The ICC has issued a revised version of the Uniform Rules for Demand Guarantees (URDG), designed to become the international standard for demand guarantee practice. Shannon Manders speaks to Roger Carouge, director of Deutsche Bank’s trade finance team and member of the ICC’s drafting group responsible for the conception of the new rules.

The revised URDG 758 – which set out the liabilities and responsibilities of parties at each key stage of the lifecycle of a demand guarantee – is due to come into effect on July 1 this year.

In international sales, whereas a documentary credit assures the exporter of being paid upon the presentation of complying documentation showing that shipment is made, a demand guarantee provides protection to the importer against non-performance, or late or defective performance, by the exporter (or vice versa).

The long-awaited revision of the URDG is the first in 18 years and contains major changes to rules destined to apply to billions of dollars of demand guarantees, securing monetary and performance obligations in a wide array of international and domestic contracts.

The changes to the rules include innovative treatments of payment contingencies and more precise language for determining whether a presentation made under a guarantee or counter-guarantee, whether paper-based or electronic, is a complying presentation. These changes are expected to curb the rate of rejection of demands and increase the certainty of the instrument.

The revision of the URDG spanned two and a half years and was a cooperative effort by ICC’s Banking Commission and its Commission on Commercial Law and Practice (CLP), which are made up of representatives from banks, companies and law firms worldwide.

GTR: Why are the new rules deemed necessary?

Carouge: The former rules, with the publication number 458, were implemented in 1992. They formed the first attempt by the ICC to unify the use of independent demand guarantees across the globe. The drafting of these first rules took more than a decade.
Over the years, URDG 458 proved to be successful and reliable, but showed increasingly – over a period of nearly 18 years – that there was a need for a drafting adjustment, more clarification, and expansion of the scope of the rules.

GTR: How have the rules been changed in the revised version?

Carouge: The new URDG 758 is clearer, more precise and comprehensive, as well as more balanced and innovative. For example, the ICC has adopted a more universally-accepted language that has brought together the definitions of terms in the articles.

Some rules and standards of URDG 458 left room for individual interpretation. As such, it was quite common to see terms such as “reasonable demands” and “reasonable care” – whatever that means. So the URDG language has been revised, and now excludes all improvised standards with the aim to increase certainty and predictability.

The new rules are comprehensive in that they include what has previously been omitted, for whatever reason. For instance, it was not required at the time of preliminary drafting to think about details such as the advice of guarantees if you wish to include a bank in another country. The new rules now also include an amendment procedure as to the standard for the examination of presentations, as well as the rules for partial or multiple or incomplete demands.

URDG 758 also expressly outlines the full treatment of counter-guarantees. Also, for example, the new rules offer a clearer linkage to the beneficiary’s entitlement to receive payment upon presentation of a complying demand, without the need for the guarantor to seek its customer’s approval. The guarantor’s role as an independent and abstract undertaker is also more clearly expressed in the revised rules.

In order to increase the sound handling of this product by all parties, the revised URDG expects the guarantor to act diligently. For example, a guarantor is expected to reject a non-compliant demand within five business days by sending a rejection notice listing all the discrepancies. In some cases it is quite common for parties to be irresolute and to not speak about full non-compliance topics, and rather focus on just one topic in a rejection notice, leaving others to be addressed at a later stage.

Now, if guarantors fail to check the demands within these five banking days, they become automatically precluded from claiming that the demand is non-compliant, and will be compelled to pay if they do not act accordingly.

We have noticed that there is often a “ping-pong” game being played between guarantor and beneficiary. This has resulted in the time of payment extending up to two or three full weeks which is unsound practice. Finally, the new rules are innovative in that, for example, they propose a substitution of currencies when payment in the currencies specified by the guarantee becomes impossible for some reason.

GTR: How will the new rules affect both banks and corporates and their trade operations?

The new rules will support the further development of the sound handling of guarantees, and will include two main targets, namely the reduction of time spent and the reduction of legal and operational risk. Both will result in increased efficiency.

Traditionally, eight out of 10 transactions for which the client applies at the bank for the issue of a guarantee need to be discussed individually and tailor-made. This requires all parties to look into the underlying transactions. This can be quite a lengthy process, and may take many days to resolve.

The application of the revised rules will result in less time spent discussing the topics, subsequently resulting in fewer costs – especially if lawyers and outside counsels become involved.

GTR: Members of the ICC URDG drafting group gave a public presentation on the new rules at a seminar in Paris on March 18. What feedback has been received?

Carouge: The feedback from the user and from guarantors around the world – especially from banks – has been extremely positive. This revision will alert parties to the importance of reducing costs as well as legal and operational risks.

GTR: Can you provide a timeline of how long it will take to approve and implement the changes? Will it be a big operation for banks to update their procedures?

Carouge: For banks that have already applied the URDG 458 there will be an adjustment needed in the procedure. But for banks that have not yet generally applied the 458, there will be a bigger step in the adjustment of their policies, guidelines and rules.