New rules for demand guarantees - URDG 758
July 1 2010 a new set of ICC rules for Demand Guarantees will enter into force. The revision, the first in 16 years and formally called URDG 758, replaces URDG 458. The revision process took two-and-a-half years and produced five comprehensive drafts based on 600 comments from 52 countries.
URDG 758 consists of 35 articles that set out the liabilities and responsibilities of the parties to a demand guarantee. Compared to its predecessor the URDG 758 explain vital phases in the lifecycle of a demand guarantee; for example how to examine a demand – and the extend or pay situation. The language is clear and precise – and the terms, wordings and structure are close to that of UCP 600 (ICC’s rules for documentary credits).
The URDG 758 include amongst others the following new provisions/articles:
Definitions (terms and parties) (article 2)
Like the UCP 600 an article defining terms and parties is included. This article consists – as an example – of the following defined terms and parties.
- Advising party
- Business day
The URDG 758 include a number of new parties, for example:
Previously referred to as “principal” – however the UCP 600 name and definition has been adopted, i.e. “the party indicated in the guarantee as having its obligation under the underlying relationship supported by the guarantee. The applicant may or may not be the instructing party;”
A new party to the URDG – now defined as: “the party, other than the counter-guarantor, who gives instructions to issue a guarantee or counter-guarantee and is responsible for indemnifying the guarantor or, in the case of a counter-guarantee, the counter-guarantor. The instructing party may or may not be the applicant”
In far the most cases “applicant” and “instructing party” is one and the.
Is defined as “the party that advises the guarantee at the request of the guarantor”. This should be read in conjunction with article 10 describing the rules for the advise of a demand guarantee.
And a number of new concepts, for example:
(Complying) Presentation and (Complying) Demand
The URDG 758 make a distinction between Presentation and Demand.
A Demand is “a signed document by the beneficiary demanding payment under a guarantee” whereas “Presentation” has a broader definition i.e. “the delivery of a document under a guarantee to the guarantor or the document so delivered…”.
Consequently a demand is always a demand for payment – where a presentation may have other purposes; like providing documentation that will make the guarantee come into force – or reduce the amount of the guarantee. Therefore a demand is always a presentation – but a presentation is not always a demand.
From the UCP 600 comes the term “complying presentation”. The definition provides the following hierarchy:
A presentation under a guarantee that is in accordance with
- the terms and conditions of the guarantee
- the URDG 758, and
- international standard demand guarantee practice
A “complying demand” is a demand which meets the requirements of a complying presentation.
In the URDG 758 it is strongly recommended that any demand guarantee includes information on expiry. This could be either in the form of an expiry date or an expiry event. Any presentation must be made on or before expiry.
A new rule to the URDG is that if the guarantee states neither an expiry date nor an expiry event, the guarantee shall terminate after the lapse of three years from the date of issue.
Interpretation (article 3)
Like the UCP 600 an article providing interpretations is included. This article consists – as an example – of the following Interpretation.
Branches of a guarantor
“from”, “to”, “until”, “till” and “between”
Non-documentary conditions (article 7)
The URDG 758 make emphasis on the independent and documentary nature of demand guarantees. This means that all requirements in a demand guarantee should also stipulate a document to indicate compliance. In guarantee transactions there are however situations where a document need not be presented – and this is duly acknowledged in the article. Consequently the exceptions are:
- Dates or the lapse of a period
- For example where the amount of the guarantee is reduced on a certain date if no complying demand is made prior to that date.
- Guarantors own Index specified in the guarantee.
- For example the payment of a specified amount to a given account held with the guarantor.
- An Index specified in the guarantee.
- For example the use of a Platts index.
The rule is that non-documentary conditions are disregarded. It should be noted however that this should be read in conjunction with sub-article 19(b) meaning that data in a document presented must not conflict with data in the guarantee. So for example the requirement “Goods of China origin” in a guarantee is a non documentary condition. However if a document (for example the commercial invoice) shows that goods are of Swedish origin the presentation is discrepant – and may be rejected.
Advising of guarantee or amendment (article 10)
The URDG 758 include detailed rules for the situations where a demand guarantee is advised to the beneficiary through an advising party. An advising party has no obligations under the guarantee as such – but must satisfy itself as to the apparent authenticity of the guarantee and that the advice accurately reflects the terms and conditions of the guarantee as received by the advising party.
Information about demand (article 16) / Transmission of copies of complying demand (article 22)
The guarantor has two different “information obligations” when a demand is made:
- To inform the instruction party (or a counter-guarantor) of the demand, and
- To transmit copies of any complying demand to the instruction party (or a counter-guarantor)
This does however not interfere with the guarantor’s obligation to pay when a complying demand is made.
Examination (of the presentation) (article 19)
The URDG 758 introduce a new standard for examining the presentation made under a demand guarantee. The core principles are:
The guarantor shall determine, on the basis of a presentation alone, whether it appears on its face to be a complying presentation. I.e. underlining the independent and documentary nature of demand guarantees.
Data between documents – and between documents and the guarantee need not be identical – but must not conflict. In addition they should be read “in context”. This is the same principle that applies to documents presented under a documentary credit subject to UCP 600. This rule is especially important to note where the guarantee – in addition to the demand – requires a list of supporting documents like packing list, certificates and bill of lading.
When a guarantee requires a document to be presented without stipulating the issuer or data content, the document will be accepted as presented if it appears to fulfil the function of the document.
Time for examination of demand; payment (article 20)
Also new to the URDG is a time line for the guarantor to determine if a complying demand has been made; namely five business days following the day of presentation.
The same article makes it clear that when the guarantor determines that a demand is complying, it shall pay
Extend or pay (article 23)
In some cases a demand under a guarantee includes as an alternative a request to extend the expiry of the guarantee. This situation is also covered by URDG 758.
The basis for this is that a complying demand is made. If the demand is not complying – it can be rejected – and the guarantor would neither be obligated to pay nor extend the expiry.
However where the demand is complying the guarantor may suspend payment for a period not exceeding 30 calendar days following its receipt of the demand. Provided the requested extension of the guarantee is granted – the demand for payment is deemed to be withdrawn.
The guarantor many refuse to grant any extension and shall then pay
Non-complying demand, waiver and notice (article 24)
Unlike its predecessor the URDG 758 include detailed rules as to how to deal with a demand that does not comply with the requirements of the guarantee.
The principles are:
When the guarantor determines that a demand under the guarantee is not a complying demand, it may reject it. In addition it may approach the instructing party for a waiver of the discrepancies
The requirements for a demand is as follows:
- The guarantor shall give a single notice to the presenter of the demand that it is rejecting.
- The notice shall state that the guarantor is rejecting the demand, as well as
- Each discrepancy for which the guarantor rejects.
- The notice must be sent no later than the close of the fifth business day following the day for presentation.
- A guarantor failing to act in accordance with the above shall be precluded from claiming that the demand does not constitute a complying demand. I.e. it must pay!
Force Majeure (article 26)
The URDG 758 include a new article on force majeure. The URDG definition of Force Majeure is:
“ …“force majeure” means acts of God, riots, civil commotions, insurrections, wars, acts of terrorism or any causes beyond the control of the guarantor or counter-guarantor that interrupt its business as it relates to acts of a kind subject to these rules…”
This would for example not include the situation where a demand can not be presented timely to a guarantor because of cancelled flights due to a volcanic eruption – given of course that the guarantor is not closed for business due to that situation.
The article describes 3 different scenarios:
- The guarantee expires at a time when presentation or payment under that guarantee is prevented by force majeure.
In this case the guarantee shall be extended for a period of 30 calendar days from the date on which it would otherwise have expired.
- The presentation has been made – but not examined due to the force majeure situation.
In such case the examination is suspended until the resumption of the guarantor’s business
- A complying demand has been presented – but not paid due to the force majeure situation.
In this case payment must be made when the force majeure ceases
Other information related to the URDG 758
The rules are published by the ICC Services who hold the copyright. They can be purchased through ICC Books or through the national ICC Committee.
In connection with the URDG 758 being revised Nordea have revised the brochure “Bank Guarantees in International Trade”. This publication explains the terminology, rules and practices for bank guarantees in international trade. The information provided in the publication is based on our acquired expertise in this field, as well as the URDG 758. The publication will consider the bank guarantee from two perspectives. The first section provides general information on guarantees, the specific purpose for which they are used in the transaction. The second section (Chapter 5) provides an introduction to URDG 758 by focusing on the parties to a guarantee as defined in these rules, as well as taking the practitioner step-by-step through the process of a single demand guarantee issued subject to them.
Also connected to the revision of the URDG 758 Nordea have revised the guarantee standard wordings available on Nordea.com
Should you have any questions related to the URDG 758 you are most welcome to contact your local Nordea trade finance office.