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All business entities around the world are suffering from the impact of coronavirus (COVID-19). COVID-19 has bought fast-moving and unexpected variables, some of which existing crisis plans and teams were not prepared to handle. The increasing spread of the coronavirus across countries has prompted many governments to introduce unprecedented measures to contain the epidemic. These measures have led to many businesses being shut down temporarily, widespread restrictions on travel and mobility, financial system turmoil, an erosion of confidence, and heightened uncertainty.
Coronavirus impact on businesses
Given the COVID-19 outbreak, it seems risky to continue having demand guarantees that incorporate no rules at all. Indeed, the outbreak of COVID-19 highlighted the importance of URDG 758. In case a guarantee is issued incorporating no rules, the guarantee wording should cover most of the issues covered by the URDG 758 expressly. Otherwise, many points that arise in day-to-day guarantee operations may be unclear and lead to confusion. Theoretically, it would be possible to draft a guarantee that covers all the issues covered by URDG 758, but negotiating the text would take long time, the instrument itself becomes more complex and it might be difficult to achieve the balance between the interests of all parties, as set by the rules. Examples of issues that need to be covered in a guarantee text that incorporate no rules include:
- Terms for payment under the guarantee.
- Type of presentation acceptable under the guarantee (electronic, paper, or both).
- The mode of delivery of a presentation.
- The place and time for presentation.
- What happens if the bank is closed on the last day for presentation?
- The time for the guarantor to examine a demand and reject or accept the demand
- The language of documents to be presented under the guarantee.
- The possibility to make partial demand or multiple demands.
- The governing law clause.
- Any exemptions of liability for the guarantor.
The use of demand guarantees without any applicable rules is never recommended, but sometimes the guarantor has no choice. The decision not to incorporate any rules into the demand guarantee comes from the applicant or beneficiary. They may have used a set text over many years, without reference to any rules, and are reluctant to change. However, the current circumstances of COVID-19 showed that such a practice seems to be risky. The following few paragraphs would shed light on some of the features of the URDG 758 that are important to banks, beneficiaries, and applicants when having to issue a guarantee in an unstable business environment.
ARTICLE: Triggering Force Majeure – The Impact on Documentary Trade Finance and Credit
1. Closure of Banks During Lockdown Periods
In many countries, banks were forced to close their premises and branches as per measures announced by governments in response to the COVID-19 outbreak. In such a situation, if a guarantee or counter-guarantee that is issued subject to no rules expired during the lockdown period of banks, the guarantee or counter-guarantee will be terminated on the expiry date, and beneficiary rights are certain to be forfeited because of the guarantor closure.
The case is different for a guarantee subject to URDG 758. Article 26 of URDG 758 emphasizes that where the guarantor closure prevents the presentation of a demand under a guarantee before its expiry, the guarantee and any related counter-guarantee are to be extended for 30 calendar days from the date on which they would otherwise have expired. Furthermore, URDG 758 organizes the relations between a guarantor and counter-guarantor during times of lockdown which affects presentation under the counter-guarantee but not the guarantee. Article 26 mentioned that should a counter-guarantee expire at a time when presentation or payment under that counter-guarantee is prevented by force majeure, the counter-guarantee shall be extended for 30 calendar days from the date on which the counter-guarantor informs the guarantor of the cessation of the force majeure.
Besides, the examination time for a presentation made but not yet examined before the force majeure shall be suspended until the resumption of the guarantor’s business. A complying demand under a guarantee presented before the force majeure but not paid because of the force majeure shall be paid when the force majeure ceases even if that guarantee has expired, and in this situation the guarantor shall be entitled to present a demand under the counter-guarantee within 30 calendar days after cessation of the force majeure even if the counter-guarantee has expired.
Thus, it seems better to have the coverage provided by article 26 of URDG 758 during times of uncertainty similar to the outbreak of COVID-19 than having a guarantee subject to no rules. Under a guarantee or counter-guarantee that is subject to no rules and mentions noting in its text regarding force majeure or similar events, one may have to investigate the position under the governing law of the guarantee, but there may be no clear answer. The URDG 758 provides a clear scenario to be applied in case a guarantor or counter-guarantor closure as a result of the measures set by governments concerning COVID-19 pandemic.
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 in addition to the requirements of the governing law. Since it is often the case that the applicable law will not have developed any rules or precedents on a particular aspect of demand guarantee operations, one usually has to rely solely on the terms and conditions of the guarantee itself to determine what is required for a demand under 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. In the absence of such specific provisions, the presentation of a simple demand for payment before expiry will usually be sufficient 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.
On the contrary, guarantees that are subject to URDG 758 indicate under article 15(a) that whether or not explicitly stated in the guarantee, 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. The purpose of this provision is to create 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. Whereas the applicant also needs some kind of safeguard against unfair demands. Article 15 may limit the possibility of unfair or abusive claims, in the sense that a beneficiary who is prepared to make a demand for payment under a guarantee although it knows that there is no reason for doing so might hesitate to commit itself 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 more specific provision in the guarantee relating to the procedure for rejection and one is then left with an area of uncertainty. Indeed, many guarantees texts are left without any specifications for the examination period on which a demand is to be accepted or rejected. During the period of COVID-19 where banks in many countries are operating under reduced working hours and/or insufficient staffing levels, a rejection notice may be delayed and beneficiaries may receive such notice shortly before the expiry of the guarantee or even after expiry, therefore depriving the beneficiary of a reasonable opportunity to remedy the discrepancies.
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 demand of the beneficiary 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. Consequently, a beneficiary of a guarantee or counter-guarantee may still have an opportunity to make a complying demand under the guarantee before its expiry.
ARTICLE: A Bankers Dilemma – Stretching the Operating Cycle for Trade Credits
4. Exemptions from Liabilities for Acts of Another Party
During times of COVID-19, many business entities all over the world are in the process of being closed or operating under reduced working hours and/or reduced staffing levels. Hence, some of these entities may not be able to provide their usual services in a timely and efficient manner as they used to do before the COVID-19 pandemic. For example, documents may be forwarded by the guarantor but cannot delivered due to the shutdown of delivery services in particular areas or countries as per the measures announced by governments in response to the COVID-19 pandemic.
Given situations as mentioned above, it worth mentioning that the URDG 758, provides defenses 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, utilizes 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 that may occur as a result of the COVID-19 outbreak, including:
- non-delivery or late delivery of document by a delivery service company or, in the case of electronic document, disruption in the transmission not due to the guarantor’s own systems.
- Errors in the transmission of document, such as when the courier service company mistakenly delivers the documents to the wrong addressee.
- Mutilation of a document because of deliberate of the document in transit outside the control of the guarantor.
Of course, such exemptions are available subject that the guarantor act in good faith.
Adoption of URDG 758
This paper aims at summarizing some of the features of the URDG 758 that seems to be critical for different parties dealing with demand guarantees during the COVID-19 outbreak. It appears that having guarantees or counter-guarantees subject to URDG 758 involves advantages to all the parties. Such benefits are important for beneficiaries, applicants, and guarantors, especially in times of COVID-19 outbreak.
It is recommended to encourage the use of guarantees and counter-guarantee subject to URDG 758 as it provides a balance between the interests of all the parties involved. The ICC national committees encourage business communities in various countries to adopt the URDG 758 instead of having guarantees and counter-guarantees that incorporate no rules. The ICC national committees should explain, through webinars and other available communication channels, the risk of having guarantees or counter-guarantees that are subject to no rules under unstable environment similar to those currently faced under COVID-19 pandemic.