Legal Perspective
To promote international trade, there is a great need for financial guarantees to support exports and imports. In this respect, the International Chamber of Commerce’s (ICC) “Uniform Rules for Demand Guarantees” (URDG 758) and the United Nations Convention on Independent Guarantees and Standby Letters of Credit (ISDGP) are both giving international guidelines for guarantees. The UN endorsed the “URDG 758” in 2011 to promote a kind of clarity, predictability, sustainability and great harmonisation in international trade. Both are relating to guarantees, one for "demand" guarantees whereas the other for "independent" guarantees.
While the URDG 758 rules have been developed and published by the ICC with the intention to promote and to specify rules for "demand" guarantees, needed for international trade purposes. With this understanding in mind, we say that the UN Convention is intended as an international convention for "independent" guarantees and standby letters of credit.
To explain more, we take the opportunity to highlight some features of the URDG and the UN Convention. The URDG 758 rules govern demand guarantees, which are forms of financial security used in international trade to ensure performance or payment. The current edition, URDG 758, came into force on 2010. The UN endorsed the URDG 758 in 2011 with the aim of harmonising international trade law and at the same time to remove all legal obstacles to enhance international trade.
The URDG 758 mainly aims to provide clarity, precision, and predictability in demand guarantee practices. Regarding the ISDGP, we can say that, this is an international convention created by the UN Commission on International Trade Law (UNCITRAL). The Convention, provides a legal framework for independent guarantees and standby letters of credit, which are also common in international trade frequent transactions. The UN Convention and the URDG often cover similar areas and are sometimes used in conjunction or in comparison to one another; the two resemble the two sides of the coin.
Harmonisation is taken as a relationship and significance to both, the URDG and the UN Convention enable them to work towards harmonising trade practices and laws related to guarantees in their different shapes. The UN's endorsement of the URDG 758 signifies the clear support of the international community for these rules and their role in modernising trade.
With reference to application, it is left for the parties to a guarantee who can choose which rules to apply. For the URDG, important to say, the guarantee itself expressly indicates it is subject to the URDG and for them to be applicable.
The United Nations Convention on Independent Guarantees and Standby Letters as UCP and URDG are issued with the aim of developing different international trade relations. The UNICITRAL and the UN endorses ICC Demand Guarantee Rules the “URDG 758, and this endorsement reinforces the ICC mandate of removing legal different obstacles to international trade by actively and progressively modernising procedures and enhancing relative laws and regulations. International trade, deserves all support to promote international ties and peaceful relations between all parts of the world.
An “independent” guarantee, like a “demand guarantee”, creates a primary direct obligation for the guarantor, separate from the underlying contract and requires payment upon presentation of a demand. The key difference is that a demand guarantee is a specific type of independent guarantee, where the payment is triggered by a simple written demand by the beneficiary, regardless of the underlying contract's performance. In contrast, other independent guarantees may have more specific conditions for payment that are tied to the main agreement.
Dr AbdelGadir Warsama Ghalib is a corporate legal counsel. Email: [email protected]
