the applicant is past due on their loan payments” and a guarantor receives a demand from the beneficiary in June indicating that: “the applicant has failed to pay their loan instalments for the months of April and May” then the beneficiary’s statement, while not exactly worded in strict compliance with the guarantee, is in context with the guarantee’s demand requirement and as such, it is complying.



916 917 918



Examiners should refer to this ISDGP and any relevant ICC Official opinions and to DOCDEX decisions for guidance as to whether their examination is in accordance with international standard guarantee practices.



919 920 921 922 923 924 925 926 927 928 929



Examiners are cautioned that examination requirements cannot override or otherwise exceed a demand guarantee’s specific requirements. For example, Official ICC Opinion R622 / TA361rev2 includes the following in its conclusion - The guarantee required a written statement stating: "The principal is in breach of his payment obligation(s) under the contract for the deliveries under the contract during the period from 1st April until 20th August of year 1998 and the beneficiary fulfilled his delivery obligations under the contract during the period from 1st April until 20th August of year 1998" without specific mention of the contract number or date. Whilst this information was included within the introduction to the guarantee, it was not requested as part of the requirements for the statement under the guarantee”. The opinion goes on to state that the guarantor must accept the presentation as delivered. This opinion predates the current URDG 758 revision, yet it remains applicable to it.



930 931 932 933 934 935 936 937 938



Typographical errors



939 940 941



Company names



942 943 944 945 946



Punctuation marks in a document



Simple typographical errors which do not materially change the meaning of a demand and/or a supporting statement’s requirement will be allowed. For example, when a guarantee requires a document to state a contract number(s) then the contract number is expected to match exactly as stated in a guarantee. However, when a contract number appears as 0012345 and a statement states 12345 the omission/deletion of the “00” at the beginning (or at the end) of a contract number is acceptable. Additionally, as different type fonts cause confusion, e.g. a number “5” may be confused with a letter “S” or the letter “O” could be confused for the number “0”, these examples would be acceptable.



Abbreviations for words or company names e.g. Inc. for Incorporated, Ltd for Limited, or S.A. for Societe Anonyme do not make a document non-complying.



Missing or changing punctuation such as a period/full stop, comma, colon, etc. does not constitute a discrepancy, including where the guarantee quotes the precise wording/text of a required statement and the text in quotation includes a punctuation, unless such a change alters the meaning of a word or the value of an amount, etc. e.g. “14” cannot be used to represent 1/4 when the “/” is missing.



30



947 948 949 950



First class and well known



951 952 953 954 955 956



Document issuers



957 958 959 960 961



When a guarantee requires a document to be issued by a specific person, or company then the document must appear to be issued by that person or company. This can be evidenced by the document’s letterhead being shown as the person or company or when the document appears to have been completed and/or signed by the person or company or when the company’s stamp is affixed to the document.



962 963 964 965 966



Beneficiary name change



967 968 969 970 971 972 973 974



This is not considered a transfer as defined in URDG 758 Article 33. When the new beneficiary has the legal right to present a demand under a guarantee, it must indicate in what capacity it has assumed the right to present a demand under a guarantee e.g. as a successor by merger, etc. In such cases, a guarantor could require additional documents satisfactory to it, including a legal opinion, to ensure that the party making the demand is the new beneficiary, or it can refer the matter to the instructing party for a potential waiver or instructions. However, a guarantor cannot suspend the examination period defined in URDG 758 Article 20 a. and if a guarantor deems that the party making the demand is not authorized, it may refuse a demand on that basis.



975 976



When a beneficiary changes for a reason such as detailed above, it is a recommended best practice for them to notify the guarantor, in advance of any demand.



977 978 979 980 981



Copy(ies) of a document(s)



982 983 984 985 986 987



Copies of invoices



Terms such as first class, well known, A-rated bank (unless referring specifically to the nomenclature of a rating agency), international bank, etc. have no defined meaning and as such, will be disregarded. No discrepancy can exist relative to this type of instruction.



Other than a demand and a supporting statement which must be issued by the beneficiary, the onus is on the guarantor to provide clear instructions in its demand guarantees, to indicate whether any and all documents are to be signed and who should issue them and what the documents should state (data content). Failing this, a guarantor or their applicant or instructing party could easily suffer an unintended or unsatisfactory result.



Not specifically addressed in URDG 758, and subject to the applicable law, in cases of a reorganization, acquisition rebranding, merger, death, etc. of the existing beneficiary or of the issuer of any required document, it is expected that the legal successor automatically becomes the new beneficiary or document issuer irrespective of whether a guarantee is transferable or not.



URDG 758 does not specifically address or define originals versus copies of documents. A guarantee requesting a copy or copies of documents is understood to allow the presentation of an undated or unsigned document including unsigned non-negotiable copies, and/or photocopies of signed or unsigned documents, faxes or e-mail copies and similar.



When a guarantee requires: Invoice copies, or Unpaid Invoices, or similar without providing any additional requirements, then a copy of an invoice, issued by the beneficiary which does not otherwise conflict with the guarantee’s terms or any other required document under it, will be acceptable. If the guarantee is silent as to which type of invoice is required, any commercial invoice will be acceptable, whereas a proforma invoice or similar, will not be acceptable. It need not be signed or dated unless a



988 989



guarantee specifically requires these aspects or provides a term or provision which requires the invoice to be dated similar to: “Presentations cannot occur earlier than 30 days from the invoice date.”



990 991 992 993 994 995 996 997 998 999



Copies of receipt of transport documents Where a guarantee requires a copy of a bill of lading (B/L), Air Waybill, courier receipt, or any type of transport document without specifying any additional requirements then a copy of a bill of lading/transport document or courier receipt which does not otherwise conflict with the guarantee’s terms will be acceptable. It need not be signed or dated. Issuances of such documents by freight forwarders versus a carrier are acceptable unless prohibited. Any party can be labelled as “the shipper” or “the consignee”. (Note: any requirement for an original transport document is not standard practice for a guarantee. This requirement is most appropriate for a commercial letter of credit transaction). In addition, when silent, any instruction e.g. “to order” or “to XXX (a particular entity) can appear as the “consignee”.



1000 1001 1002 1003



As URDG 758 does not discuss transport documents such as bills of lading, waybills, etc., should a document or copy of a document bear more than one date e.g. a date of issuance and a date of loading on board or a flight date, and should a guarantee be silent as to which date should govern, then guarantee practice is to use the latest of the dates appearing in the document.



1004 1005 1006 1007



Beneficiary’s bank signatures or authentication of beneficiary signatures



1008 1009 1010 1011 1012 1013 1014



In accordance with URDG 758 Article 27 a., international standard demand guarantee practices do not require examiners to verify the signatures, of any party, on any paper document. Most often, when a beneficiary bank countersigns or otherwise makes a simple attestation on behalf of a beneficiary they have no working knowledge as to whether the signing party for the beneficiary is authorized to make a demand under a demand guarantee. Rather, the countersigning or attestation is only verifying that the beneficiary’s signature appears to be an authorized signatory for the beneficiary, on the date of the countersignature/attestation. The beneficiary’s bank has no liability whatsoever for this service.



1015 1016 1017 1018 1019 1020



Should a beneficiary make a complying demand directly to a guarantor without another bank’s attestation, the guarantor must pay. The lack of a 3rd party bank attestation cannot make a presentation non-complying for that reason as any additional bank is not the beneficiary and only the beneficiary may make a demand and provide a supporting statement. Note that URDG Article 5 indicates, in part, that: “The undertaking of a guarantor to pay under the guarantee is not subject to claims or defences arising from any relationship other than a relationship between the guarantor and the beneficiary”.



1021



Multiple demands in a single presentation



1022 1023 1024 1025 1026 1027



Each presentation must fully comply with a guarantee’s terms. While not specifically addressed in URDG 758, when a single presentation includes multiple demands or supporting statements and/or documents (e.g. one cover letter with three demands attached to it), the whole presentation must stand on its own merits, in full. No credit, partial payment or other considerations will be made if the whole presentation does not comply even where partial or multiple demands are permitted, unless explicit individual instructions are provided for each demand.



Requirements for a countersignature/attestation from a beneficiary’s bank is not a standard practice under the URDG 758 and it does not require a beneficiary’s document to be countersigned or contain some form of attestation from a beneficiary’s bank.



32



1028



Timeline for examination of demand; payment



1029 1030 1031 1032 1033 1034 1035 1036



Examination timeline



1037 1038 1039 1040 1041 1042 1043 1044 1045 1046 1047 1048 1049 1050 1051



Paying a complying demand



1052



Demands under counter-guarantees



1053 1054



A guarantor cannot make a demand to the counter- guarantor where the demand it has received under its local guarantee is non-compliant for the terms and conditions of that local guarantee.



1055



Payment currency



1056 1057 1058 1059 1060 1061 1062 1063 1064



As per URDG 758 Article 21 a. a guarantor is obligated to pay a complying demand in the currency of the demand guarantee or a counter-guarantor in the currency of a counter-guarantee, even in situations where a beneficiary would prefer payment in a different currency. A guarantor has no obligations to pay in a currency which differs from its demand guarantee, even when so requested by a beneficiary. However, while a guarantor or counter-guarantor and a beneficiary and/or a guarantor or counterguarantor and an instructing party may agree to settle a demand or the demand’s reimbursement in a currency that differs from that stated in a guarantee, that decision is binding only upon the parties which have both agreed to it e.g. a guarantor and a beneficiary who have agreed to settle a demand in USD for a guarantee denominated in Euro’s cannot require the instructing party to reimburse in USD.



1065 1066



A guarantor cannot elect to pay a beneficiary in a currency other than the currency of the demand guarantee, unless prohibited from doing so for reasons beyond its control, such as in cases where:



1067 1068



1. A local law or regulation no longer permits the use of said currency; or 2. A currency which no longer exists at the time a payment is due.



URDG 758 Article 20 needs to be read in conjunction with URDG 758 Articles 14 b. and 14 f. The date of receipt of a demand does not count towards the examination period. The maximum time period available to a guarantor for the examination of documents is five business days following the date of its presentation (5+1 business days) and the guarantor is not required to shorten that period to be within a guarantee’s expiry date. The beneficiary should, whenever possible, make their demands, leaving themselves enough time to make corrections, if needed. What constitutes a business day is determined by the place of issuance of the guarantor or the counter-guarantor.



When a guarantor has determined a presentation contained a complying demand (as defined in URDG 758 Article 2) it is then obligated to pay the amount demanded, in full, at that time (URDG Article 20 b.). However, as examinations occur at all times throughout a guarantor’s work day, and/or as a guarantor may have specific requirements to notify individual instructing parties pursuant to terms in separate agreements between the guarantor and the instructing party, and/or as the process of wire transfer payments may take more than the day when a determination of compliance is made the URDG direct the guarantor to pay without any delay. Pursuant to Article 16, the guarantor must, without delay, notify the instructing party that it had received or paid a complying demand. In accordance with Article 20 b. when a guarantor has determined that a demand is complying, it must pay. However, URDG 758 does not specifically require the guarantor to notify the instructing party before making payment or, where notification is so made, to withhold payment of a complying demand until after the instructing party has acknowledged the notification.



1069 1070



In situations such as those defined above, a guarantor shall make payment in the currency of the place of payment.



1071 1072



If a guarantor improperly withholds payment, when due, despite there being a reason such as stated above, then URDG 758 Article 21 c. governs.



1073 1074 1075 1076 1077 1078 1079



In cases where the beneficiary has provided a complying demand in the currency of the guarantee and has made a request for payment in a currency which differs from the guarantee, the guarantor may elect, at its discretion, to accommodate this request. However, this agreement is independent of the guarantee and remains solely applicable to the guarantor and the beneficiary including the applicable exchange rate and any fees. The instructing party is not a party to this agreement and is required to reimburse a guarantor’s guarantee payment in accordance with the terms of their underlying application/reimbursement agreement.



1080



Extend or pay demand considerations



1081



This section should be read in conjunction with URDG 758 Article 23.



1082 1083 1084 1085 1086



Interest



1087 1088 1089 1090 1091 1092 1093 1094 1095 1096 1097 1098



Examination and suspension



1099 1100 1101 1102



A beneficiary does not have the right to dictate a time period relative to a extend or pay request. For example, a beneficiary’s extend or pay instruction cannot indicate a condition similar to: “if an extension is not granted in 5 business days, then the guarantor must pay”. Any such requirement will be deemed as not stated.



1103 1104 1105 1106 1107



Repeating a demand under suspension



A complying demand for payment that includes in the alternative a request for extension, permits a suspension of the payment to allow the guarantor (or counter-guarantor) time to make an extension decision. As it is an allowable suspension of payment, the beneficiary or guarantor is not entitled to interest; or similar delayed payment compensation, etc. during the allowable suspension periods.



When the beneficiary makes a demand that includes a request to extend the demand guarantee or pay the beneficiary, the guarantor must examine the documents within the 5 business days following the day of a receipt of the demand in accordance with URDG 758 Article 20 a., and when determined that the presentation is complying, the guarantor or counter-guarantor “may”, at their option, suspend the payment for up to 30 calendar days from its receipt of a demand. If the extend or pay presentation is compliant, the guarantor does not have to communicate their suspension information to the beneficiary and will proceed at the end of the suspension period to extend or to pay. In accordance with URDG Article 23 c. the local guarantor when acting as the beneficiary of a counter-guarantee must provide the number of days a counter-guarantor has to make their own extend or pay decision. In all cases, if any demand is not compliant, the guarantor or counter-guarantor must provide their notification of noncompliance/refusal in accordance with URDG 758 Article 24.



In accordance with URDG 758 Article 23 d. a beneficiary is not entitled to make a second demand for payment for the same reasons as the existing demand which is currently under suspension. The guarantor has the whole of the suspension period within which to grant or deny the extension requested by the beneficiary. If the extension in the terms and for the period requested by the



34



1108 1109 1110



beneficiary is denied, a payment is due including in instances where the guarantee has expired in the meantime. If extended, a beneficiary may present a new complying demand at any time, prior to the new expiry date/period.



1111 1112 1113 1114 1115 1116 1117 1118 1119 1120 1121 1122



Hold for value; similar



1123



BALANCE OF PAGE INTENTIONALLY LEFT BLANK



A beneficiary has only a right "to demand payment" by making a complying demand. It has no right to compel an extension or similar “hold for value” type request from the guarantor. A beneficiary has to protect its own interests by making a valid and complying demand. If a beneficiary only requests an extension with a “hold for value request” as an alternative there is no obligation for the guarantor to inform the beneficiary that its request (which is not a demand) was or was not agreed to or to provide it any response whatsoever. However, it is a recommended best practice for a guarantor to inform a beneficiary, without delay, that the beneficiary should consider contacting its counter-party, the applicant, for this type of request. A guarantor, may, in its sole discretion, elect to contact the instructing party. However, to ensure prompt action from a guarantor, a beneficiary must make a complying demand which includes may include a extend or pay statement.



1124 1125 1126 1127 1128 1129 1130



Suspension period by counter-guarantor Once a counter-guarantor receives an extend or pay demand, and they deem it complying, the counterguarantor can suspend their payment to the guarantor for a maximum of four calendar days less than the suspension period notified by the guarantor so as to allow the counter-guarantor enough time to decide whether to: a) amend the guarantee to extend the expiry date or b) to effect payment upon their decision to refuse to extend. Refer to below chart* with an example: of a demand containing an ‘extend or pay’ statement which was determined to be compliant on Monday 6th April.



*April 2020 Sun



5



Mon



Tue



Wed 1



Thu 2



Fri 3



Sat 4



6



7



8



9



10



11



Guarantor suspends for a 30 day period beginning here



12



13



14



15



16



17



18



19



20



21



22



23



24



25



26



27



28



29



30



1 May



2



8



9



CG extend or pay decision ends



3



4



5



6



7



Guarantor 30 day suspension period ends/expires



1131 1132



Weekend



1133



Bank Holiday



1134 1135



1. Guarantor received an ‘extend or pay’ demand on April 6, 2020 and determines it is a complying demand on that same date.



36



1136 1137 1138 1139 1140 1141 1142 1143 1144 1145 1146 1147 1148 1149 1150 1151 1152 1153 1154 1155



2. Guarantor decides to suspend the payment for the maximum period of 30 calendar days following its receipt of the demand with a extend or pay request. 3. Guarantor calculates the expiry of the suspension period to be May 6, 2020. 4. Counter-guarantor receives the ‘extend or pay’ demand on April 9, 2020 and determines it is a complying demand. 5. Counter-guarantor decides to suspend the payment for a period of 4 days shorter than May 6, 2020 (the 30 day suspension period indicated by the guarantor). 6. Counter-guarantor calculates the expiry of the suspension period to be May 2, 2020. However, since this is a non-banking day for the counter-guarantor, the latest possible business day for the counter-guarantor to decide whether to extend the counter-guarantee expiry date or effect payment, while respecting the minimum of 4 calendar days less than the 30 days suspension period indicated by the guarantor, is April 30, 2020. 7. By the latest of April 30, 2020, the counter-guarantor must amend the guarantee to extend the expiry date or will effect payment, as the case may be. It should be noted, as in this example, that, because calculations are based on calendar dates, for practical purposes, the counter-guarantor's final date for a payment decision may necessitate an action more than the minimum 4 calendar days earlier than the last day of the suspension period for the guarantor. The final calendar date would be 2nd May, but as this is not a business day, the final decision should be made latest 30th April in practice, which is the last business day possible to stay within the 4 day limit.



1156 1157 1158



Beneficiary extend or pay rights:



1159 1160 1161 1162



In accordance with Article 23 d., a beneficiary and/or the guarantor does not need to provide an update to nor otherwise provide any additional documents or statements if the guarantee is not extended as requested in that demand or as otherwise agreed by the party making that demand and agreed to by the guarantor in a demand guarantee or the counter-guarantor in a counter-guarantee.



1163 1164 1165 1166 1167 1168 1169 1170



Missing notification for suspension period



1171 1172 1173 1174 1175 1176



Different decisions from guarantors



1177 1178



As a result of the independence of the guarantee from the counter-guarantee, if a guarantor is granted the requested extension under the counter-guarantee, that guarantor could still elect to refuse to



If the guarantor or counter-guarantor are unwilling to suspend the payment or extend the expiry, it must pay a complying demand.



Should a guarantor omit to include the suspension period they assigned to a particular presentation, the counter-guarantor should contact the guarantor. The omission by the guarantor cannot be a basis for a refusal. In the absence of any notification, then in accordance with URDG 758 Article 23 a. and b. the counter-guarantor has the maximum period available which is 4 calendar days less the 30 calendar days the guarantor is now obligated to suspend following its receipt of a complying demand unless otherwise agreed to by the counter-guarantor. Any delays for this reason are the full responsibility of the guarantor.



Not specifically addressed by URDG 758, if the guarantor requested an extension and the counterguarantor decides to refuse an extension, it shall pay the guarantor. Following the independence principle, and unless otherwise agreed, the guarantor may elect to hold the payment and extend its demand guarantee or it may pay the beneficiary, at its discretion or in accordance with its relationship with the counter-guarantor.



1179 1180 1181 1182



extend its demand guarantee and elect to pay the beneficiary. Should that happen, that guarantor would: a. Pay the beneficiary of its guarantee given its decision not to extend; and b. Be required to submit a new complying demand that does not include a extend or pay request.



1183 1184



The reason for b) is that, by submitting a extend or pay demand, the guarantor is deemed to have waived its right to require payment if the requested extension is granted.



1185 1186 1187 1188



Note: Extend or pay is only relevant to beneficiary demands for payment under a demand guarantee which comply with a demand guarantee. Simple amendment requests from an applicant, for an extension of an expiry date which a guarantor refuses to grant does not require a payment to a beneficiary, if the extension is not provided by a guarantor.



1189



Non-complying demand, waiver and notice



1190 1191 1192 1193 1194 1195 1196 1197 1198



Notification Party



1199 1200



The instructing party’s or the counter-guarantor’s acceptance of a non-complying demand does not alter the fact that the demand is non-complying, nor compel a guarantor to pay against the presentation.



1201 1202 1203 1204 1205 1206 1207 1208 1209



The word: reject



1210



Corrections to a presentation



1211 1212 1213



The beneficiary may make a correction to its presentation within the time limits (before expiry) allowed by the demand guarantee. This does not afford the guarantor a second opportunity to reject any unsubstituted document previously found to be compliant.



In accordance with URDG 758 Articles 24 c. and e., a guarantor can, at its discretion, refuse a presentation and provide its refusal notification or contact the instructing party or, in the case of a counter-guarantee, contact the counter-guarantor to seek their acceptance of any non-complying demand by means of a waiver. Electing to contact an instructing party or in the case of a counterguarantee, the counter-guarantor does not extend the refusal notification period. Any notice will be provided to the bank which forwarded a presentation or if presented by the beneficiary, then, the notice will be sent to the beneficiary or if the beneficiary has used a presenter for its demand, the guarantor will notify the presenter or their agent if so designated in their presentation.



The word “reject” does not need specifically to be used when sending a notification of non-compliance to the beneficiary or the bank who made the presentation for or on behalf of the beneficiary. Guarantors may use terms such as dishonour, reject, refuse, discrepancy, non-complying and/or similar terms. In any case, a notice must include all reasons for the rejection/refusal in a single notice. Any additional rejection notice is deemed as not stated. Failing to provide the notice as per Article 24 d. and e. within 5 business days after receipt of the complying demand will preclude the guarantor from claiming that the presentation/demand is not complying and so the guarantor must pay.



38



1214



Reduction and expiry of a guarantee



1215 1216 1217 1218 1219



Payment reductions



1220 1221 1222 1223 1224 1225 1226



Authorizations to reduce or cancel



1227 1228 1229 1230 1231 1232 1233 1234 1235 1236 1237 1238 1239 1240 1241 1242 1243 1244 1245 1246 1247 1248 1249 1250 1251 1252 1253 1254



Closing, terminating a guarantee at expiry



1255 1256



These types of clauses are deemed non-documentary conditions and, according to URDG 758 Article 7, are deemed as not stated and will be disregarded. Sub-article 25 (c) therefore applies.



The international standard demand guarantee practice is to reduce a counter or demand guarantee current amount by the value of each presentation paid by a guarantor or counter-guarantor. A presentation returned unpaid due to a refusal/noncompliance does not qualify for a guarantee’s or counter-guarantee’s reduction in value.



URDG 758 Article 25 a. iii. and b. iii., indicates that a beneficiary/guarantor may authorize a guarantee’s or counter-guarantee’s reduction or cancellation by providing a signed authorization releasing the guarantor from liability (in part or in full). An authenticated SWIFT message or authenticated communication through some other mutually agreed data processing system/technology provided by an advising party indicating that they have received a beneficiary’s request to reduce or cancel a guarantee would allow a guarantor or counter-guarantor to reduce, or respectively close its guarantee.



A guarantee will terminate upon the earlier of: a. its stated expiry date or event; b. when presentations have been paid amounting to the full remaining value of the guarantee (value of the guarantee is inclusive of any automatic increases and/or values increased by amendments); c. when the terms of a guarantee contain a reduction schedule and the reduction(s) have occurred until the guarantee’s balance is fully utilized or zero; or d. upon a beneficiary providing its signed authorization releasing the guarantor from its liability under the guarantee. These aspects are meant to ensure closure, whether or not a guarantee is returned, and any one of the defined events will ensure that the guarantor may fully close its undertaking. When a demand guarantee is silent and does not otherwise provide a set expiry date or event as defined in URDG 758 Article 2 then URDG 758 Article 25 c. provides a defaulted expiry date of three years from the date of issuance of the demand guarantee (to be read in conjunction with URDG Article758 Article 25 d. below). Additionally, a counter-guarantee will expire 30 calendar days after the guarantee terminates. When a chain of counter-guarantees is used to support a single local issuance, each counter-guarantee will expire 30 calendar days after the subsequent counter-guarantee has expired. When a guarantee expires due to an event, the guarantor must be precise with regards to the event or events that will allow a guarantee to expire. In addition, a guarantor must be able to review the event from the guarantor’s own records where necessary. As noted in ICC’s Official Opinion R783 / TA745 expiry terms such as: “1. This guarantee will expire upon final acceptance. 2. This guarantee is valid until completion of the contract. 3. This guarantee is valid until released by the beneficiary.” and similar ambiguous clauses should not be used.



1257 1258 1259



To be effective under URDG 758 an expiry event must be either documentary in nature (the guarantee must specify a document to be presented to the guarantor indicating the occurrence of the event) or be determinable from the guarantor's own records.



1260 1261 1262



If the expiry date or event at the place of guarantor’s business is on a non-business day (Note: business day is a defined term in URDG 758 Article 2) then the guarantee is automatically extended until the first following business day at that place (Refer to URDG 758 Article 25 d.)



1263 1264 1265 1266 1267 1268 1269



Extension of expiry based on beneficiary approval only



1270 1271 1272 1273 1274 1275 1276 1277 1278 1279 1280



Overrides to URDG 758 Article 25: Reduction and termination



1281 1282 1283 1284



Should a counter-guarantee contain a clause similar to: “Our liability towards your bank under this counter-guarantee is valid until you release us from our liabilities by authenticated SWIFT” overrides the default position relative to URDG 758 Article 25 c. and the expiry event will occur upon the counterguarantor’s receipt of a SWIFT message from the guarantor/beneficiary.



1285 1286



As noted, best practice is for guarantees to indicate that a particular URDG 758 article is being overridden and to include a clause which acts as a substtute for that article.



1287 1288 1289 1290 1291 1292



Guarantees which contain a self-extension provision – evergreen clause



1293 1294 1295 1296



Should a guarantor insert a term into a guarantee that accepts the obligation to extend the expiry/validity of a guarantee whenever so requested by beneficiary (without regard to any objections whatsoever from the applicant), a guarantor will extend for a period defined by the beneficiary’s request provided that the beneficiary makes the request before the then current expiry date or period. Once a guarantee expires, it ceases to exist. This type of condition is deemed poor practice and should be avoided.



Should a guarantee contain a clause similar to: “This letter of guarantee is treated as the original document only if it is printed on a paper which bears the watermark of our Bank's logo which is visible when it is held up to the light, the hologram of our Bank's logo on the bottom right-hand corner and the original signatures of our Bank's authorized representatives. Any reproduced copies of this letter of guarantee will not be processed. We are released from all liabilities and undertakings under this Letter of Guarantee only if the original document which bears the watermark of …….bank, hologram and original signatures is returned to us.” or “When the original of this guarantee (or counter-guarantee) is returned to the guarantor (counter-guarantor) then it will be cancelled”, then these and similar statements override the default position relative to URDG 758 Article 25 b. and upon the return of the original, a guarantor will cancel the guarantee without the need for a beneficiary’s signed release.



Guarantees have sometimes been issued without any expiry date or event. However, this is not an ideal situation and is deemed a bad practice. While not specifically addressed in URDG 758, international standard demand guarantee practice has developed to allow a guarantee to expire and automatically extend without an amendment. This approach allows a guarantee to maintain a manageable expiry date or event while offering: a. Guarantors the opportunity to review the party (or parties) for which they are providing support b. Guarantors and/or an instructing party the opportunity to exit a guarantee, at pre-set internals, without the need for a beneficiary’s consent.



40



1297 1298 1299 1300



In addition, there may be occasions where an evergreen clause contained in a guarantee allows a beneficiary the opportunity to make a demand due solely to the non-extension. In such cases, it is presumed that the underlying contract/agreement will provide details as to how payments will be managed once the beneficiary receives funds based upon the closing of the guarantee.



1301



In cases of a counter-guarantee it is recommended to insert a condition similar to:



1302 1303 1304



e.g. “Should the guarantor receive a notice of non-extension from us, as counter-guarantor, while the guarantor’s own issuance will remain open past the cancellation date/period cited in our non-extension notice then the guarantor can present their demand stating:



1305 1306 1307 1308 1309



We have received your notice of cancellation against your counter-guarantee number (insert relevant counter-guarantee number). However, our guarantee will remain unexpired past your cancellation date. We herewith demand payment in the amount of (insert amount) which we will hold as collateral should we receive a complying demand against our guarantee. We will return any unpaid amounts should our guarantee expire without our having to pay any complying demands.”



1310 1311



Non-extension notifications



1312



“Letterhead of guarantor



1313



Notification of Non-extension



1314



Date of Notice:



1315



Addressed to the beneficiary at the address stated in the guarantee.



1316



To Whom It May Concern;



1317 1318 1319 1320



Reference is made to demand (or counter) guarantee number (insert relative number) issued by ourselves. Unless expired by means of a demand in full beforehand, this guarantee will not be extended beyond its current expiry (insert relative information) and on the close of business on such date, this guarantee will be cancelled and cease to exist.



1321



With Best Regards,



1322



________________”.



1323



Additional consideration for counter-guarantees:



1324 1325 1326 1327 1328



Where a counter-guarantor issues a counter-guarantee containing an evergreen clause, consideration should be given to allowing a guarantor the ability to demand a payment for instances where a counterguarantee will be cancelled while a local guarantee is not cancelled e.g. when a counter-guarantee with an evergreen clause is supporting the issuance of a local guarantee with an open ended expiry date/period.



The notice of non-extension should be clear and concise. A recommended written format is:



1329 1330 1331 1332 1333 1334 1335



Non-standard evergreen term



1336



Liability for charges



1337 1338 1339 1340 1341



The hierarchy imposed by URDG 758 Article 32 is that the requesting party is ultimately responsible for the payment of any charges relative to the actions related to their requests made to another party e.g. asking another party to advise a demand guarantee makes that requesting party liable for any fees relative to the action of advising a guarantee. Charges must be claimed within the life time of the guarantee or within a reasonable period upon after its cancellation or expiry.



1342 1343 1344 1345 1346 1347 1348 1349 1350 1351 1352 1353 1354 1355



The instructing party is the initial requestor for all instructions and is expected to bear all costs when charges are incurred but cannot be collected or where a beneficiary refuses to pay charges when so indicated within the guarantee. However, should an instructing party cease to exist, then the counterguarantor, if any, is responsible for the local guarantor’s costs. Where no counter-guarantee exists then the instructing party remains responsible to the guarantor for the guarantor’s costs and/or any advising party’s costs, when said party: i. completed an action assigned to them by a party to the demand guarantee e.g. advising, etc.; and ii. has attempted to collect their charges from the party stated in the guarantee but has been unable to collect them. In accordance with Article 32 c. if adding a clause in an amendment to the effect that it won’t be available or operative, etc. unless payment of the guarantor’s charges by the beneficiary or applicant/instructing party has been received will be disregarded unless Article 32 a. through c. is clearly modified or excluded and the amendment is binding on the guarantor or counter-guarantor.



1356



Transfers under a guarantee



1357



This section should be read in conjunction with URDG 758 Article 33.



1358 1359 1360



Transfer meaning



1361 1362



The new beneficiary assumes all the rights and the obligations relative to the requesting beneficiary including the right to make a presentation under a guarantee.



1363 1364 1365



If a demand guarantee indicates terms such as “assignable”, “conveyable”, “consignable”, etc. then such terms do not make a demand guarantee transferable and if not defined, they will be disregarded, unless a local law requires a different action.



Non-standard drafting would be to include a term similar to: “This guarantee will expire six months after the guarantor has cancelled the guarantee by registered letter to the beneficiary, or at such earlier time as the beneficiary may decide.” This is not a standard evergreen clause. A clause such as this inserted in a guarantee would override URDG 758 Article 25 c. and the expiry would remain in effect until the beneficiary had agreed to its cancellation or until six months had elapsed from the date that the guarantor had provided their written notification of cancellation to the beneficiary.



If a guarantee states it is “transferable”, it may be transferred by the guarantor, at the request of the existing beneficiary (transferor), to a new beneficiary (transferee).



42



1366 1367 1368 1369 1370 1371



Transfer amount



1372 1373 1374 1375 1376 1377



Guarantor’s obligation to transfer



1378 1379 1380 1381 1382 1383 1384 1385



Increased risks relative to a transfer



1386 1387 1388 1389 1390 1391 1392 1393 1394 1395 1396 1397 1398 1399 1400 1401 1402 1403 1404 1405 1406



Processing transfers against guarantees with amendments



Each transfer must be for the full guarantee amount available at the time of transfer. It is not allowed to transfer a guarantee for an amount less than the full currently available amount at the time the transfer request is granted i.e. no partial transfers were contemplated by the rules. A partial transfer would only be possible if a guarantee allowed for it. A guarantor or counter-guarantor should only consider such requests in limited circumstances where it is relevant to the current underlying contract or situation.



According to URDG 758 Article 33 b., a guarantor is not obligated to perform the transfer simply because it has received a request for a transfer. A guarantor must follow its procedures including compliance, KYC and due diligence requirements, etc. before agreeing to the transfer request. A guarantor may refuse to transfer the guarantee even if the transfer request complies with the conditions set out in URDG 758 Article 33 but it is presumed that a guarantor will not unreasonably withhold a transfer.



Both a beneficiary and an applicant shall consider the increased risk caused by transferable guarantees relative to the introduction of outside parties to the underlying contract/agreement. Guarantors must consider the legal and any compliance aspects and the instructing party/applicant must consider working with a new, third-party entity. From time to time a transfer request is received which names a party such as a bank or other financial institution as the transferee beneficiary. In these situations careful consideration must be given as the new transferee beneficiary must be in a position to legally make the demand statements required under a guarantee.



It is a recommended best practice to have the original demand guarantee and all its amendments (if any) returned to the guarantor at the time of a transfer and the current beneficiary’s acceptance or rejection decision for each and every amendment which was issued under a guarantee, prior to transferring the guarantee. A guarantor will transfer the full guarantee terms including the terms of any amendments accepted by the then current requesting beneficiary. Amendments which were rejected will not be included in the transfer. The approach followed with regards to transfers of guarantees which have amendments is: A) Amendments rejected by the beneficiary - do not become part of the transferred demand guarantee. Any amendment rejected by the beneficiary does not form part of the guarantee. B) Amendments accepted by the beneficiary - become a part of the transferred guarantee. C) Amendments pending a beneficiary’s response – is not specifically addressed by URDG. In these cases, the amendments pending a beneficiary’s decision must be discussed with the beneficiary and each amendment must be either agreed or rejected by the beneficiary, prior to any transfer. Transfer requests should not be confused with an applicant’s request for an amendment to change the beneficiary’s name in a guarantee. If the applicant nevertheless requires such amendment, the existing current beneficiary must agree to the amendment.



1407 1408 1409 1410 1411



Assumption of rights and obligations



1412 1413



Consequently, the transferee acquires transferor’s duties to fulfil the underlying agreement/contract and then receives the right to make a demand under the guarantee.



1414 1415 1416 1417 1418 1419 1420 1421 1422 1423 1424



Documents issued by the beneficiary



1425 1426



If the guarantee specifically states that the additional documents must bear the name and signature of the transferor, the transferee must make presentation of such documents.



1427



Assignment of proceeds



1428 1429 1430 1431 1432



The beneficiary (assignor) may assign any proceeds to which it may be or may become entitled under the guarantee to an assignee, subject to the provisions of applicable law. However, an assignment is not automatically binding on the guarantor unless it has agreed to act on the assignment. A mere notification of assignment on the guarantor is not sufficient to meet the requirement of URDG 758 Article 33 (g) (ii) unless such notification has been acknowledged and agreed to by the guarantor.



1433 1434



A guarantor’s agreement to pay the assignee is needed. Agreement is expected to be in writing, in advance of any payment due.



1435 1436 1437 1438 1439



It is recommended that for an assignment to be truly effective, the assignor/beneficiary should request an assignment from the guarantor and seek the guarantor’s acknowledgement agreeing to act on such notice. A guarantor may not agree to act on an assignment request if it has concerns relating to its compliance requirements or similar policies in regard to assignee’s identity, activity, legal or beneficial ownership, sanctions issues, etc.



1440 1441 1442 1443



As an assignee to proceeds is not a party to the guarantee, it cannot claim any rights under the guarantee, e.g. to make a demand or to agree to an amendment. The single effect of the assignment, if agreed to by the guarantor, is that any proceeds due from the assignor/beneficiary having submitted a complying presentation have to be paid to the assignee and not to the assignor.



1444 1445 1446



It is important to recognize that an “assignment” as defined in URDG 758 Article 33 may not have the same meaning or intent when used in a guarantee. For example, a guarantee may contain a clause prohibiting assignment, or subjecting the effectiveness of assignments to certain conditions, these are



Under URDG 758 Article 33 a. 33d ii a transfer can be effected only when the transferor (current requesting beneficiary) has provided a signed statement to the guarantor that the transferee has acquired the transferor’s rights and obligations under the underlying agreement/contract. Accordingly, the transfer request must incorporate or enclose the aforesaid signed statement from the transferor.



Under a transferred guarantee, it is the transferee (new beneficiary) who has to sign a demand and any supporting statement prescribed under URDG 758 Article 15 (a) of URDG 758. If the guarantee requires any additional documents to be created or signed by the transferor (current beneficiary) or should any required document have a need to quote the name of the beneficiary, the name and signature of the transferee or transferor may be used. URDG 758 Article 33 f. provides flexibility by indicating that the beneficiary’s name “may” be the transferee name as there may be instances where the existing transferor beneficiary is also allowable. For example, if a guarantee indicated that a statement must state: “In accordance with contract 123 between applicant and Company XXO” (guarantee’s original beneficiary) then the statement stating “Company XXO” would be acceptable in spite of a change in the beneficiary.



44



1447 1448 1449 1450 1451



treated differently in accordance with the applicable law. Inclusion of the term “assignment” must be accompanied by a definition, when it is meant to be used other than for the purposes provided in URDG 758 Article 33 g. Also, where the assignment is meant to be a transfer of a beneficiary’s guarantee rights or benefits to another party then the only term permitted by URDG to accommodate this is the term “transfer” as noted in URDG 758 Article 33.



1452



Other guarantee considerations or special situations



1453 1454 1455 1456 1457 1458 1459 1460



Documents to be issued or countersigned by an applicant



1461 1462



This is not a standard practice for most situations, as the beneficiary is not in a position to obtain the document or signature of the applicant with any degree of certainty.



1463 1464 1465 1466



Guarantees with multiple beneficiaries



An applicant will sometimes retain control of the payment process, by making it a condition of a demand guarantee that it issue, sign or countersign one or more of the stipulated documents. The beneficiary and the applicant (and any instructing party) may have both agreed to such a condition(s), and for this reason it is of no concern of the guarantors. If a demand guarantee includes such a requirement, the beneficiary should consider the appropriateness of such a requirement and determine its ability to comply with it, or seek a suitable amendment and/or reject the guarantee if it does not agree with the condition.



Most guarantees have a single beneficiary. More than a single beneficiary is a complex topic and there are many variations and risks. Guarantors are cautioned that when accommodating this need, they should also consider:



1467 1468 1469 1470 1471 1472 1473



a) Situations where multiple beneficiaries may draw simultaneously; b) Who should agree to any amendment or request for cancellation, a single beneficiary or all beneficiaries; c) Requests for assignment of proceeds or transfers; d) To which beneficiary should notices of reductions, increases and/or non-extension be sent; and/or e) The risk of duplication of demands, either fraudulently or otherwise.



1474 1475 1476 1477



In such situations, a recommended approach would be to have a single beneficiary appointed to be the agent or trustee for all other stated beneficiaries and then only allow demands or other decision or request correspondence from that beneficiary. Where that is not possible, it is suggested to include the insertion of a clause similar to:



1478 1479 1480 1481 1482 1483 1484 1485 1486 1487



“Any one/single beneficiary or combination of beneficiaries, acting individually or collectively, may draw under this guarantee, in full or in part (assuming partial demands are allowed) and any payment will be made by the guarantor predicated on the first complying presentation received until the guarantee’s value is fully utilized. Where a complying demand is made, or where a beneficiary has responded to an amendment’s acceptance or rejection or where a request is received and consented to by the guarantor to transfer or assign proceeds by any individual beneficiary or combination thereto this will be deemed conclusive evidence that all beneficiaries have consented and agreed to the requested action or inaction. In such a case, no action from a guarantor is required to inform and/or to obtain approval from the other beneficiaries. Any payment made by the guarantor will be made to beneficiary (or beneficiaries) which have presented their complying demand”.



1488 1489



Note: In cases where multiple beneficiaries are named in a guarantee, a compliance, sanction or similar situation may prevent payment under a guarantee to any and all named beneficiaries.



1490 1491 1492 1493 1494



Guarantees with multiple instructing parties



1495 1496 1497 1498 1499 1500 1501 1502



Most guarantees have a single instructing party. More than a single instructing party is a complex topic and there are many variations and risks. Guarantors are cautioned that when accommodating this need, they should also consider in their underlying application or reimbursement agreement: a) Who should agree to issue any amendment or request for cancellation, a single instructing party or all instructing parties; and/or b) Which instructing party(ies) can authorize a guarantor’s decision to authorise or reject a payment when a noncomplying presentation is received; c) How collateral and/or liens are apportioned between the instructing parties; and/or d) etc.?



Guarantor payment without a document presentation In rare instances, a guarantee will include a clause similar to:



1503 1504 1505



“Guarantor may, at any time, without being required to do so, pay the beneficiary the maximum available amount or any lesser amount that the beneficiary may accept and thereupon this guarantee expires in full”; or



1506 1507 1508



“At any time, without being required to, the guarantor may pay the beneficiary the guarantee’s remaining balance less any amounts previously paid under this undertaking, and the liability of the guarantor will then immediately end”.



1509 1510 1511 1512 1513 1514



Sometime known as a “walkaway” or a “pay and walk” clause, these clauses were not anticipated when URDG 758 was drafted and the rules do not specifically address them. The effect of such a clause is when the guarantee is closed, prior to its expiry and without the complying demand from the beneficiary (or guarantor, in the cases of a counter-guarantee), the beneficiary (or guarantor) obtains cash from the guarantor which depending on the terms of the underlying contract/agreement they may use as cash collateral/security or account for the payment in some other manner.



1515 1516 1517 1518 1519 1520 1521



The payment by the guarantor, at its discretion, with the purpose to cancel the guarantee, is intrinsically different from the payment upon a guarantor’s receipt of a complying demand under URDG 758 Article 15a (or 15 b.) which has implied requirements for a guarantor’s receipt of a demand and a supporting statement from the beneficiary, indicating in what respect the applicant is in breach of its obligations under the underlying relationship. These types of clauses should only be undertaken with the agreement of the instructing party and it is recommended that the instructing party should ensure that a guarantee indicating such a term:



1522 1523 1524 1525



a. is fully addressed in the underlying contact/agreement with their beneficiary; and b. then the contract addresses the handling of any cash received by the beneficiary in the event that a guarantor elects to exercise its right to make a payment to the beneficiary without receiving a beneficiary’s demand.



46



1526 1527 1528



It should be noted that this type of clause could give rise to a duplication of payment with a payment being made by the applicant or the instructing party and another by the guarantor. It is expected that the guarantor and the instructing party will communicate their intentions to avoid this.



1529



Guarantors are reminded that:



1530 1531 1532 1533



URDG 758 Article 15 a. or 15 b. and 20 b. should be explicitly excluded from a guarantee when payments are envisaged for these reasons; and The guarantor should ensure that their application/reimbursement agreement with the applicant covers these payment decisions being made by a guarantor.



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Beneficiaries should also ensure they can legally address any payment they receive without having made a demand for payment.



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Presentation of original guarantees or lost, stolen, destroyed originals



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URDG 758 does not require that an original guarantee be returned to the guarantor or a counterguarantee to be returned to a counter-guarantor when any demand is being made. The drafters of URDG 758 understood that:



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a) All presentations will go directly to a guarantor. URDG 758 does not facilitate payments by others; and b) Since guarantors control the payment process, there is no opportunity for a duplicate payment to occur outside of a guarantor’s error.



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With modern technology, it is very difficult to determine what the original guarantee actually is. For example, when a guarantee is transmitted using SWIFT, the original guarantee is the data content transmitted between the sending and receiving financial institution, through the SWIFT network. That data is not transmitted directly to the beneficiary. Rather, a receiving financial institution receives the data, and then advises the beneficiary of the data content either through a printout of the data received attached to an original cover letter from the party advising the beneficiary or electronically from the advising party to the beneficiary using a third party software. When this occurs, to all intents and purposes, a proxy original is created.



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To a financial institution, the SWIFT message, when authenticated represents the original while to a beneficiary the original is deemed that which they have received from the advising party (or from a guarantor directly). Also paper guarantees can be easily reproduced in colour, looking exactly like the original.



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Some guarantors prefer that a guarantee require the original guarantee to be presented with each demand as this helps to alleviate fraudulent demands. The offset to this train of thought is the fact that only a beneficiary of a guarantee can receive a payment (unless a guarantor has agreed to an assignment of proceeds). Taking into account the above thoughts on determining what the original is, this is bad practice and should at all times be avoided as a condition. It also excludes the possibility of making multiple demands.



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If a guarantee requires the original to be presented with any demand, then the original guarantee message and the original of any subsequent amendments that the beneficiary received must be part of the presentation. A presentation can be refused for failure to provide the original(s) received when a guarantee specifically requires this.



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In situations where a guarantee requires that its original (and any amendments) be presented and an original was lost, stolen, or destroyed, a guarantor is expected to replace it, with a duplicate original after the beneficiary has provided an indemnity to the guarantor, in a format acceptable to the guarantor.



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Precedents



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Each action or inaction conducted under a guarantee is specific to an individual situation and will stand on its own merits as it applies to that situation. For instance, a guarantor may pay against a complying or non-complying presentation (discrepancies waived) or they may extend the expiry of a guarantee numerous times but decide on a future occasion to refuse to waive the same discrepancy or to extend the guarantee any further. The fact that a guarantor has taken a specific action or inaction in one circumstance or in a series of circumstances does not set a precedent for the future, nor does that action or inaction by itself give rise to a reasonable/justified expectation on the part of the beneficiary that similar actions or inactions will occur again.



1579



Fraud



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Law generally mandates that any demand made by a beneficiary be true and factual and that any drawing is genuine and not false. However, should the beneficiary falsely receive payment from a guarantor, an applicant will be compelled to reimburse the guarantor. Any claim of fraud between an applicant and its beneficiary would need to be resolved against the underlying contract between the two parties. A guarantor would not be a party to those claims.



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Additionally, law typically mandates that all parties act in Good Faith in their dealings. “Good Faith” is loosely defined as acting honestly and having sincere intentions not to defraud another and not ignoring apparently undesirable information.



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2. The following are types of situations in which a demand has no conceivable basis: a. The contingency or risk against which the undertaking was designed to secure the beneficiary has undoubtedly not materialized; b. The underlying obligation of the principal/applicant has been declared invalid by a court or arbitral tribunal, unless the undertaking indicates that such contingency falls within the risk to be covered by the undertaking; c. The underlying obligation has undoubtedly been fulfilled to the satisfaction of the beneficiary; d. Fulfilment of the underlying obligation has clearly been prevented by wilful misconduct of the beneficiary; e) In the case of a demand under a counter-guarantee, the beneficiary of the counter-guarantee has made payment in bad faith as guarantor/issuer of the undertaking to which the counterguarantee relates.



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Fraud and document examination



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a. Guarantors have no responsibility to ensure or otherwise verify whether a document is real, what its legal status is, what format it is issued in nor to ensure any signature is authentic. However, they are expected to ensure electronic documents are “authentic” as defined in URDG 758 Article 2. b. Guarantors do not ensure or otherwise verify whether any statements are factual. c. Guarantors do not ensure or otherwise verify any facts relative to the documents received.



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d. Guarantors are not liable for other parties who have not acted in good faith nor whether performance has occurred nor the standing of any person issuing or referred to in any document.



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A guarantor will not go past the four corners of a document to determine whether any statement in a document is true, valid or accurate except as specifically detailed in a guarantee and as allowed in URDG 758 Article 2 under the definition of a guarantor’s own records.



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A guarantor makes its decision to pay a presentation against its determination that the presented documents are, on their face, in compliance with the terms of the guarantee. A guarantor is not responsible for paying for under a presentation which may contain a fraudulent document, whether the beneficiary was unaware or aware and/or part of the fraud.



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Where a guarantor knows of a fraud, based on their own records, they are expected to act in good faith and in accordance with local law even in instances where an apparently complying demand is presented. A simple example could be where a guarantor receives a statement from a beneficiary under a demand guarantee which states: “We certify that on (a future date) we have performed the services referenced in contract XXX and as such, we herewith demand XX dollars against demand guarantee number XX”. A guarantor should be aware that the services can only be completed on or before the date a presentation is made taking into account differences between global time zones. Another example would be to receive a request for payment under an advance payment guarantee from the beneficiary before the guarantee becomes available for drawings by not providing the required advance payment.



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Guarantee types:



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Requests from a counter-guarantor to issue in a guarantor’s format



1626



Advance payment guarantees:



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In these contracts, a guarantee’s beneficiary must make an advance payment to the guarantee’s applicant for the amount of the guarantee or any amount as stated in the guarantee. A guarantee will be issued indicating that a single payment is required by the beneficiary, for the guarantee’s maximum stated amount and typically requiring the guarantee’s reference number to be stated for identification purposes which will allow the guarantee to become operative, effective or otherwise available to receive demands.



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Considerations: Often, unbeknownst to the beneficiary effecting the required payment via a wire transfer, the amount sent is often greater than the amount being received by the recipient/applicant. For example, when the advance payments are made via wire transfer through banking channels, the applicant ordering the wire transfer is made to pay for the full amount of the transfer including the sending bank’s wire transfer commissions, if any. Wire transfers often route through different banks before the funds are ultimately delivered to the intended recipient. Even in cases where the wire transfer is sent directly to the recipient’s bank, it is a banking industry standard for different banks touching a wire transfer to deduct a fee from the recipient unbeknownst to the applicant. For example, Company A authorizes a wire transfer in the amount of USD 1,000,000.00 to satisfy an advance payment obligation. Their bank, Bank A, charges Company A USD 50.00 to effect the wire transfer and then debits their account for USD 1,000,050.00 and sends USD 1,000,000.00 via wire transfer to Bank B. Bank B deducts their wire transfer fee of $75.00 and sends USD 999,925.00 to Bank C. Upon receipt of the wire transfer, Bank C deducts their commissions totalling USD 100.00 and credits the recipient, who is the applicant of the demand guarantee, with USD 999,825.00.



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The paying party should endeavour to ensure that all payment charges should be paid by them.



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When this occurs, a guarantor should have clear procedures. Options include:



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A. Contact the guarantee’s applicant indicating that a shortfall was received and request their permission to allow the demand guarantee to become effective for the amount received; B. Immediately return the incoming funds, for the full amount received, under a SWIFT or other expeditious advice indicating that: a. the funds were returned in full, and b. notify the beneficiary that the guarantee is not in effect due to the incorrect amount being received; C. Immediately contact the beneficiary or their bank (the original bank which sent the wire transfer) and request an immediate payment to cover the payment shortfall clearly indicating that the demand guarantee will not become operative until the amount is paid in full; or D. The guarantor can elect, at their sole discretion, to make the guarantee operative for the full amount available to the beneficiary, understanding that they will need to incur an initial loss for the amount of the payment’s shortfall. E. Indicate as part of a guarantee’s terms that the guarantee will become operative for the amount of any payment(s) received. This is the preferred solution as it prevents the four options above which can all cause discussions. A guarantor receiving less than the full maximum guarantee value, in a single payment should indicate which approach they will follow if a payment is not received in full. There is no time frame for a guarantor to provide a notification that a guarantee has become operative. An advance payment received in multiple payments and/or for less than the guarantee’s value may elude a guarantor’s monitoring and cause delays. Any demands made against a guarantee which is not operative may be refused for this reason.



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A guarantor receiving less than the full value of the guarantee has no obligation to make the guarantee operative or available for a demand and may refuse any demand until the guarantee is made operative.



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Another scenario to consider is when this type of demand guarantee is required under a line of credit shared by multiple participant banks (hereinafter known as a: syndicated facility) and the bank being requested to issue the advance payment guarantee on behalf of the syndicate is not going to be the bank which receives the incoming wire transfer. In those cases where another bank is receiving the wire transfer which differs from the guarantor bank, the guarantor must decide which document will activate the advance payment guarantee e.g. a copy of a wire transfer from the applicant or, an originally signed letter from the bank which received the funds indicating the date and amount received, etc.



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Counter-guarantee considerations



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The counter-guarantee should address all the provisions detailed in URDG 758 Article 8.



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When the counter-guarantor and the guarantor are both financial institutions, the counter-guarantee is expected to accommodate demands via a simple SWIFT message indicating that the guarantor has received a complying presentation.



As noted in URDG 758 Article 1 b. when a counter-guarantor issues a counter-guarantee which is silent as to its governing rule set and said counter-guarantor has requested a guarantor to issue a local guarantee subject to URDG 758 then the counter-guarantee will also be subject to URDG 758 unless the counter-guarantee specifically excludes URDG 758.



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Charges and their respective collection period(s) should be agreed in advance, or at the time of issuance of the guarantee. The instructing party ultimately remains responsible for the charges of the counterguarantor(s) and the guarantor.



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When drafting a counter-guarantee, the instructing party and the counter-guarantor must add a time period to allow a local guarantor to receive a demand, examine it and make their own demand against the counter-guarantor. This time period is typically between two and four weeks from the expiry date or period required in a local guarantee. Where an evergreen clause is needed, a counter-guarantor is expected to consider:



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a. Adding an additional time period e.g. between two and four weeks from the then current expiry date/period to allow a guarantor to make a demand against a counter-guarantee, and allow time for its examination by the counter-guarantor. This will require the instructing party to extend its anticipated expiry date or period. b. Allowing a guarantor the opportunity to make a demand due solely to the non-extension. This is a recommended best practice. In such cases, it is presumed that the guarantor will maintain the funds until the earlier of the expiry or cancellation of the guarantee has occurred or use the funds in settlement of any complying demand(s). If silent in a counterguarantee and a counter-guarantor and a guarantor have not pre-agreed in writing to any unused funds distribution then upon full closing or settlement of the guarantee, the guarantor may elect to retain or return to the counter-guarantor any funds which remain unused.



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Syndication and similar clause considerations



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Where a syndication agreement allows the party to request the issuance of guarantees, the agreement should consider addressing the following points, which list is not exhaustive:



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When a customer requires a guarantee credit facility which exceeds the capital or credit limits of a single lender, that lender can invite other lenders to join in sharing the risks and rewards of working with the customer who for the purposes of URDG 758 will become known as the instructing party. For the purposes of this publication the term “syndication” means that two or more parties such as financial institutions and/or banks have jointly agreed to a single agreement to provide a guarantee facility (and/or other lending services) to the instructing party. The syndication agreement regulates the relationship between the customer and the lenders and it also governs the relationship between the lending parties.



a. Which lenders/parties are approved to issue a guarantee on behalf of the syndicate members (Note: guarantors which can issue guarantees on behalf of a syndicate have been known as “fronting” parties)? b. What approvals are needed to allow an individual guarantee issuance and/or a demand containing a extend or pay request e.g. must all lenders review the request, or must a designated agent bank review it, etc.? c. Is the lender issuing the guarantee solely responsible for maintaining any limits on dollar values, expiry dates/periods, currencies, allowable rule sets, allowable types of underlying contracts or situations which can be supported by a guarantor, etc.? d. If a guarantee is issued in a currency other than the issuing party’s base currency (foreign currency/exchange) and should a complying drawing be received then: a. Is the debtor required to provide the foreign currency or must they provide reimbursement in base currency?



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b. If base currency is needed, is the issuer of the guarantee allowed to set the exchange rate, at their sole discretion, on behalf of the other lenders? e. Is the issuer of the guarantee solely responsible for reviewing any demands, and if yes, in the event that an examination falls outside of international standard demand guarantee practice and/or should it be determined that a valid discrepancy was missed by the examining guarantor(s), are all lenders responsible to provide reimbursement for their relative dollar portions? f. When a demand is paid, how will reimbursement occur? g. All relative guarantee fees such as, fees associated with the issuing, and/or amendment(s) and/or demand(s) and the collection and distribution of the fees. h. Which lending party’s location governs force majeure situations? i. If lending parties are in different locations, which regulatory and/or legal doctrine governs and would that agreement govern in demand guarantee matters when taking into account URDG 758 Articles 34 and 35?



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Participation Considerations



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Some prudential considerations when entering into a participation agreement:



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For the purposes of this publication the term “participation” means that two or more parties such as financial institutions and/or banks have jointly agreed to a single agreement to offset the drawing risks associated with the issuing of a guarantee or guarantees in the event that the guarantor is not timely reimbursed by the instructing party for any complying presentation/demand/drawing. The guarantor selling the risk uses these participation agreements to help diversify risk while supporting their customer’s need for a large guarantee or for a combination of guarantees. The financial institution(s), bank(s) or other party(ies) which are sharing in the risk, have no contractual relationships with the instructing party but will often receive revenues for the risk sharing they are entering into. Many participation agreements are known only to the parties involved with the agreement and the instructing party is often unaware of these agreements.



a. Typically, the issuer of the guarantee is solely responsible for reviewing any demands without any consultation from a participant(s). However, should an examination fall outside of international standard demand guarantee practice and/or should it be determined that a valid discrepancy was missed by the examining guarantor(s), the participant(s) may remain responsible to provide reimbursement for the instructing party’s non-reimbursement. b. All relative guarantee fees such as, fees associated with the issuing, and/or amendment(s) and/or demand(s) should be agreed between the participating parties and the collection and distribution of the fees should be outlined. It is important to note that the fee arrangements in the participation agreement need not be known or otherwise correspond, in any manner, to the fee agreements between the instructing party and its bank.



Sanction clauses Rules sets do not override local laws and URDG 758 is no exception. URDG 758 reaffirms this in a variety of ways including specific references in Articles 21, 31 and 33. However, it is an unfortunate trend for guarantors and/or counter-guarantors to add clauses in guarantees related to sanctions and/or



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compliance related matters which derive from country law/mandates to prohibit dealings with specific countries, persons, ships, aircraft or goods. As noted in the ICC Document No.470/1238 titled: “Guidance Paper On The Use Of Sanctions Clauses In Trade Finance -Related Instruments Subject To ICC Rules” which is also applicable to guarantees, “The enforceability of sanctions is a question to be decided by courts or national regulators or administrative agencies and is not an issue that can be addressed by rules of banking practice”. Further, it states in section 4.1: “It is recommended that banks should refrain from issuing trade finance-related instruments that include sanctions clauses that purport to impose restrictions beyond, or conflict with, the applicable statutory or regulatory requirements. …” , and Section 4.2 recommends that: “In trade finance transactions involving letters of credit or demand guarantees subject to ICC rules, practitioners should refrain from bringing into question the irrevocable, independent nature of the credit, demand guarantee or counter-guarantee, the certainty of payment or the intent to honour obligations. Failure to do so could eventually damage the integrity and reputation of letters of credit and demand guarantees which may have a negative effect on international trade.”



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ICC Official Opinion TA 752rev3 provided an example of a bad clause. Official ICC Opinion TA884rev also reaffirms that sanctions clauses should not be needed and if they are used, they should be very limited in scope, should refer only to specific laws or regulations, should never refer to “internal policies” or make similar references to internal policies and that any refusal of a demand for such a reason will generally need to be substantiated.