In practice, the most important hurdle is how the presentation documents must be drafted and executed to constitute a complying presentation under the guarantee.

Calling on demand guarantees – an extreme sport

| Innsikt

With many yards, charterers and ship owners struggling to keep their head above water in the current economic climate, calling on guarantees to collect an otherwise straightforward claim is often proving to be more difficult than expected.

Nature of demand guarantees

Whether it is a performance bond issued as security for the charterer’s obligations under a charterparty or a refund guarantee issued to secure instalments paid under a shipbuilding contract, the preferred type of guarantee is the demand guarantee.

As opposed to an accessory guarantee (a «true guarantee»), which is dependent on the underlying contractbetween the principal debtor under the guarantee and the beneficiary, the demand guarantee, although factually linked to an underlying contractual relationship, is independent[1] of the underlying contract.

This is important to the beneficiary, as it enables him to collect payment directly and immediately from the guarantor, without allowing the guarantor to raise any objections rooted in the underlying relationship. The principal debtor, who will become subject to a recourse claim, will insist that the guarantor shall not pay anything. However, unless the claim is fraudulent, the demand guarantor is barred from entering into discussions concerning breach of contract.

URDG 758

To help the market navigate the difficult terrain of guarantee law, the International Chamber of Commerce (ICC) has developed a set of rules for demand guarantees, which «reflect a broad consensus among bankers, users and all members of the guarantee community».[2] The latest version is the ICC Uniform Rules for Demand Guarantees, 2010 revision – usually referred to as the «URDG 758» or simply «URDG» -, and these rules are often incorporated in demand guarantees, particularly in international transactions.

The 35 articles of URDG regulates all aspects of guarantee wording and practice. The parties must however consider carefully if, or to what degree, URDG should be incorporated, as it would sometimes suit them best to draft their own tailor made provisions. This is particularly important when regulating how to claim under a demand guarantee.

Presentation of the claim

To claim under a guarantee, the beneficiary must make a formal written demand to the guarantor – a presentation -, which is a submission of documents stating why the beneficiary is entitled to collect money under the guarantee. Usually, the presentation documents consists of a demand letter together with supporting statements or certificates describing to what extent the principal guarantee debtor[3] is in breach of the underlying contract secured by the guarantee.

«The guarantor shall determine, on the basis of a presentation alone, whether it appears on its face to be a complying presentation».[4] In the absence of specific regulations in the guarantee, URDG grants the guarantor five business days to determine payment or rejection.[5]

A presentation must comply with the requirements in the guarantee, and if URDG is incorporated, the relevant regulations in URDG itself. According to URDG, «…Data need not be identical to, but shall not conflict with data in that document, any other required document or the guarantee.»[6]

If a presentation is made which does not comply with the documentary requirements in the guarantee, the guarantor may rightfully reject the demand. The beneficiary may in turn repair the error, and deliver a new, correct presentation. However, a demand guarantee will always have an expiration date, which the beneficiary must respect.

To claim under a guarantee is a dramatic event for all parties involved, and it will often be the last resort for the beneficiary. The parties will therefore try to negotiate an amicable solution up to the last minute, before the situation gets so far that the threat to claim under the guarantee must be followed up by action. Consequently, claims under guarantees are often made immediately prior to the expiration date. This usually means that the beneficiary has one shot to make a complying presentation, and if the guarantor rightfully rejects the claim after the expiration date, the beneficiary has lost his rights to claim.

The courts’ approach to errors in guarantee presentations may vary in different jurisdictions. There is usually no doctrine of strict compliance, but there is in practice very little room for formal errors or discrepancies in presentation documents.

The most common types of grounds for rejection are:

  • execution errors, i.e. the demand is not signed by authorized signatories according to the signature rules of the beneficiary, failing to properly notarize and legalize documents, etc
  • dating errors and mismatches between the demand letter and corresponding documents in relation to termination of the underlying contract [7]
  • statement errors, i.e. factual misrepresentations and erroneous orfraudulent statements

As there is often very little time to prepare a guarantee presentation, errors are more likely. If the beneficiary sends the presentation documents by courier or registered mail, shipment time in relation to the expiration date must be taken into account. It is not uncommon that the beneficiary himself must travel to the guarantor to be able to make the presentation before the expiration date.

It is therefore important that the beneficiary has a keen eye on potential formal and practical difficulties in the presentation phase, already at the drafting stage of the guarantee.

Where and who to claim

The first thing to be crystal clear about is to whom the presentation shall be made. This is not always obvious when dealing with foreign and multinational entities, especially large banks with many office locations.

Article 14 (Presentation) (a) of URDG lists the requirements for a valid presentation of a claim:

«A presentation shall be made to the guarantor:

i.    At the place of issue, or such other place as is specified in the guarantee; and

ii.   On or before expiry.»

If the presentation is delivered to the wrong address on the last day of the guarantee period, it will likely be rejected by the guarantor. If the guarantor for instance has moved to a new location and it is not possible to make the presentation in time on the new address, the guarantee claim will be lost.

In a recent matter, the guarantor was stated to be «…[name]…(also trading under the name of [name]) …statutorily established in London…». The bank in question was an international bank with head office in London, but the letters describing the bank’s type of incorporation indicated that the guarantee had been formally issued by the bank’s branch in Mumbai.

URDG 758 was incorporated, and article 3 a. states that «[B]ranches of a guarantor in different countries are considered to be separate entities.». Consequently, the (Norwegian) beneficiary had to travel to India if he were to present his demand, even if all communication concerning the guarantee had been with the bank’s London office.

The presentation documents

In practice, the most important hurdle is how the presentation documents must be drafted and executed to constitute a complying presentation under the guarantee.

The requirements must be construed on the basis of the wording in the guarantee itself, but sometimes the guarantee is ambiguously worded, making it difficult for the beneficiary to be 100% sure on how to compile the proper documents. Further, it is not always easy to write in short and objective terms «…a unilaterally signed statement by the beneficiary describing the scope of non-performance or improper performance of the Contract…indicating the amount claimed…» if the facts of the dispute and the calculations of the loss are complicated.

Unless the guarantee says otherwise, the beneficiary may rely on article 15 (Requirements for demand) of URDG which states:

a. A demand under the guarantee shall be supported by such other documents as the guarantee specifies, and in any event by a statement, by the beneficiary, indicating in what respect the applicant is in breach of its obligations under the underlying relationship. This statement may be in the demand or in a separate signed document accompanying or identifying the demand.

The general contractual law requirement of clarity in wording applies as much to demand letters as to any other financial contracts. A demand must clearly express the amount which is claimed and be supported by invoices or statements. If a claim consists of future loss items, a reasonably clear explanation and listing of such items must be included with the demand. Adequate bank details, such as IBAN number and swift, must be included in the demand letter to enable the guarantor to pay the claim. Sending a letter «calling on the guarantee», followed up with an e-mail with bank details sent after the expiration date, is not sufficient.

Conclusion

It should be evident that there are many pitfalls to look out for when claiming under a guarantee, and the incorporation of URDG may contain surprises for the beneficiary in situations where time is of the essence. The prudent approach is to acquaint oneself thoroughly with URDG and to sort out any potential difficulties by forward-looking and clear drafting.

The guarantee must be precise when rendering names and addresses. Appointing authorized contact persons under the guarantee is a good idea. To prepare for the case that it is not possible to negotiate a suitable extension of the expiration date in order to repair presentation errors, the parties could even agree that claims under the guarantee may be made by e-mail using a pre-agreed demand letter, a form of which could be attached to the guarantee as an appendix. Simply having to fill in the amount in the agreed claim form, sign it and send it by e-mail to the guarantor would eliminate many potential dangers in the claim phase.

[1]Many guarantees are hybrid variants, and the determination of type of guarantee is often subject to litigation, see for instance the Norwegian law distinction between selvskyldnergaranti (type of accessory guarantee) and påkravsgaranti (demand guarantee) in the Norwegian Supreme Court «Silvercoin»-judgment (Rt. 2012 s. 1267).

[2] Quote from the foreword of URDG 758.

[3] The principal debtor under the guarantee is referred to as the «applicant» in URDG 758.

[4] URDG 758 Article 19 a.

[5] URDG 758 Article 20 a.

[6] URDG 758 Article 19 b.

[7] Note URDG 758 Article 15 b: » Neither the demand nor the supporting statement may be dated before the date when the beneficiary is entitled to present a demand…».