International Standard Demand Guarantee Practice for URDG 758
On 31 March 2021 the ICC Banking Commission approved the new International Standard Demand Guarantee Practice (“ISDGP”) as the companion to its Uniform Rules for Demand Guarantees 758 (“URDG”). The ICC have clearly emphasised that the ISDGP represents international banking practice in demand guarantees and so supplements but does not amend the URDG. In a similar view, it cannot conflict with the URDG. The ISDGP offers an insight into the correct application of the URDG in a practical context. As it is representative of international standard demand guarantee practice, the ISDGP should also serve as a useful resource on best practice in the context of demand guarantees that are not subject to the URDG.
There is no start date for the ISDGP’s application, as it is not a separate set of rules; it simply supplements and explains the URDG. Therefore, where a guarantee incorporates the URDG, the ISDGP automatically applies without the need for any further reference. As is made clear in the document, the ISDGP does not exhaustively codify international standard banking demand practice under the URDG (or indeed more generally). It is also subject to the overriding mandatory rules of applicable law.
By its 215 articles, the ISDGP covers “all the stages in the lifecycle of a demand guarantee and counter-guarantee”. A selection of the issues addressed in the ISDGP and arising from the various stages of a guarantee is set out below[1]:
Definitions
1. Business days / hours:
a. A Business Day is defined at URDG art. 2 as a “a day on which the place of business where an act of a kind subject to these rules is to be performed is regularly open for the performance of such an act”. Article 20 clarifies that this refers to a day when a guarantor is regularly open for business for the acts of processing guarantees. Days where the guarantor is open to perform non-guarantee business do not count as Business Days under the URDG.
b. Article 23 further clarifies that unless a guarantee indicates the business hours of a guarantor during which an act indicated in the guarantee is to take place, a business day is a standard 24 hour period in the time zone of the guarantor. This is a useful clarification of what counts as business hours within a business day. Although, as Article 25 states, where the presentation is to be made in paper form, the beneficiary bears the risk that practically the business hours are likely to be significantly less than 24 hours, as the office may be closed outside of specified hours.
2. Guarantor’s own records:
a. URDG art. 2 defines the Guarantor’s own records as the “records of the guarantor showing amounts credited to or debited from accounts held with the guarantor..”. Articles 37 and 38 clarify that records of other operations involving the guarantor or its branches (within the same country) do not fall within the scope of a “Guarantor’s own records” as defined in the URDG even if the guarantee refers to those other operations. Similarly, records showing movements on an account held with a branch of the guarantor that is located abroad does not fall within the scope of the definition even if the guarantor has a centralised data system permitting access and control of all credits and debits involving its branches abroad.
Drafting the guarantee
3. Reference to the underlying relationship:
a. URDG art. 8 sets out the recommended terms / matters that should be addressed in a guarantee. One of the recommendations is that a guarantee should include “a reference number or other information identifying the underlying relationship” and guarantees commonly adhere to this requirement by referring to the underlying contract in consideration of which the guarantee is issued. Article 50 does caution against going further and making references in the guarantee to definitions provided in the underlying contract. It is better practice to define those terms in the guarantee themselves (even if it means repeating what is said in the underlying contract) as otherwise, the cross-reference risks “establishing an accessory connection with that contract”, which may bring into question the independent nature of the guarantee.
b. Likewise, Article 53 of ISDGP frowns upon another practice that is common when guarantees are used in certain sectors, which is making reference in the guarantee to the underlying relationship “in terms such that any operative part of the guarantee becomes predicated on the occurrence of an event under the underlying relationship”. An example given is where the guarantee is drafted on terms that have the effect of making payment conditional upon establishing breach in the underlying relationship[2].
4. Expiry terms:
a. The expiry of a guarantee is typically tied to a specified expiry date or the occurrence of an expiry event or where both are specified, the earlier of the two. It is not uncommon to have a guarantee referring to multiple expiry possibilities and the clarity of the drafting is key in ascertaining the order of priority amongst the possibilities provided. Article 55 provides an example of the type of drafting that avoids confusion or anomalies that sometimes arise.
Issuing the guarantee
5. The question of when a guarantee is issued can give rise to disputes and legal arguments. URDG art. 4a. states that “a guarantee is issued when it leaves the control of the guarantor.” Assessing whether a guarantee has left the control of the guarantor can be challenging when it involves transmission to a third party (who is not the beneficiary) and consideration of whose agent that third party is. Articles 68 and 70 deal with what is arguably the fairly straightforward situation concerning the guarantor’s transmission of the guarantee to its external legal counsel and courier companies entrusted with the delivery of the guarantee. It does not address the question of transmission to an advising party (and there may be more than one); whose agent is the advising party? This is something that will still be debated before the relevant courts, applying the standards of agency under applicable law.
Amendments
6. Save for an automatic amendment made in accordance with the express terms of the guarantee, URDG art. 11c states that an amendment is not binding on a beneficiary until it accepts the amendment. Article 81 further explains that where a beneficiary is notified of multiple separate amendments, each amendment stands on its own to be rejected or accepted by the beneficiary.
Presentation & Examination
7. Further underlying the independent nature of the guarantee, Article 102 stresses that terms in the guarantee requiring that a document be approved or countersigned by the applicant as a pre-condition to payment under the guarantee does not reflect international standard practice. From the perspective of a beneficiary, the benefit of having a guarantee in its favour can be lost if an applicant refuses to sign or countersign a document, so such a requirement should be avoided regardless of what rules apply to the guarantee.
8. The standard for determining whether a demand is complying is set out at Articles 138 to 143. Article 141 in particular makes clear that the definition of “complying presentation” in URDG art. 2 does not require literal compliance. Although, where a guarantee does require the presentation to contain specific terms by quoting those or attaching the form, then as referred to in Article 142, the presentation must reproduce those terms.
Non-complying demand and rejection
9. As per Article 174, a notice of rejection must state within the same message all the discrepancies for which the guarantor rejects the demand. It is not uncommon to see guarantors serving additional rejection notices purporting to supplement an initial list of discrepancies. Article 174 makes clear that such practice is not international standard practice and no effect will be given to any such additional notice where the guarantee is subject to URDG.
10. Furthermore, where a guarantor has previously assessed a document as complying, within the context of a demand that is found to be non-complying (i.e. the discrepancy was identified in another document), Article 176 confirms that the guarantor cannot change its mind as regards that document. In other words, where a document was previously held to be compliant and it is presented again by the beneficiary as part of a new demand seeking to correct an earlier non-complying demand, the guarantor cannot find fault with that document where no change has been made to it.
Effect of court measures and sanctions
11. Court Measures: The effect of court orders on the operation of a guarantee is an area on which legal advice is often sought. Articles 211 to 213 set out key principles in respect of this as follows:
a. A court order preventing the payment of a guarantee does not extend the five business day period (under URDG art. 20a) within which the guarantor has to examine and determine if a demand is complying. Similarly, the deadline for the guarantor to serve a notice of rejection, if it finds the demand to be non-complying, remains five business days following the day of presentation (as per URDG art. 24e.)
b. Where the guarantor is notified of, and complies with, a court order preventing the payment of a guarantee, the guarantor should inform the beneficiary of the order without delay and provide a copy of the order. The guarantor is not required to translate the order or express any views or comments on the order.
c. In the absence of the guarantor having clear evidence of fraud or other impropriety being established, the guarantor should seek to resist the imposition of an injunction preventing payment or, where it has already been obtained, seek to have it lifted.
d. A decision as to whether to comply with its duty to honour its payment undertaking under the guarantee or to comply with a provisional measure of a competent court, is a matter on which the guarantor has to look to applicable law for guidance.
12. Sanctions: Sanctions undoubtedly override any payment obligations under a guarantee. However, there has been an increasing use of sanctions clauses in guarantees that are on terms that allow the guarantor a level of discretion as to whether or not to honour a complying demand, beyond the statutory or regulatory requirements applicable to it. As we have previously addressed3, the ICC discourages the use of sanctions clauses in instruments subject to ICC Rules (such as guarantees subject to URDG) and Article 214 again emphasises that approach.
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[1] References below to guarantor and guarantees included a counter-guarantor and counter-guarantee unless otherwise indicated. Also, references in the form “URDG art. [#]” are to the articles of the URDG and those in the form “Article [#]” are to the articles in the ISDGP.
[2] This practice goes beyond the requirement for a statement by the beneficiary (accompanying the demand) indicating in what respect the applicant is in breach of its obligations under the underlying contract as is required by URDG art. 15(a).