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Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy. In May, the Nigerian government announced the deregulation of the oil and gas sector which involved the removal of fuel subsidy 1 and the freedom of oil importers to source for foreign exchange FX from the secondary sources to facilitate their international trade.

Laudable as this deregulation policy may seem, the decline in world crude oil prices and Nigeria's depleting foreign reserves means that the positive impact has not been readily felt by Nigerians, particularly importers, due to their inability to access the FX needed to open Letters of Credit LCs for importation of petroleum products.

In a bid to mitigate the challenges posed by the FX crisis, the Central Bank of Nigeria CBN has attempted several intervention mechanisms, and the jury is still out on the determination of the effectiveness of these mechanisms and their potential to resolve the FX scarcity.

An example of such intervention mechanism is the creation of a priority list for accessing the available FX, including to the manufacturing and oil and gas sector. Despite the CBN's efforts, the fact remains that importers are still unable to meet up with their FX demands to facilitate the importation of goods. Potentially, the offshore market may create a financing stop gap in meeting Nigerian importers' FX requirements and offshore financiers in sponsoring FX backed LCs, may require Nigerian importers to provide demand guarantees from Nigerian banks.

The URDG consists of 35 Articles which in clear, simple and precise terms set a balance in the legitimate and competing interests of the applicant, the guarantor and the beneficiary; limit the risk of unfair calls and demands on guarantors and counter-guarantors; and explain the various important phases in the lifecycle of a demand guarantee, just like the ICC's Uniform Customs and Practice for Documentary Credits UCP 4 which is used for Letters of Credit LCs and other documentary credits.

The URDG, being a voluntary instrument, lacks the force of law, and must thus be expressly incorporated by the parties in order for it to apply to a demand guarantee or counter-guarantee. Likewise, parties are free to exclude provisions they are not comfortable with. It is important to note that the URDG may apply without the parties expressly including it in certain instances, including where it is in the general usage of a particular trade; 7 where the applicable law provides for its application; or where it has been in consistent use in the course of a transaction or dealings between the parties.

Being a standard form of contract, once incorporated, there is little need for parties to draft a long form contract. The provisions of the URDG are limited to the scope of the matters upon which the contracting parties are free to contract on, and is subject to mandatory national laws of the governing jurisdiction, which is the law and jurisdiction of the guarantor or counter guarantor, unless otherwise agreed by the parties. Under the URDG, demand guarantees are completely independent of any underlying relationship between the applicant and beneficiary, and subject to only the terms contained in it, thereby limiting the liabilities and rights of the guarantor bank to only matters it voluntarily commits itself to.

In this context, demand guarantees differ from true guarantees in that, a true guarantee is an undertaking or promise of a secondary nature made by a bank to pay a beneficiary in the event that an applicant fails to pay, upon proof of default. The maxim "pay first and argue later" best describes one of the key principles underlying demand guarantees. The demand guarantee also differs from LCs in that the LC is in itself a means of payment by the applicant in the normal course of the transaction; whereas the demand guarantee is an assurance of payment in the event that the applicant fails to make payment under the actual means of payment, as agreed.

However, the demand guarantee is similar to the Standby Letter of Credit, as the payment obligations are alike but differing only in structure. The Diagram above depicts a rudimentary structure of a demand guarantee and the relationship between the Applicant, the Guarantor and the Beneficiary.

The actual structure would however depend on the complexity and other features of the transaction. There are many reasons why a Nigerian bank should adopt the URDG in their demand guarantees, some of which are highlighted below:. Article 5 of the URDG expressly provides that the obligations of a guarantor and counter-guarantor is independent of any issues in the underlying contract.

This provision is rather favorable to the banks because guarantor and counter-guarantor banks are not usually parties to such underlying contracts, hence, it is unreasonable to have them entangled in issues emanating from such contracts. The URDG limits the guarantor's responsibility and role in the agreement to dealing with, 11 and examining presented documents on their facial appearance of conformity only, without any need to verify the authenticity.

Although welcome by beneficiaries and guarantors, applicants on the other hand consider this rule as an exposure to the risk of fraud because in a situation where a beneficiary presents falsified documents or sends inferior goods, the guarantor bank is not required to verify the validity of the goods or services being rendered in the underlying contract, but merely to examine the presented documents on the facial appearance only.

That being said, the importance of this provision to the fluidity of international trade cannot be gainsaid, as banks remain unencumbered by the underlying contract, are entitled to rely on complying documents, and are protected from liability in instances where falsified documents are presented on a demand for payment, as it places the responsibility on the applicant to seek redress in the law courts.

Article 11 provides that where at the time of receiving instructions to amend a guarantee, a guarantor for whatever reason is not prepared or is unable to issue that amendment, the guarantor shall without delay inform the party that gave the instructions to amend of its refusal or inability to do so.

The guarantor thus has a discretion on whether or not to accept an instruction to amend a guarantee. Article 12 of the URDG limits the liability of the guarantor to only the terms contained in the agreement, hence further alienating and protecting the guarantor bank from liabilities emanating from other agreements entered into by the other parties to the contract of which it may or may not even be aware.

Article 15 of the URDG provides that where a beneficiary makes a demand on a guarantor, the demand shall be accompanied by the documents specified in the guarantee and also by a supporting statement which indicates in what respect the applicant is in breach of its obligations under the underlying contractual relationship. This rule undoubtedly stands in favour of the guarantor bank because it provides an opportunity or a basis upon which the guarantor may challenge a demand in court by claiming that an accompanying statement is false.

Article 21 of the URDG ensures that a guarantor bank is not held in default in the event that it is unable to pay the beneficiary in the currency specified in the demand guarantee, due to an impediment beyond its control or because it is illegal under the law of the place for payment, by providing that the guarantor may make payment in the currency of the place for payment, which need not be the same as the place where the presentation was made.

This provision also works in favour of the beneficiary, as it can rest assured that irrespective of unforeseen disruptions, payment can be made in a different currency that is, the currency of the place of payment according to the applicable rate of exchange prevailing there when payment or reimbursement is due.

In a country beset by unpredictable currency fluctuations, the ability to pay in a currency other than the currency stipulated in the guarantee must have considerable advantages. Hopefully, the financier should have in place a Certificate of Capital Importation, which then entitles it to purchase foreign exchange in the official exchange market for remittance offshore.

Article 23 provides that where a guarantor receives an extend or pay request, which is a request made by a beneficiary for the extension of the validity of the guarantee, or alternatively for payment of the demand sum, a guarantor bank may suspend payment for a period not exceeding 30 calendar days; and where following the suspension, the guarantor makes an extend or pay request under the counter-guarantee, the counter guarantor may suspend payment for a period not exceeding 26 calendar days to enable the parties resolve any dispute between them and agree to extend the validity of the guarantee.

Where no extension is granted, the guarantor must pay after the 30 calendar days have elapsed without any further demand being required. But if the extension is granted during that time, the demand is deemed to be withdrawn, 14 and the guarantee and counter-guarantee will need to be amended to effect this change. In practice, extend or pay requests which result in an extension happen far more frequently than actual payment of the guarantee.

In favour of the guarantor bank, the URDG entitles a guarantor and counter-guarantor to a discretion on whether or not to accept an extend or pay request.

Articles 27 to 30 of the URDG exempts the guarantor from liability on the quality of documents presented to it; 16 on errors it may make in the transmission of documents; 17 or the acts of its agents and subagents 18 and any act or omission carried out by it in the course of carrying out the applicant's directives where it acts in good faith. Article 31 of the URDG provides for unlimited indemnity in favour of a guarantor and counter-guarantor with regard to all obligations and responsibilities imposed on them by foreign laws and usages.

These obligations or responsibilities may include foreign regulations obligating guarantor to indemnify other third parties or pay fees or charges outside the scope of the transaction or impose a validity period on guarantees. The URDG backed guarantee ensures that the guarantor and counter guarantor banks are indemnified for their loss in such instances. Article 33 of the URDG provides that a guarantee is transferable only if it specifically states that it is "transferable", in which case it may be transferred more than once for the full amount available at the time of transfer.

However, a counter-guarantee is not transferable. It further provides that a guarantor may refuse a request by a beneficiary for the transfer of a guarantee and assignment of proceeds. Hence such transfers can only be done to the extent that a guarantor has expressly consented to it, failing which the guarantor has a right to refuse to pay the proposed assignee. This provision is highly beneficial to the guarantor, who can withhold its consent to a transfer or assignment of a guarantee, even if the guarantee provides that it is transferable.

This protection is important for various reasons amongst which are: the likelihood of termination of an existing insurance coverage by reason of such transfer; the need for banks to be able to assess the credit worthiness of the potential beneficiary; 21 and to help a guarantor bank determine the possibility of payment recovery in the event that the courts decide that the proposed beneficiary is not entitled to payment.

Articles 34 and 35 of the URDG provide that except the parties agree otherwise, the guarantor's law and jurisdiction applies to the demand guarantee and in the case of a counter guarantee, the counter guarantor's law and jurisdiction applies to the counter guarantee. Thus, where a Nigerian bank gives a guarantee, Nigerian law automatically governs the guarantee and the courts of Nigeria have jurisdiction over any dispute, without any need for the guarantee to provide to that effect.

As a practical matter, foreign financiers typically prefer that English law govern their financing instruments except with respect to security located in Nigeria, which must be governed by Nigerian law as the lex situs. Incorporating the URDG automatically swings the balance of negotiation in favour of the Nigerian bank, who may rely on the default provisions. While the foregoing Articles seem to be mainly in favour of the guarantor, it is useful to mention that Article 4 b of the URDG appears to swing in favour of the beneficiary to the disadvantage of the guarantor, by providing that a demand guarantee issued subject to the URDG is deemed irrevocable, even though the guarantee declares itself to be revocable.

This obviously precludes guarantors from issuing revocable demand guarantees. In our view, this rule is not as dis-advantageous as it appears. In reality, a bank is not likely to issue a revocable guarantee in international trade as the probability of beneficiaries accepting revocable guarantees is very low because of the little protection it affords them.

Also, even where a guarantor bank is desirous of issuing a revocable guarantee, it can simply exclude the applicability of Article 4 b As a matter of practice, demand guarantees issued by Nigerian banks tend to be bespoke and differ largely from bank to bank. Overall, Nigerian banks tend to include some of the protection afforded by the URDG in their respective demand guarantees to varying extent. We are of the view that since the URDG offers more protection to Nigerian banks, negotiating bespoke guarantees can be more trouble than it is worth.

By adopting the URDG, demand guarantees issued by Nigerian banks can be much simpler documents, as all the protection found in a standard Nigerian bank guarantee are included in the URDG, while the URDG has additional protection which may not necessarily be found in bespoke bank guarantees. Consequently, we are of the view that Nigerian banks should adopt the URDG in their demand guarantees, subject to any exclusions they may wish to make for the following cogent reasons:.

These widespread acceptance and endorsements are mainly due to the fact that adopting the URDG brings on board the benefits of adopting a standardized agreement, especially in cross border transactions, as it:. Finally, banks should remember that the terms and conditions of the URDG are not cast in stone, and they are free to exclude any terms they find not suitable or amenable to their appetite.

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Uniform Rules For Demand Guarantees (URDG)

Uniform Rules For Demand Guarantees URDG refers to a set of guidelines first adopted by the International Chamber of Commerce ICC in that sets forth generally agreed-upon rules governing securing payments and meeting performance guarantees in contracts among global trading partners. According to the ICC, many bankers, traders, and industry associations recognize and accept the URDG, as it attempts to balance the interests of all parties involved in various types of widely used international contracts. Uniform Rules For Demand Guarantees URDG covers billions of dollars of contract guarantees in a number of industries, including banking and construction. Most commonly, the URDG covers so-called demand guarantees, or specific rights or countermeasures one party can impose on another party if the second party does not perform according to contract specifications. However, the UDRG also applies to agreements requiring the decision of an arbitrator, as well as require as some contracts that involve slightly more complex agreements, such as situations dealing with the default of one of the parties.


Uniform Rules for Demand Guarantees URDG - 2010 revision

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy. In May, the Nigerian government announced the deregulation of the oil and gas sector which involved the removal of fuel subsidy 1 and the freedom of oil importers to source for foreign exchange FX from the secondary sources to facilitate their international trade. Laudable as this deregulation policy may seem, the decline in world crude oil prices and Nigeria's depleting foreign reserves means that the positive impact has not been readily felt by Nigerians, particularly importers, due to their inability to access the FX needed to open Letters of Credit LCs for importation of petroleum products. In a bid to mitigate the challenges posed by the FX crisis, the Central Bank of Nigeria CBN has attempted several intervention mechanisms, and the jury is still out on the determination of the effectiveness of these mechanisms and their potential to resolve the FX scarcity.


Uniform Rules for Demand Guarantees (URDG)




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