Uniform Rules For Demand Guarantees 2010
Elfreda Barrick
As well as replacing the previous URDG 458 in commercial transactions, URDG 758, which today celebrate their two-year anniversary, are now being applied more widely, for example in procurement contracts, and in deals where demand guarantees or counter-guarantees were previously not subject to rules, according to a survey compiled by the Guarantees Department of Raiffeisen Bank International based on contributions from the 46-member ICC Task Force on Guarantees.
Endorsed by the United Nations Commission on International Trade Law in 2011, the revised ICC Demand Guarantee Rules are also used in the International Federation of Consulting Engineers model construction contracts. Around the world, banks are promoting URDG guarantees and counter-guarantees, with leading European banks offering them in their standard forms. Bank regulators and lawmakers, including the Organisation for the Harmonisation of Business Law in Africa, approved the new rules and used them as a model for national statutes now in force in 16 countries.
Mr Affaki puts this wide acceptance down to a number of factors. If an international commercial transaction falls through and occasions a breach in delivery or payment obligation, URDG 758 are reliable in ensuring that an agreed third party, usually a bank, pays up. This is reassuring for risk-averse companies and allows their cash-strapped business partners to avoid putting down a cash-deposit. As far as the banks are concerned, devising their internal processing system on the basis of standard rules decreases the likelihood of an operational failure, so reducing internal costs. The hope is that this lowering of banking costs will be passed on to customers, whether they are large multi-nationals or small businesses.
Document Details: The ICC Uniform Rules for Demand Guarantees (URDG) reflect international standard practice in the use of demand guarantees and balance the legitimate interests of all parties. The URDG 758 has been in effect since the 1st of July 2010.
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The ICC Uniform Rules for Demand Guarantees (URDG) reflect international standard practice in the use of demand guarantees and balance the legitimate interests of all parties. More than an update of the existing rules, the revised URDG 758 is a new set of rules for the twenty-first century that has been in effect since the 1st of July 2010.
Since their first adoption in 1991, ICC's URDG have gained international acceptance and official recognition by bankers, traders, industry associations and international organizations including UNCITRAL, FIDIC and the World Bank. The current edition, URDG 758, was officially endorsed by the UN Commission on International Trade Law (UNCITRAL) in 2011.
Following what most observers feel has been a successful revision of ICC's Uniform Customs and Practice for Documentary Credits ("UCP 600") which, has led to a significant revival in the fortunes of the documentary credit, the ICC has launched on 1 July 2010 the revised Uniform Rules for Demand Guarantees ("URDG 758").
The new rules came into effect on 1 July 2010 and the most striking change is the adoption of the drafting style and language of UCP 600 to give the rules broader appeal among those used to the well established documentary credit terminology. So who should be looking to use demand guarantees issued subject to the new rules and why?
Presentation (Article 14)
This is a new feature, previously silent in URDG 458. Presentation of a claim must be made at the place of issue or such other specified place on or before expiry of the guarantee. If a presentation indicates that it is incomplete, it can then be completed on or before expiry. An incomplete presentation is unlikely to occur in practice but if it does happen the beneficiary does not suffer a technical knock-out for failing to provide everything in one envelope.
Currency of Payment (Article 21)
Where the guarantor is unable due to illegality or other cause beyond its control to make payment when due and in the currency of the guarantee then, notwithstanding any provision in the guarantee to the contrary, the guarantor can pay in its local currency at the prevailing rate of exchange. If payment is delayed, the beneficiary can require payment to be made in such increased sum as so as to reflect the amount which would have been received according to the exchange rate prevailing when payment was originally due rather than the date of payment if the exchange rate has moved against him.
Non-complying Demand (Article 24)
A major innovation is the new rule that if a guarantor rejects a non-complying demand it must send a rejection notice with five business days setting out all of the discrepancies, as in a UCP 600 documentary credit rejection. Failure to do so results in the guarantor losing its right to claim that the demand does not comply and it is then obliged to pay.
Requirements for Demand (Article 15)
Demands must be accompanied by such documents as the guarantee specifies and contain a statement setting out "in what respect the applicant is in breach of its obligations under the underlying relationship"1. The statement required is slightly simpler than under URDG 458 that may reduce the risk of a non-complying or inaccurate demand. However, the requirement for such a statement at all means that this rule continues to act as a pro-applicant/guarantor provision because it provides a basis upon which a guarantor can challenge a demand claim in court by alleging that an accompanying statement is false while a standby credit could provide for a statement of fact on a payment trigger there is no requirement under VCP 600 or LSP 98 that it does so. As in URDG 458 it remains open to the parties to expressly exclude this provision and it frequently is excluded.
Extend or Pay (Article 23)
The rule on "extend or pay", where the beneficiary makes a demand close to the expiry date and permits the guarantor to extend the validity of the guarantee as an alternative to immediate payment, has also changed. The guarantor now has the option to pay up immediately or to suspend payment for a period not exceeding 30 calendar days following receipt2 to allow negotiation. Previously it had no choice but to suspend payment while consulting with the applicant in relation to the extension. The guarantor now has a discretionary right to refuse to grant any extensions, "even if instructed to do so"3 by the applicant, and may simply proceed to pay. Banks will welcome this change.
Transfer of guarantee and assignment of proceeds (Article 33)
Partial transfers of a "transferrable" guarantee which were previously allowed are not now possible and the guarantor has the right to refuse to give effect to a request to transfer a guarantee at all unless it has expressly consented to the transfer. In addition, the agreement of the guarantor is required for the assignment of proceeds under Article 33(b). Failure to obtain such agreement gives the guarantor the right to refuse to pay the assignee in question. The parties can negotiate to exclude this provision if they wish.
Despite the stated aim of striking a greater balance between the competing interests in any demand guarantee, URDG 758 is still noticeably tilted in favour of the interests of the applicant/guarantor.
The UCP style language should make it easier to use but many beneficiaries who operate within the international trade market will continue to regard the URDG based guarantee as of lesser value than guarantees or standby credits issued without URDG.
The Uniform Rules for Demand Guarantees (URDG) are the rules underpinning the commonly used trade finance instruments, demand guarantees. This guide explains the purpose of demand guarantees and the rules governing them, which can help you understand how to mitigate risk in certain commercial trade transactions.
URDG (Uniform Rules for Demand Guarantees) Rules are internationally recognised guidelines established by the International Chamber of Commerce (ICC). These rules provide a standardised framework for demand guarantees, promoting transparency, efficiency, and fairness in international trade and financial transactions.
URDG Rules are widely used by banks, financial institutions, and businesses globally to govern demand guarantee transactions. They ensure that the rights and obligations of the parties involved are clearly defined and understood. By adhering to URDG Rules, all parties can minimise disputes and conflicts that may arise during the process of demand guarantee issuance and utilisation.
Demand guarantees, underpinned by URDG rules, aim to streamline and provide security in international trade transactions. However, certain aspects can sometimes lead to misunderstandings, disputes, or failed transactions. Five of these areas include:
2. Complying Presentation (Rule 8): The requirement for a complying presentation, or the submission of specified documents in the exact manner stipulated, can be a common source of disputes. If the beneficiary fails to present the documents as per the terms and conditions set in the guarantee, it might lead to the rejection of the demand, causing transaction failures.
3. Expiry Events (Rule 9): Clarity on when exactly a guarantee expires can be confusing for parties involved. This rule states that a guarantee expires on the earliest of its expiry date, the expiry date of any further extension, or on the date of a payment by the guarantor. Misinterpretation or disagreements on expiry dates can lead to transactional disputes.
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