Standby & Demand Guarantee Practice: Understanding UCP600, ISP98 & URDG 758

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1 Standby & Demand Guarantee Practice: Understanding UCP600, ISP98 & URDG 758 First Edition By PROFESSOR JAMES E. BYRNE Director, Institute of International Banking Law & Practice, Inc. Faculty, George Mason University School of Law Co-Editors Spencer R. Nelson J.D., George Mason University School of Law and Peter Traisak J.D., George Mason University School of Law

2 Copyright 2014 All rights reserved No reproduction of this material may be made without express written permission. The Institute of International Banking Law & Practice, Inc Ryecroft Court Montgomery Village, MD USA Phone: Fax: Website: The services and products of the Institute are described on the back pages. ISBN Standby and Demand Guarantee Practice: Understanding UCP600, ISP98 & URDG 758 is published by the Institute of International Banking Law & Practice, Inc. Opinions expressed in it do not necessarily reflect the official positions of the Institute. ii

This volume is dedicated to Lena Andersson Demonstrating in her work a commitment to the integrity and enhancement of demand guarantee & standby LC practice that is unparalleled, Lena exemplifies the

3 This volume is dedicated to Lena Andersson Demonstrating in her work a commitment to the integrity and enhancement of demand guarantee & standby LC practice that is unparalleled, Lena exemplifies the best practices in this field and embodies the principles described in this book. Lena is a Global Product Specialist in Guarantees and Standby Letters of Credit at SEB. She is a member of the European Advisory Council for the Institute of International Banking Law and Practice, Inc. She was a member of the ICC Task Force that translated the URDG into Swedish, and works with ICC Sweden. She is a regular speaker at conferences and seminars relating to Guarantees and Standby Letters of Credit. iii

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5 Preface This book is intended to provide a comparison of the three practice rules used in standby letters of credit and independent guarantees, namely UCP600, ISP98, and URDG 758. Incidentally, it compares and contrasts typical standby and independent guarantee practices and also surveys general rules of letter of credit law that are related to these undertakings. In doing so, it breaks new ground. While separate treatments of each practice rule exist, 1 until now there has been no serious comparison of the three practice rules. That such a comparison is needed is apparent to anyone considering the situation of major banks and users of these instruments. While one set of practice rules may be preferred, it is the rare Issuer/Guarantor or applicant who can insist that only these practice rules be used for its undertakings. Therefore, any serious user of these undertakings must be able to work with each of the rules. Doing so, however, is not an easy matter. While the practice rules resemble one another in broad outline, they differ considerably in their application to specific issues and problems. The inability to move from practice rule to practice rule or ignorance or confusion about the differences will inevitably result in costly mistakes in presentation of documents, their examination, refusal, and other aspects of practice such as transfer, assignment of proceeds, etc. In addition, the failure to appreciate these differences will lead to errors in drafting of the undertaking. What is fundamental about these undertakings is not their name, whether standby, demand/bank/independent guarantee, letter of credit, bond, or whatever. What is important is the practice rule to which it is subject. An Issuer/Guarantor, Confirmer, Nominated Bank, Applicant, Beneficiary, Transferee, assignee, or successor overlooks the not insignificant differences between these practice rules at their peril. The organization of this book follows that of the practice rules themselves, starting with basic propositions about independent undertakings (Chapter 1) and moving to obligations of the parties (Chapter 2), presentation (Chapter 3), examination (Chapter 4), honour and dishonour (Chapter 5), and miscellaneous issues such as retention of the original past expiry, transfer, assignment, succession, disclaimers, LC Fraud and Abuse, protected persons, sanctions, charges, reimbursement, syndication/participation, law, forum, and arbitration (Chapter 6). Although the relevant text of the practice rule being discussed is recited, most readers will want to have the full text of the three rules at hand when they read this book. LC Rules & Laws: Critical Texts for Independent Undertakings (IIBLP) is an ideal means of doing so, containing all practice rules and legal documents related to independent undertakings in one easily managed volume. In effect, it is a companion volume to this book. While this book was not designed to complement the Certified Standby and Guarantee Professional certification programme, it provides a useful accompanying text. This certification programme is the only one that covers all three practice rules and both standbys and demand guarantees. James E. Byrne 10 April 2014 Upper Puddleby on Marsh 1. UCP600: An Analytical Commentary (IIBLP); Official Commentary on the International Standby Practices (IIBLP), Professor Goode et al, The Guide to ICC Uniform Rules for Demand Guarantees (URDG 758) (ICC Publishing). v

6 Acknowledgements This Book is the product of talks, seminars, and programmes on ISP98, UCP600, URDG 758, and on standby letters of credit and independent guarantees. It has been prepared with the active assistance of my editors, Spencer R. Nelson and Peter Traisak, both graduates of George Mason University School of Law and former students without whose help, this book would not have come to print for several years, if ever. I also acknowledge the assistance of the following professionals who reviewed one or more chapters of this book. Their advice and insights are gratefully acknowledged but any errors are solely the responsibility of the author: Buddy BAKER, Head of Trade Services Sales, Fifth Third Bank (USA); Sam JEBAMONY Standby LC Unit Manager, JPMorgan Chase (USA); Khalil MATAR Senior Manager, Business Audit, Alinma Bank (Saudi Arabia); Vincent M. MAULELLA Associate Director, IIBLP; Donald SMITH President, Global Trade Advisory Ltd (USA); Jeremy SMITH Documentary Risk Advisor, Lloyds TSB Bank plc (UK). I also express my thanks to the staff of the Institute whose daily efforts on my behalf were critical in bringing this work to life: my secretary Kathleen Blumberg who has typed, retyped, sorted through my impenetrable edits, all the while bringing to her work a bright and cheery disposition; the editor of Documentary Credit World, Christopher S. Byrnes, whose editorial and proofing skills have prevented many errors from slopping past; James E. Byrne, Jr. who has ably handled the production and layout of this book; Matthew J. Brown, Associate Counsel of the IIBLP, who has provided editorial advice on many of the chapters; and Christopher Sandler who has designed the cover and assisted with layout. Above all, I thank my wife, Maria T. Byrne, whose patience and encouragement have enabled me to spend the time and energy necessary to master this subject and to write this book. In writing a book of this nature, it is necessary to draw on prior work and teaching, which I have done extensively. As a result, it is necessary to acknowledge the many people who have assisted in forming my thought process regarding standby letters of credit and independent guarantees over the past 30 years. They include James G. Barnes of Baker & McKenzie, my able companion and fellow traveler in the process of unfolding ISP98, the ISP98 Model Forms, and the revision of UCC Article 5; Vincent M. Maulella, my companion in our work and programs throughout the world for many years; Professor Boris Kozolchyk of the Center for National Law Center for Inter-American Free Trade and the University of Arizona in our work on the UN LC Convention; the many bankers and lawyers with whom I have worked on many projects over the years, and the hundreds of students and participants in my classes and seminars who have forced me to clarify and articulate my notions about this subject. The support of George Mason University School of Law and its Center for Law & Economics is also gratefully acknowledged. vi

7 SUMMARY OF CONTENTS SUMMARY OF CONTENTS... vii TABLE OF CONTENTS... ix Chapter One: Independent Undertakings... 1 Chapter Two: Obligations of Parties to an Independent Undertaking Chapter Three: Timely Presentation of Documents Chapter Four: Examination and Compliance of Documents Presented Chapter Five: Honour and Dishonour Chapter Six: Miscellaneous Issues Questions & Answers Index vii

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9 TABLE OF CONTENTS Dedication... iii Preface... v Chapter One: Independent Undertakings Types of LCs and Their Characteristics Types of Independent Undertakings/LCs Common Characteristics of all Independent Undertakings Documentary Promises Independence Payment on Underlying Transaction Not a Consumer Transaction Binding and Irrevocable Definite Promise Independent Undertakings Distinguished from Dependent Undertakings Traditional or True Guarantees Bonds or Indemnities Insurance Undertakings Commercial or Financial Contracts Negotiable Instruments Types of Standbys and Demand Guarantees Practice Rules What is Practice? Uniform Customs and Practice for Documentary Credits ( UCP600 ) International Standby Practices ( ISP98 ) Uniform Rules for Demand Guarantees ( URDG 758 ) Uniform Rules for Bank-to-Bank Reimbursements ( URR 725 ) Practice Rules Overview LC Law The Relationship Between LC Law and Practice Sources of LC Law Statutes The Supreme People s Court of the People s Republic of China Judicial Decisions Bank Regulations Litigation Forms and Standardization SWIFT Messages ISP98 Model Forms Other Forms Standbys vs. Demand Guarantees Definitions Secondary Differences between Standbys and Demand Guarantees Historical Evolution Evolution of Standby LCs Evolution of Bank Guarantees Geography Transactions and Rules Familiarity Practices Achieving and Determining Independence ix

10 1.8.1 Factors in Determining Whether an Undertaking is Independent The Undertaking Terms and Phrases Name of the Undertaking Applicable Practice Rules Applicable Laws Person Making the Promise Interpreting Undertakings to Determine Independence Intent Review Questions Chapter Two: Obligations of Parties to an Independent Undertaking Issuance Meaning of Issuance Meaning of Issuer and Related Terms Issuance in Practice Issuance Via Advising Banks or Other Third Parties Conditional Issuance, Pre Drawing Conditions, or Non-Operative Provisions Non-Documentary Conditions to Issuance Obligation Where Undertaking Not Issued ISP98 Model Form 1 (Standby Incorporating Payment Demand) Obligations of Issuer/Guarantor Issuer / Guarantor Defined Credit Definitions Substantive Rules Regarding the Undertaking Characteristics of an Independent Undertaking ISP98 Model Form 1 (Standby Incorporating Payment Demand): The Undertaking Additional Undertakings in the Standby/Demand Guarantee Undertakings Supplementing Those of the Issuer/Guarantor Confirmation and Confirmer ISP98 Model Forms 7, 8, IX, and X Regarding Confirmation Counter Undertakings Challenges of Counter Undertakings Challenge 1: Parallelism Challenge 2: The Compliance of Documents Challenge 3: The Separate and Independent Character of the Counter Undertaking and the Local Undertaking Challenge 4: Governing Law ISP98 Model Form 6 (Counter Standby) Comparing Confirmations and Counter Undertakings Advice The Meaning and Significance of Advice Who is an Adviser, Whether it is Nominated, and Second Advising Banks Obligations of an Adviser Nomination and Confirmation A Confirmer as a Nominated Bank Confirmers Amendments Meaning of Amendment Issuance of an Amendment: the Issuer/Guarantor Confirmer and Beneficiary Bound by an Amendment?: Consent Routing of Amendments x

11 2.7 Expiry of an Independent Undertaking The Meaning and Significance of Expiry Substantive Provisions Regarding Expiry Expiry Events The Place of Presentation for Expiry Open Ended Undertakings Automatic Amendment and Variation Meaning of Automatic Automatic Extension of the Expiration Date Automatic Increase or Decrease Informing the Instructing Party of a Payment Demand The Applicant s Relationship to the Undertaking The Applicant vs. the Instructing Party The Issuer/Guarantor s Duty Under Different Practice Rules Review Questions Chapter Three: Timely Presentation of Documents What is a Presentation and a Presenter? Where is Presentation to be Made? To Whom is Presentation to be Made? Providing for Exclusive Presentation to an Entity Other Than the Issuer/Guarantor Timely Presentation Problems with Specifics Regarding Presentation The Manner of Presentation: How Mode of Presentation Documents Lost in Transit Incomplete Presentations Partial and Multiple Drawings Re-Presentation Installments Separateness of Each Presentation Cure Wrongful Dishonour Presentation After Normal Banking Hours Extend or Pay Demands Consequences of Extension Deadline When Bank is Ordinarily Closed Closure When the Expiration Date is on a Business Day Closure Due to Force Majeure Inadequacy of Force Majeure as a Basis for LC Practice Solutions and Guidance to Closure from the Practice Rules: UCP Solutions and Guidance to Closure from the Practice Rules: ISP Solutions and Guidance to Closure from the Practice Rules: URDG URDG 758 Article 26 (Force Majeure): Force Majeure Preventing Presentation URDG 758 Article 26 (Force Majeure): Documents Presented, but Force Majeure Preventing Examination URDG 758 Article 26 (Force Majeure): Force Majeure Preventing the Issuer/Guarantor from Paying Closure and Extension in Counter Undertaking Situations & Confirmation ISP98 Approach to Closure in Counter Undertaking Situations; UCP xi

12 URDG 758 Article 26 (Force Majeure): Application to Counter-Guarantee Situations Does URDG Force Majeure Rule Affect Inability to Present? Closure Prior to Expiry Review Questions Chapter Four: Examination and Compliance of Documents Presented Standard of Compliance Beyond Compliance: Preclusion Compliance Standards in the Practice Rules Strict Compliance The Standard for Data Complying Presentation Extraneous Documents Extraneous Data Inconsistency or Conflict within Documents Presented Conflict in LCs Conflict in Standbys Conflicts and Non-Documentary Conditions Language ISP98 Approach to Language UCP600 Approach to Language URDG 758 Approach to Language Identification of the Undertaking No Instructions in Standby/Demand Guarantee and No Identification of Number in Documents, But Identification in Presentation Under ISP Under URDG Under UCP No Instructions in Standby/Demand Guarantee and No Identification of Number in Document or Presentation Under ISP Under URDG Time for Examination Where There is No Identification Under URDG 758 & ISP Under UCP Instructions in Standby/Demand Guarantee, But No Identification in Presentation Under ISP Under UCP600 & URDG Identification Revisited Document Issuer, Document Date, and Amount Drawn Early Presentation Greater Amount Due Than Demanded Lesser Amount Due Than Demanded Demand in Excess of Balance on Standby/Demand Guarantee Use of Imprecise Terms Unconditional or Abstract Absolute Primary Payable From the Issuer s Own Funds Payable on Demand or Clean Calculations xii

13 4.8 Formality Requirements for Documents that are to be Presented Is a Signature Required? Is Formalization Other than a Signature Required? Standby/Demand Guarantee Requirements for the Insertion of Specified Text or Provisions Applicant Approval Non-Documentary Conditions in Standbys/Demand Guarantees Practice Rules Regarding the Issuer/Guarantor s Own Records The Practice Rules as Applied Non-Documentary Conditions Not Limited to Presentation of Documents Conflicts Between Non-Documentary Conditions and Data in Other Documents Merger of Issuer/Guarantor or Confirmer with Another Entity and Change of its Name Originals and Copies Originality of Documents Presentation of Demands or Drafts Elements of a Demand Demands Under ISP Demands Under UCP Demands Under URDG Problems in the Use of demand in URDG Drafts or Bills of Exchanges Drafts Under the Practice Rules Explanatory Statements ISP98 Model Form 1 (Standby Incorporating Payment Demand) Default Under URDG Excluding or Modifying a Supporting Statement Under URDG Requirement that Legal Documents be Presented Requirements that Negotiable Documents Other than Drafts be Presented Documents Related to Counter Undertakings Examination of Documents Under Commercial Standbys Other Documents Review Questions Chapter Five: Honour and Dishonour Making a Decision to Honour or Dishonour Time Frame for Examination Beginning to Calculate Time Acceleration of Time Frame Honour of a Complying Presentation Discretion in the Decision to Honour Payment Waiver of Discrepancies Prior to Refusal Reimbursement of Nominated Banks Documents Lost in Transit LC Fraud or Abuse Dishonour Notice of Refusal: ISP Notice of Refusal: URDG Notice of Refusal: UCP Adequate Notice of Refusal Indication of Refusal xiii

14 Statement of Discrepancies Disposition of the Documents Effect of LC Fraud or Abuse Waiver of Discrepancies Preclusion Preclusion Under UCP Preclusion Under ISP Preclusion Under URDG Beneficiary Options After Notice of Refusal Received Separate Presentations Applicant Reimbursement Who is the Applicant? Reimbursement in the Practice Rules Binding the Applicant Confirmer s Right to Reimbursement from Applicant Review Questions Chapter Six: Miscellaneous Issues Retention of the Operative Instrument The Operative Instrument as a Required Document Retention and Return Transfer of Drawing Rights Transfers in Commercial LCs and UCP Transfers in Standbys/Demand Guarantees: Whole Transfer Multiple Transfers Issuer of Required Documents URDG Signed Statement Mandatory Transfer Assignment of Proceeds Transfer by Operation of Law Disclaimers Loss in Transit and Translation Errors Acts of an Instructed Party, Foreign Law, and Usage Force Majeure LC Fraud, Abuse, or Unconscionability LC Fraud or Abuse Abusive Drawing and Unconscionability Duty and Right to Dishonour Injunctions and Similar Court Orders Protected Persons Sanctions and Illegality Bank Charges Bank-to-Bank Reimbursement Syndication and Participation Law, Forum, and Arbitration Choice of Law Choice of Forum ISP98 Model Form: Choice of Law and Forum Clause LC Arbitration and Mediation Review Questions Questions & Answers xiv

15 Q&A: Chapter 1 Independent Undertakings Types of LCs and Their Characteristics Independent Undertakings Distinguished from Dependent Undertakings Types of Standbys and Demand Guarantees Practice Rules LC Law Forms and Standardization Standbys vs. Demand Guarantees Achieving and Determining Independence Q&A: Chapter 2 Obligations of Parties to an Independent Undertaking Issuance Obligations of Issuer/Guarantor Additional Undertakings in the Standby/Demand Guarantee Advice Nomination and Confirmation Amendments Expiry of an Independent Undertaking Automatic Amendment and Variation Informing the Instructing Party of a Payment Demand Q&A: Chapter 3 Timely Presentation of Documents What is a Presentation and a Presenter? Where is Presentation to be Made? To Whom is Presentation to be Made? The Manner of Presentation: How Incomplete Presentations Partial and Multiple Drawings Presentation After Normal Banking Hours Extend or Pay Demands Deadline When Bank is Ordinarily Closed Closure When the Expiration Date is on a Business Day Q&A: Chapter 4 Examination and Compliance of Documents Presented Standard of Compliance Extraneous Documents Inconsistency or Conflict within Documents Presented Language Identification of the Undertaking Document Issuer, Document Date, and Amount Drawn Formality Requirements for Documents that are to be Presented Standby/Demand Guarantee Requirements for the Insertion of Specified Text or Provisions Applicant Approval Non-Documentary Conditions in Standbys/Demand Guarantees Merger of Issuer/Guarantor or Confirmer with Another Entity and Change of its Name Originals and Copies Presentation of Demands or Drafts Requirement that Legal Documents be Presented Requirements that Negotiable Documents Other than Drafts be Presented Documents Related to Counter Undertakings Examination of Documents Under Commercial Standbys xv

16 4.19 Other Documents Q&A: Chapter 5 Honour and Dishonour Making a Decision to Honour or Dishonour Honour of a Complying Presentation Reimbursement of Nominated Banks Dishonour Preclusion Applicant Reimbursement Q&A: Chapter 6 Miscellaneous Issues Retention of the Operative Instrument Transfer of Drawing Rights Assignment of Proceeds Transfer by Operation of Law Disclaimers LC Fraud, Abuse, or Unconscionability Protected Persons Sanctions and Illegality Bank Charges Bank-to-Bank Reimbursement Syndication and Participation Law, Forum, and Arbitration Index xvi

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