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Desiderato Merriwether
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.
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.
5. Making a Demand (Rule 11): This rule, which outlines the process for making demands under the guarantee, can often be a source of confusion. It specifies what the demand should include and the documents that should accompany it. Misinterpretation or non-adherence to this rule can cause the failure of transactions.
2020 is anything but normal. It is rare for there to be any judicial treatment of the ICC Uniform Rules on Demand Guarantees No. 758 (URDG 758) but 2020 has already brought us not one but two cases on its interpretation and applicability.
URDG 758 applies to all demand guarantees (commonly performance bonds or advance payment guarantees in the construction industry) that incorporate the rules. Despite being around for almost a decade, uptake and usage of URDG 758 has been patchy, which is often blamed on the rules not being sufficiently tested in the courts. 2020 court rulings may encourage users of demand guarantees, particularly in international construction projects, to now adopt URDG 758.
In that case, the court considered whether a term in an advance payment guarantee was a condition which had to be complied with for the beneficiary (Tecnicas) to call the demand guarantee. The court found, as a matter of construction, that Tecnicas had complied with the condition, but helpfully also went on to make obiter comments about the application of URDG 758.
The second case of the year is a decision from the Appellate Court of the Qatar Financial Centre in Leonardo SpA v Doha Bank Assurance Company LLC. In that case, the court dismissed an appeal from Doha Bank in regard to calls made on two demand guarantees, an advance payment guarantee and a performance guarantee, on the basis that the calls were valid as made in strict compliance with URDG 758.
In Tecnicas, the TCC found that a condition in the advance payment guarantee, which provided that the initial advance payment was to be paid into an HSBC account, was a factual condition and not a documentary one: there was no requirement that payment into the HSBC account was to be indicated by documentary evidence to the guarantor and therefore Article 7 operated to remove the condition. The condition would have otherwise been enforceable. In that context, and underlying the supremacy of URDG 758, the TCC commented:
The timing of the judgments is welcome. The construction industry has not avoided the turbulence of 2020. Now the initial wave of force majeure notices (and blogs about them!) have subsided, we are increasingly seeing projects mothballed resulting in terminations and the inevitable rise in calls on performance and advance payment bonds.
In the Middle East, the courts are increasingly intervening in bond calls with unpredictable and, at times, inconsistent results. Incorporating URDG 758 in demand guarantees used in international construction projects would likely bring much needed consistency and uniformity to this issue.
We now have two high-profile cases from internationally respected courts that endorse the clarity and simplicity offered by URDG 758 to demand guarantees. It is hoped that this will allay concerns that URDG 758 is untested. We could not have a clearer endorsement of the benefits of international adoption of URDG 758.
The ICC Uniform Rules for Demand Guarantees (URDG), first adopted in 1991, reflect international standard practice in the use of demand guarantees while at the same time balancing the legitimate interests of all parties. In the years since their adoption, the URDG have gained increasingly broad international acceptance and official recognition and use by bankers, traders, industry associations and international organizations including UNCITRAL, FIDIC and the World Bank.
More than an update of the existing rules, the revised URDG 758 are a new set of rules for the twenty-first century, rules that are clearer, more precise and more comprehensive. The new rules contain significant changes practitioners will need to know, including:
In Leonardo S.p.A v. Doha Bank Assurance Company LLC1 the Appellate Division of the Qatar Financial Centre in a Judgement handed down by Lord Thomas of Cwmgiedd, Justice Chelva Rajah SC and Justice Ali Malek QC stressed the fundamental importance of incorporating by reference Uniform Rules for Demand Guarantees (URDG) 758 into so-called on-demand bonds and guarantees. This is an important judgement. The URDG International Chamber of Commerce (ICC) Publication 758, known internationally as URDG 758, became effective on July 1, 2010, but there were no reported cases dealing with its application and practical effects. In Leonardo S.p.A the court explained:
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