Last month the Uniform Rules for Demand Guarantees (URDG), a set of contractually incorporated rules that apply to demand guarantees and counter-guarantees in international trade, celebrated twenty years since they were first adopted by the International Chamber of Commerce (ICC) on 20 December 1991.
The rules themselves have changed considerably since their earliest form in 1978 but are now rapidly gaining popularity across the globe. URDG’s success lies in its ability to present beneficiaries with a rapid way of calling on a guarantee but which also safeguards the account party (applicant) by requiring the beneficiary to make a statement of breach. The result is a relatively simple instrument, internationally recognised, that now underpins billions of dollars of trade.
A history of the URDG
The ICC first discussed creating a set of rules in the mid 1960s. However it took 13 years before a joint ICC working group established between the Commission on International Practice and the Commission on Banking Technique and Practice finally established the first text. The end result in 1978 was the Uniform Rules for Contract Guarantees (URCG), ICC Publication No. 325 (URCG).
Take up of the URCG was poor. This was partly because the URCG did not make a clear distinction between demand guarantees and suretyship guarantees, and partly because the rules provided that in the absence of agreement the beneficiary was entitled to payment only on production of a judgment or arbitral award. This came very close to treating demand guarantees as suretyship guarantees and fatally undermined the purpose of a demand guarantee as a near-cash instrument providing the beneficiary with a rapid means of securing payment.
During the late 1980s a new ICC joint working group of the two commissions, under the chairmanship of Dr Rudolf von Graffenried, drafted a substantially different set of rules. The Working Group had some success but was unable to finalise the rules because of a continuing disagreement about a few basic provisions. The resulting delay led the United Nations Commission on International Law to proceed with work on a Convention, previously held in abeyance, which resulted in the 1995 UN Convention on Independent Guarantees and Stand-by Letters of Credit. Meanwhile a small drafting group had been set up by the ICC Commissions to resolve the impasse on the URDG and its second draft was endorsed without dissent by both Commissions and became the URDG 458, published in April 1992.
Sir Roy Goode, involved both as Chairman of the drafting group for URDG 458 and as a member of the drafting group for URDG 758 explains: “These things take time to gain acceptance and then usually only after several revisions. It took 30 years for the UCP to become widely adopted. URDG 458 started very slowly and was only when the ICC Task Force headed by Dr Georges Affaki initiated a drive to publicise the instrument that it began to gain a wider acceptance.”
URDG 758: the latest rules
In January 2010, the ICC released URDG 758, a more comprehensive set of the rules, which took two and a half years to draft. The drafting group was chaired by Dr Georges Affaki. The new rules aimed to be more precise and comprehensive than their predecessor, with a number of new definitions and new substantive provisions.
In preparing URDG 758 the drafting group, set up by the Banking Commission and the Commission on Commercial Law and Practice, sought a closer alignment with UCP 600 on matters common to the two sets of rules.
“URDG 758 borrowed ideas on non-documentary conditions, transfer of guarantees (albeit with important modifications) and assignment of proceeds. In addition we tried to keep the drafting style and terminology between the two as similar as possible and to bring common terms into line with modern demand guarantee practice,” adds Goode.
In practice this saw the word “principal” in URDG 458 change to “applicant” and “instructing party”, previously used to denote the counter-guarantor, now mean the party giving instructions for the issue of the guarantee, while the issuer of a counter-guarantee is the counter-guarantor. Other important new provisions include: advice on guarantees, standards for examination of presentations, partial and multiple demands, linkage of documents, incomplete demands and transfer of guarantees, force majeure and currency of payment.
Reception to the new rules
Despite some controversy (see our article URDG 758: What’s hot and what’s not) the general consensus is that the new set of rules are clearer and more comprehensive than its predecessors. Kate Richardson, managing associate at SNR Denton comments: “As far as 758 being an improvement on 458, the proof is in the pudding so to speak. 758 is not even eight months old but already URDG usage is on the rise virtually everywhere because of the introduction of 758.”
Indeed the new URDG rules have been enjoyed notable success since they entered into force on 1 July 2010. Leading trade finance banks that have completely adopted URDG 758 include: BNP Paribas, Deutsche Bank, RZB, Bank of China and Credit Agricole. In the UK, where usage of URDG 458 was traditionally very low, both Standard Chartered and HSBC have implemented the rules as standard while banks in Italy, Turkey and Egypt have reported usage increases of over 50%.
The US has also opened its market to URDG guarantees with several guarantees being issued by US national banks as well as US branches of foreign banks. More recently, the UN also endorsed the URDG last July and FIDIC and the World Bank are reported to be adapting their URDG 458 guarantee forms to the new URDG 758.
Richardson at SNR Denton says: “The first URDG 758 guarantee was issued to a Chinese beneficiary at their insistence, two weeks before 758 came into force. We now virtually always recommend making demand guarantees subject to 758 but increasingly we do not need to do this because we are being asked to review demand guarantees that are already subject to 758. This is the case not just for guarantees issued by the major players in big deals but by domestic banks in some fairly remote places.”
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Why are the URDG rules so useful to banks?
Dr Georges Affaki, chair of the URDG 758 drafting group and head of structured finance legal affairs at BNP Paribas, explains why URDG 758 is proving popular with banks.
It is a combination of many factors. The new rules have incorporated the feedback that thousands of ICC members have been providing us over the past 15 years on their use of URDG 458. As a result the new rules are much clearer, in a more straightforward style and are much more comprehensive. Banks also find comfort with an enhanced legal certainty due to the use of standard terms well-known and recognised by correspondent banks, regulators and customers across the sectors and the countries; a closer alignment on UCP solutions (including in particular the banning of non-documentary conditions and the preclusion rule that applies where a demand is not properly rejected during the set time period); a substantial saving of time in the negotiation of the guarantee or counter-guarantee wording and a decrease of potential errors when using the model forms appended to the rules – and on this last point, the feedback I received indicate that the publication of such forms plus a comprehensive set of optional clauses in the same publication as the rules is found to be particularly helpful. Add to these advantages the access to ICC's valuable services in terms of free opinions from international experts addressing queries on the interpretation of URDG and a fast-track dispute resolution mechanism (DOCDEX).
Finally, banks are particularly supportive of the balance that the URDG offer: the applicant shall be informed at each stage throughout the lifecycle of the guarantee (issue, extension, demand, expiry); the beneficiary is assured to benefit from a truly irrevocable and independent undertaking payable according to its terms; the reimbursement of any payment effected by the guarantor to the beneficiary is ensured as long as the guarantor acts diligently and professionally.
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