Guarantees: Rules, Practices, Conventions and Laws

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Rules, Practices, Conventions and Laws

The world of Guarantees is governed by a number of regulations. Some are set out by law, some are based on pre-agreed rules, while others are based on international conventions – the purpose of which is to have them adopted by individual countries.

Rules and practices

More than one set of rules could govern a Guarantee. In order for a Guarantee to be subject to a specific set of rules, it must include a clear indication that it is subject to those rules.

The current set of rules includes:

URDG: Uniform Rules for Demand Guarantees (2010 Revision) (ICC Publication No. 758) i.e. rules to govern demand Guarantees, effective as of 1 July 2010, replacing ICC’s first set of Guarantee rules, URDG 458.

ICC 325: Uniform Rules for Contract Guarantees ICC 325 are ICC’s rules for contract Guarantees. They came into effect in August 1978. As they haven’t been generally accepted by the market, they are rarely used.

ICC 524: ICC Uniform Rules for Contract Bonds, that came into effect in January 1994 and are seldom used.

ISP98 International Standby Practices (ISP98): Developed by the Institute of International Banking Law and Practice, and endorsed and published by ICC, they stand as the basic rules for the use of standbys worldwide.

UCP 600: Uniform Customs and Practice for Documentary Credits (2007 Revision) (ICC Publication No. 600). They are universally used for commercial documentary credits but can also be used for standbys.

ICC Banking Commission Opinions: For educational purposes – and to facilitate proper use of ICC rules (UCP, URR and URDG, Incoterms, as well as the ISBP) – anyone can submit a query relating to ICC rules to the ICC Commission on Banking Technique and Practice (also known as the Banking Commission).

When dealing with Incoterms, queries should be submitted to the ICC Commission on Commercial Law and Practice, whose responses are called Opinions and are routinely published by ICC Business Bookstore.

DOCDEX Decisions: The ICC Banking Commission also offers a service called DOCDEX (short for Documentary Instruments Dispute Resolution Expertise), i.e. an expedited process for resolving disputes involving:

  • A documentary credit, incorporating the ICC Uniform Customs and Practice for Documentary Credits (UCP), the application of the UCP and/or of the ICC Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits (URR)
  • A collection, incorporating the ICC Uniform Rules for Collections (URC), and the application of the URC
  • A Demand Guarantee, incorporating the ICC Uniform rules for Demand Guarantees (URDG), and the application of the URDG. Its aim is to provide independent, impartial and prompt expert decisions as to how the dispute should be resolved on the basis of the terms and conditions of the documentary credit, the collection instruction, the Demand Guarantee and the applicable ICC rules, (UCP, URR, URC or URDG)

The ICC charges a fee for handling cases under the DOCDEX system, and a submission will be subject to the ICC Rules for Documentary Instruments Dispute Resolution Expertise (the DOCDEX rules), which can be downloaded free of charge from the ICC website.

Conventions

The Rome Convention on the Law Applicable to Contractual Obligations: This was introduced in 1980 by the European Commission. Under this Convention, the parties may choose the law applicable to the contract. In the absence of a choice, the governing law is the one of the country where the provider of the performance has its business site.

The UNCITRAL Convention: The ICC is not the only organisation engaged in drafting rules in order to ensure Guarantees are construed and handled as uniformly as possible. A working party set up by the United Nations, with representatives from countries worldwide, has drafted rules and legislation for international Guarantees, the result of which is the United Nations Convention On Independent Guarantees and Stand-By Letters Of Credit.

It describes the basic principles of law for independent undertakings, aiming to revise their treatment in international trade, and deals with independent undertakings, which means it only applies to those cases where the Guarantee agreement does not incorporate the terms of the underlying contract.

Law and Jurisdiction: In international transactions, parties are free to choose which law will apply to the contract. The same holds true for Guarantees: the law applicable to them needn’t be the same as the law applicable to the underlying relationship.

If the Guarantee expressly stipulates the governing law applicable to it (and nominates a specific court), this law will then be applied and the nominated country will have jurisdiction. URDG is the only set of rules that provides a default rule in this situation.

Because a large number of Guarantees do not stipulate any applicable law, then parties using the URDG will have the applicable law and jurisdiction defaulting to the country of the location of the Guarantor’s branch or office that issued the Guarantee. On the other hand, if the parties are using the URDG and a Counter-Guarantee does not state the applicable law or jurisdiction, then the applicable law and jurisdiction defaults to the country of the location of the Counter-Guarantor’s branch or office that issued the Guarantee. In most cases, the Guarantor and Counter-Guarantor are located in different countries, and only the counter Guarantor will have the benefit of a local court to settle any legal issues.

If the parties are not using the URDG, it is indeed advised that they foresee a governing law and jurisdiction. Unless agreed in the underlying contract/application, this might lead to the Beneficiary refusing the Guarantee.

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