With international trade agreements and supply chains growing increasingly complex in recent years, the use of demand guarantees has expanded significantly. This increase in usage reflects a broader trend toward more secure and reliable trade practices, which is essential for businesses trying to navigate the intricacies of different regulatory environments and cultural norms.

Over the past three decades, both courts and arbitral tribunals have increasingly acknowledged the uniform rules for demand guarantees (URDG) as a significant reference point for customs and practices governing demand guarantees. 

This reliance on the URDG highlights its role as an authoritative framework and its importance in informing legal principles, promoting consistency in international trade, and fostering trust among parties involved in guarantee transactions.

While the URDG publication no. 758 – a set of rules governing guarantee practices – entered into force in 2010, a significant portion of letters of guarantee are still issued without any applicable rules. The decision not to incorporate URDG 758 into the demand guarantee usually comes from the applicant or beneficiary, who may have used a set text over many years without reference to any rules and might be reluctant to change. 

Theoretically, it would be possible to draft a guarantee that covers all the issues covered by URDG 758, but negotiating the text would take a long time, the instrument itself would become more complex, and it might be challenging to achieve the balance between the interests of all parties that is ensured by URDG 758. Achieving an accurate understanding of the key features of the URDG 758 is crucial for banks, beneficiaries, and applicants who might wish to use it when issuing a guarantee in international trade transactions.

1. Law and jurisdiction clauses

Commercial documentary letters of credit rarely include a law and jurisdiction clause because the assumption is that the credit will be used as a primary payment mechanism, so it is unlikely to give rise to a dispute. By contrast, independent letters of guarantee are used to cover the risk of default by the applicant. Most guarantees are never ‘called’ because there is no default of the applicant; however, if a demand is presented, it often means that a default took place, increasing the risk of a dispute. 

It is, therefore, good practice to include a provision in a demand guarantee that identifies which law applies to the instrument and which court or arbitration tribunal has jurisdiction to determine any dispute relating to the instrument.  URDG 758 contains specific law and jurisdiction provisions in articles 34 and 35, which will apply unless otherwise provided in the guarantee or the counter-guarantee. If the parties want a different law and jurisdiction to apply, a specific clause stating as much must be included in the demand guarantee. A demand guarantee which incorporates no rules will always need to have a law and jurisdiction clause unless all the parties are based in the same country.

2. Claims raised in an abusive manner

The requirements for a demand under a guarantee which is not subject to any rules will depend on the express terms and conditions of the guarantee as well as the requirements of the governing law. Since jurisdictions may often lack specific rules or precedents on eachaspect of demand guarantee operations, parties  usually rely solely on the terms and conditions of the guarantee.

Where no rules are incorporated in the guarantee or counter-guarantee, each instrument must state the documents required with a demand for payment and the conditions for examining the demand. If these aren’t there, the presentation of a simple demand for payment before expiry is enough to trigger the guarantor’s obligation to pay the beneficiary. Thus, this type of guarantee may not save the applicant against abusive (unfair) claims made by beneficiaries under demand guarantees, given the independent nature of the demand guarantee from the underlying relationship. 

Guarantees that are subject to URDG 758, on the other hand, indicate under article 15(a) that any demand must be supported by a statement by the beneficiary indicating in what respect the applicant is in breach of its obligations under the underlying relationship. This creates a balance between the interests of the beneficiary and those of the applicant while preserving the independent status of the demand guarantee. The beneficiary needs to be able, in the event of default by the applicant, to make a demand without having to prove that the applicant is in default, while the applicant also needs some kind of safeguard against unfair demands. 

Article 15 may limit the possibility of unfair or abusive claims because a beneficiary who knowingly demands payment under a guarantee without a reason to do so might hesitate to sign an intentionally false statement of breach. Moreover, if the applicant wants to seek an injunction or if there is a subsequent dispute between the applicant and the beneficiary over the beneficiary’s right to make a demand, the statement of default will be central to that issue.

3. Rejecting a demand

A guarantee not subject to any rules should, if well-drafted, state the number of days that the guarantor has to examine a demand and accept or reject that demand. However, it is not common to see a specific provision in the guarantee relating to the procedure for rejection. Indeed, many guarantees lack any specifications on the examination period within which a demand must be accepted or rejected. 

Under URDG 758, a guarantor is expected to reject a non-complying demand within five business days following the day of presentation by sending a rejection notice that lists all of the discrepancies; otherwise, the guarantor will be precluded from claiming that the demand is non-complying and will be compelled to pay. A notice of rejection should state that the guarantor is rejecting the beneficiary’s demand and mention each discrepancy for which it rejects the demand. 

The preclusion sanction is necessary to discipline unfair practices that work to the detriment of the beneficiary. The same rule applies in case a guarantor is making demand under a counter-guarantee. This also means that a beneficiary of a guarantee or counter-guarantee may still have an opportunity to make a complying demand under the guarantee before its expiry.       

4. Amendment of a demand guarantee

The terms of a demand guarantee may need to be changed in the course of the guarantee’s life cycle to reflect the changing circumstances of the underlying relationship. Therefore, the guarantee text that is not subject to any rules text should clearly set out the procedures for amendments in order to avoid any dispute. In particular, there may be uncertainty over how a beneficiary can signify its acceptance or rejection of an amendment. Much will depend on the governing law of the guarantee, but these may also provide little or no guidance on the point.

On the other hand, URDG 758 article 11 sets out several provisions relating to amendments. This article indicates that: 

• A guarantor is bound by an amendment from the time it issues the amendment. 
• A beneficiary may accept or reject the amendment by communicating that acceptance or rejection to the guarantor or by making a presentation that complies only with the amended guarantee.
• An amendment may not contain a provision to the effect that the amendment shall take effect unless rejected within a certain time.

5. Exemptions from liabilities for acts of another party 

The URDG 758 also provides defences to guarantors against acts of third parties whose services are used for the purpose of giving effect to the instructions of an instructing party or counter-guarantor. Article 29 of URDG 758 indicates that if a guarantor, in order to give effect to the instructions of an instructing party or counter-guarantor, utilises the services of another party, it bears no responsibility if that party fails to carry out its instructions, deviates from its instructions or carries them out in a fraudulent or negligent manner.

Furthermore, the URDG 758 exempts the guarantor from liability in a wide range of situations, including: 

• Non-delivery or late delivery of documents by a delivery service company or, in the case of electronic documents, disruption in the transmission not due to the guarantor’s own systems. 
• Errors in the transmission of documents (such as when the courier service company mistakenly delivers the documents to the wrong address). 
• Mutilation of a document in transit outside the control of the guarantor. 

Of course, such exemptions are available subject to the guarantor acting in good faith.  

6. Closure of banks due to force majeure 

Article 26 of URDG 758 gives the beneficiary an extension of 30 calendar days for presentation of a demand if the guarantee expires at a time when presentation under that guarantee is prevented by force majeure affecting the business of the guarantor. Furthermore, URDG 758 organizes the relations between a guarantor and counter-guarantor during times of force majeure which affects presentation under the counter-guarantee but not the guarantee. 

Article 26 states that if a counter-guarantee expires at a time when presentation or payment under that counter-guarantee is prevented by force majeure, the counter-guarantee is extended for 30 calendar days from the date on which the counter-guarantor informs the guarantor of the cessation of the force majeure. However, there is no extension of time when presentation under the guarantee is prevented by force majeure affecting the business of the beneficiary. In this case, the guarantee will terminate on the expiry date, and the beneficiary will lose the right to present a demand. The same applies for a presentation under the counter-guarantee in case the guarantor business is affected by force majeure.

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The URDG 758 contains a range of features that are critical for dealing with demand guarantees. Having guarantees or counter-guarantees subject to URDG 758 balances the interests of all parties while providing a unified, internationally recognised framework for transactions. Especially in a time of changing regulations – such as relating to electronic trade documents or digital assets – and increasing trade disputes, it is becoming more and more crucial to have a stable, legally sound framework to rely on, such as the one the URDG 758 provides.