The World Bank’s update of its model guarantee forms to include URDG 758 last week is the latest step towards ICC’s rules becoming the international standard for demand guarantee practice.
As well as replacing the previous URDG 458 in commercial transactions, URDG 758, which today celebrate their two-year anniversary, are now being applied more widely, for example in procurement contracts, and in deals where demand guarantees or counter-guarantees were previously not subject to rules, according to a survey compiled by the Guarantees Department of Raiffeisen Bank International based on contributions from the 46-member ICC Task Force on Guarantees.
“With trust and confidence eroded by the financial crisis, URDG 758 provide tremendous security,” said Georges Affaki, Head of Structured Finance Legal Affairs at BNP Paribas and Vice-Chair of the ICC Commission onBanking , who led the two-and-a-half-year revision, with input from thousands of exporters, importers, bankers and lawyers.
“By clarifying the presentation and examination process and excluding imprecise standards, URDG 758 foster certainty and predictability,” added Mr Affaki.
Endorsed by the United Nations Commission on International Trade Law in 2011, the revised ICC Demand Guarantee Rules are also used in the International Federation of Consulting Engineers model construction contracts. Around the world, banks are promoting URDG guarantees and counter-guarantees, with leading European banks offering them in their standard forms. Bank regulators and lawmakers, including the Organisation for the Harmonisation of Business Law in Africa, approved the new rules and used them as a model for national statutes now in force in 16 countries.
The 35 articles in URDG 758 set out the liabilities and responsibilities of each party, the process to present a demand, the expiry conditions and how to deal with amendments and transfers of guarantees and counter-guarantees. The rules are clear and concise, and exist in 21 languages. They are Shari’a-compliant, and can govern Islamic finance-related guarantees.
One new feature of URDG 758 is a rule proposing a substitution of currencies when payment in the currency specified in the guarantee becomes impossible. This rule is getting heightened attention in today’s sovereign debt crisis and does away with the need to draft and negotiate more complicated political risk clauses.
“URDG 758 is a transformation from a set of useful but basic provisions into rules which address all the key issues of modern demand guarantee practice, and in a mere two years have gained an astonishing degree of acceptance,” said Sir Roy Goode QC, Emeritus professor of law, Oxford, who contributed to drafting URDG 758.
Mr Affaki puts this wide acceptance down to a number of factors. If an international commercial transaction falls through and occasions a breach in a delivery or payment obligation, URDG 758 are reliable in ensuring that an agreed third party, usually a bank, pays up. This is reassuring for risk-averse companies, and allows their cash-strapped business partners to avoid putting down a cash-deposit. As far as the banks are concerned, devising their internal processing system on the basis of standard rules decreases the likelihood of an operational failure, so reducing internal costs. The hope is that this lowering of banking costs will be passed on to customers, whether they are large multi-nationals or small businesses.