If what you do involves:
- issuing bank guarantees;
- relying on them as credit support; or
- requesting their issue,
1 July 2010 is a date for your diary. The new revision of the ICC Uniform Rules for Demand Guarantees (URDG) comes into force on this date. URDG aspire to be a globally accepted, international standard set of rules that are incorporated by reference into bank guarantees i.e. what UCP 600 already is for documentary letters of credit.
URDG Publication No. 458 (458), the current version of the rules, is rarely used in the UK market (perhaps for about 2 per cent of demand guarantees issued out of UK branches). But the new revision, URDG Publication No. 758 (758), has more to offer so it should get more take-up. The main ways in which 758 improves on 458 are set out below.
More comprehensive. Making a guarantee subject to a set of rules is a legal short cut: anything the rules deal with you do not need to set out in your guarantee. 758 covers a lot more than 458. There are 35 articles as opposed to 28 under 458. The articles in the new version are more extensive so it is four to five times longer than 458 and has 11 articles that deal with points not covered by 458.
Drafting more user-friendly and consistent with UCP where appropriate. The new rules look and feel more like UCP. They use the same terminology (e.g. applicant, presentation, presenter) and, for issues that are common to demand guarantees and letters of credit, they mirror the approach taken under UCP 600. For instance, the new articles on advising and amendments closely follow UCP. Statement of breach requirement remains, but with improvements. The infamous Article 20 under 458 (which requires the beneficiary to present a statement of breach even where the guarantee wording requires a simple demand only) becomes Article 15 under 758. Although it remains, the article makes it clear you can exclude the requirement to provide a statement of breach and even gives sample wording to do this. The conditions the statement itself must satisfy have also been simplified.
New approach to force majeure. The force majeure rules aim to achieve a compromise between the UCP approach (unfair for beneficiaries) and the ISP98 approach (too openended for banks). They protect guarantors and counterguarantors by having a fixed extension period of 30 days. They also ensure that, if a guarantee’s tenor is extended because of force majeure, the tenor of any related counterguarantee is also extended.
New article on currency of payment. The new currency of payment terms set out what should happen if, for some reason beyond its control, the guarantor cannot pay a claim in the currency of the guarantee. They allow the guarantor to pay in its local currency and bind both the beneficiary to accept this payment and the counter-guarantor or instructing party to reimburse in that local currency or the guarantee currency (at the guarantor’s choice).
Non-documentary conditions clarified. The new rules clearly set out the narrow circumstances in which nondocumentary conditions should not be ignored and make it clear that in all other circumstances they should be. They also deal with the difficult issue of what the guarantor should do if data in a document needed for presentation conflicts with a non-documentary condition in the guarantee that must be ignored.
Now deals with counter-guarantees. You do not get confirmations of bank guarantees as you do with letters of credit. Instead the first bank issues a guarantee (called a counter-guarantee) in favour of the next bank, and so on until the last bank issues the guarantee in favour of the beneficiary. 758 expressly deals with the interrelation between counter-guarantees and the guarantee, for instance in the force majeure, currency of payment and amendment articles.
We look forward with interest to seeing whether the use of URDG increases from July 2010, in particular among UKbased banks.