IntaCapital: Bank Guarantees – Uniform Rules for Demand Guarantees (URDG)

Posted on by IntaCapital Swiss

In 1992, the International Chamber of Commerce (ICC) in Paris issued a new set of regulations titled “ICC Uniform Rules for Demand Guarantees” (ICC Publication no. 458). These rules were the product of a joint working group of representatives of the Commission on International Commercial Practice and the Commission on Banking Technique and Practice. The rules cover all types of guarantees and other payment undertakings under the terms of which the guarantor is obliged to make payment on presentation of a written demand and any other documents specified in the guarantee. While still applicable at the time, the previous “ICC Uniform Rules for Contract Guarantees” (ICC Publication no. 325) published in 1978 failed to gain general acceptance owing to confusion about the scope of their application. The regulations issued in 1992 largely correspond to current international practice and also take appropriate account of the interests of the various parties involved.

In July 2010 these rules were updated to ICC Publication no. 758. The main difference being that the underlying contract (the reason and purpose of the Guarantee) should form part of the Guarantee. It is this URDG ICC 758 protocol that is now current. It superseded ICC 458 which is no longer used.

Demand guarantees may be subjected to the new rules by including a simple statement to this effect in the guarantee agreement. To qualify as a demand guarantee, the guarantee document must not stipulate any conditions for payment other than the presentation of a written demand and any other specified documents. In particular, the guarantor must not be required to decide whether or not the beneficiary and principal have fulfilled their contractual obligations. Restrictions on entry into force – such as the receipt of a down payment – may nonetheless be imposed.

The rules are intended to balance the interests of the beneficiary with the principal’s wish for protection against unjustified claims. The beneficiary wishes to protect itself against the risk that the principal will not fulfil its contractual obligations. A demand guarantee provides quick, easy access to a guaranteed sum of money if these obligations are not met. However, for the sake of equity and fair dealing, the rules contain a provision to the effect that any demand should be accompanied by a statement by the beneficiary explaining in what respect the principal is in default. This is intended as a safeguard against unfair calling. It should be emphasized that the rules do not in any way prejudice national legislation with respect to fraudulent or fraud claims.