Article-5-URDG 758-Independence of guarantee and counter-guarantee

A guarantee and counter guarantee both are separate undertaking and independent by nature, let’s first understand the terms guarantee, counter guarantee and underlying contract.

Demand Guarantee: Is an irrevocable undertaking issued by the guarantor (bank or entity) to pay the beneficiary up to the maximum amount of the guarantee, upon presentation by beneficiary of a demand which complies with the terms of the guarantee.

Counter‑Guarantee/Indirect Guarantee: Is a form of demand guarantee which is issued in the favor of the issuer of a demand/local guarantee. It is usually used when two banks in different countries are involved. It mitigates the country risk for beneficiary as usually be issued by the bank/entity where beneficiary is located.

Underlying Relationship: As we know guarantees are used to cover the non-performance of the applicant, underlying relationship is the contract between applicants and beneficiary upon that a guarantee may be based. A guarantee is independence irrevocable undertaking once it is issued. Notwithstanding, all the guarantees are not based on underlying relationships such as tender guarantee or a custom guarantee.

 

Article-5- URDG 758

Independence of guarantee and counter-guarantee

A. A guarantee is by its nature separate from the underlying relationship and the application. Guarantor is in no way concerned with or bound by such relationship. A reference in the guarantee to the underlying relationship for the purpose of only identifying does not change the independent nature of the guarantee. The undertaking of a guarantor to pay against the guarantee is not subject to claims or defenses arising from any relationship other than a relationship between the guarantor and the beneficiary.

A guarantee is issued in documentary nature, it may or may not be based on the underlying relationship between applicant and beneficiary. However, once it is issued, is considered a separate and irrevocable undertaking.

B.A counter-guarantee is also by its nature independent of the local/direct guarantee, underlying relationship, guarantee application and any other counter-guarantee to which it relates or may be based, and the counter-guarantor is not concerned with or bound by such relationship. A reference in the counter-guarantee to the underlying relationship for identifying it does not change the independent nature of the counter-guarantee. The undertaking of a counter-guarantor to pay under the counter-guarantee is not subject to claims or defenses arising from any relationship other than a relationship between the counter-guarantor and the guarantor or other counter-guarantor to whom the counter-guarantee is issued.

As indicated above, a counter-guarantee is also a form of demand guarantee which is issued by the guarantor (usually located in applicant's country) in favor of local guarantor if beneficiary is not willing to take the credit and country risk of the guarantor located in other country. A direct/local guarantee will be subject to local law (in case not specifically indicated in guarantee) which will favor beneficiary in case of dispute as they will be well aware of law of their country. A counter guarantee and local guarantee both are separate undertaking and independent in nature once issued.

Comments

Post a Comment

My photo
Chandan Kumar Yadav
My name is Chandan Kumar Yadav CDCS, CSDG, CITF, PGDIBO,AML-KYC, CCFE, MLIBF, CSF, 6SIGMA a trade finance professional with an experience of 11 years whereas worked with several stages of letter of credit, bank guarantee and on other payments methods of trade transactions such as documentary collection, open accounts, SBLC etc., I have a fair understanding of Trade Based Money Laundering as well, Blogging related to Trade Finance is my passion and I want to share which I know and learn from others, I have worked with Wells Fargo, Yes Bank Limited and Bank of America, India which helped me to gain knowledge, view of Trade Finance and importance of International Trade in world's economy. Trade Finance is thumping product, everyday we are learning something new so in order to keep learning I started this as one of the platform. . Let's Learn Together

Popular posts from this blog

Types of Guarantees/Bank Guarantees

Image
A Bank/Demand guarantee is an irrevocable undertaking issued by the Guarantor/Bank to pay beneficiary in its currency for the maximum amount of the guarantee, upon presentation of the complied demand in documentary form. A demand/bank guarantee must be in writing, either in paper form or in digital form. If it is in paper form, it must be signed and if in electronic form, the identity of the issuer must be authenticated. SWIFT messages are usually used for demand guarantees because they are authenticated. A pdf copy of a demand guarantee may not be enough without a signed and original document. Types of Guarantees/Bank Guarantees
Read more

Article-23, URDG-758- Extend or Pay

Image
URDG 758 article 23 sets out detailed provisions for the handling of an extend or pay demand. Article-23, URDG 758 a. Where a complying demand includes, as an alternative, a request to extend the expiry, the guarantor may suspend payment for a period not exceeding 30 calendar days following its receipt of the demand. First thing to note is that the demand must be a complying demand for this reason. If it is not a complying demand, the guarantor should either reject the demand or ask for a waiver from the counter‑guarantor or instructing party, as the case may be. In case it is a complying demand, the guarantor has the option either to pay the demand or to suspend payment for 30 calendar days following the day of the receipt of the demand. During this period of suspension, the guarantor may make a complying demand under the counter‑guarantee so that the counter‑guarantor would have the sufficient time to contact the applicant or instructing party to make the decision on the basi
Read more

Article-14-UCP-600, Standard for Examination of Documents

The issuing bank issues the undertaking to honour the complying presentation so final liability comes to an issuing bank who examines the documents as per documentary credit, UCP-600, ISBP-745 and, in the case of conforming documents, honours in accordance with its terms and conditions. Usually opening banks require  original transport document to present at their counter or consign to them (to order) as a primary security for an undertaking issued in the form of credit, and releases the document with further endorsement to applicant upon payment or acceptance/debit authority, the applicant will then surrender one original bill of lading to the carrier or its agent to take the delivery of the goods. This “Document of examination” is one of the important and considerable topic, we will touch upon basic standard for examination of documents as per below article.   Article-14-UCP-600,  Standard for Examination of Documents   a. A nominated bank acting on its nomination, a confirming b
Read more