New Uniform Rules for Demand Guarantees offer a fair balance

The new Uniform Rules for Demand Guarantees (URDG), International Chamber of Commerce (ICC) Publication number 758 came into effect from July 1, incidentally the same day when Rajat Sharma, an Indian, and a senior partner emeritus of McKinsey & Company, took over as chairman of the International Chamber of Commerce (ICC).

The new rules are an updated version of the earlier URDG contained in ICC Publication number 458. The new Rules are clearer, more precise, and more comprehensive, offering a fair balance between the competing interests of the parties to the guarantees. In the new Publication number 758, the ICC has included model guarantee and counter-guarantee forms and a set of optional clauses in a ready-to-use package. In addition, practitioners will find comprehensive coverage of advice of guarantees, amendments, electronic documents, transfers and other aspects in guarantee practice.

The new Rules reflect a broad consensus among bankers, users and all members of the guarantee community for securing an array of international and domestic monetary and performance obligations. The revision, formally called URDG 758, was agreed to after a two-and-a-half year revision process that produced five comprehensive drafts based on 600 comments from 52 countries. The revision was conducted under the stewardship of the ICC Task Force on Guarantees, a standing body of experts from 26 countries and was adopted by the ICC Executive Board on December 3, 2009.

The ICC says that URDG 758 will apply to billions of US dollars in aggregate of outstanding guarantees in all sectors of trade and industry including construction, capital markets, commercial lending, corporate restructuring and structured finance. The Rules apply to all guarantees, from those payable on simple written demand, to those requiring the presentation of a judgment or arbitral award. They also apply to intermediate forms of guarantee such as those requiring a statement of default by the beneficiary with or without an indication of the nature of the default. The Rules secure uniform practice in the requirements for guarantees and will join the other ICC Rules, such as the Uniform Customs and Practice for Documentary Credits, UCP 600, in bringing order and security to international business practice.

According to ICC, the changes in the new Rules include innovative treatments of payment contingencies and more precise language for determining whether a presentation made under a guarantee or counter-guarantee, whether paper based or electronic, is a complying presentation. These changes are expected to curb reduce the rate of rejection of demands and increase the certainty of guarantees.

The ICC says that URDG 758 will help bring financial stability to markets by setting out the liabilities and responsibilities of parties at each stage of the guarantee lifecycle. As of 1 July 2010, any reference to URDG in a demand guarantee or counter-guarantee leads to the new URDG 758 applying to the undertaking.

In India, the Master Circular on guarantees issued by the Reserve Bank of India (RBI) does not insist that the guarantees issued by banks should be subject to the disciplines of the URDG although the banks are required to state on letters of credit that they are subject to the UCP 600. The ICC says that the new Rules for Guarantees are destined to become the international standard for all demand guarantees. RBI may like to take note and issue suitable instructions.

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