STANDBY AND DEMAND GUARANTEE PRACTICE RULES: UNDERSTANDING .

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Standby & DemandGuarantee Practice:Understanding UCP600,ISP98 & URDG 758First EditionByPROFESSOR JAMES E. BYRNEDirector, Institute of International Banking Law & Practice, Inc.Faculty, George Mason University School of LawCo-EditorsSpencer R. NelsonJ.D., George Mason University School of LawandPeter TraisakJ.D., George Mason University School of Law

Copyright 2014All rights reservedNo reproduction of this material may be made without express written permission.The Institute of International Banking Law & Practice, Inc.20405 Ryecroft CourtMontgomery Village, MD 20886 USAPhone: 1 301 869 9840Fax: 1 301 926 1265Website: www.iiblp.orgE-Mail: info@iiblp.orgThe services and products of the Institute are described on the back pages.ISBN 978-1-888870-61-9Standby and Demand Guarantee Practice: Understanding UCP600, ISP98 & URDG 758 ispublished by the Institute of International Banking Law & Practice, Inc. Opinions expressed init do not necessarily reflect the official positions of the Institute.ii

This volume is dedicated toLena AnderssonDemonstrating in her work a commitment to the integrity and enhancement ofdemand guarantee & standby LC practice that is unparalleled, Lenaexemplifies the best practices in this field and embodies the principlesdescribed in this book.Lena is a Global Product Specialist in Guarantees and Standby Letters ofCredit at SEB. She is a member of the European Advisory Council for theInstitute of International Banking Law and Practice, Inc. She was a memberof the ICC Task Force that translated the URDG into Swedish, and workswith ICC Sweden. She is a regular speaker at conferences and seminarsrelating to Guarantees and Standby Letters of Credit.iii

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PrefaceThis book is intended to provide a comparison of the three practice rules used in standby lettersof credit and independent guarantees, namely UCP600, ISP98, and URDG 758. Incidentally, itcompares and contrasts typical standby and independent guarantee practices and also surveysgeneral rules of letter of credit law that are related to these undertakings.In doing so, it breaks new ground. While separate treatments of each practice rule exist,1 untilnow there has been no serious comparison of the three practice rules. That such a comparison isneeded is apparent to anyone considering the situation of major banks and users of theseinstruments. While one set of practice rules may be preferred, it is the rare Issuer/Guarantor orapplicant who can insist that only these practice rules be used for its undertakings. Therefore,any serious user of these undertakings must be able to work with each of the rules.Doing so, however, is not an easy matter. While the practice rules resemble one another inbroad outline, they differ considerably in their application to specific issues and problems. Theinability to move from practice rule to practice rule or ignorance or confusion about thedifferences will inevitably result in costly mistakes in presentation of documents, theirexamination, refusal, and other aspects of practice such as transfer, assignment of proceeds, etc.In addition, the failure to appreciate these differences will lead to errors in drafting of theundertaking. What is fundamental about these undertakings is not their name, whether“standby”, “demand/bank/independent guarantee”, “letter of credit”, “bond”, or whatever.What is important is the practice rule to which it is subject. An Issuer/Guarantor, Confirmer,Nominated Bank, Applicant, Beneficiary, Transferee, assignee, or successor overlooks the notinsignificant differences between these practice rules at their peril.The organization of this book follows that of the practice rules themselves, starting with basicpropositions about independent undertakings (Chapter 1) and moving to obligations of theparties (Chapter 2), presentation (Chapter 3), examination (Chapter 4), honour and dishonour(Chapter 5), and miscellaneous issues such as retention of the original past expiry, transfer,assignment, succession, disclaimers, LC Fraud and Abuse, protected persons, sanctions,charges, reimbursement, syndication/participation, law, forum, and arbitration (Chapter 6).Although the relevant text of the practice rule being discussed is recited, most readers will wantto have the full text of the three rules at hand when they read this book. LC Rules & Laws:Critical Texts for Independent Undertakings (IIBLP) is an ideal means of doing so, containingall practice rules and legal documents related to independent undertakings in one easilymanaged volume. In effect, it is a companion volume to this book.While this book was not designed to complement the Certified Standby and GuaranteeProfessional certification programme, it provides a useful accompanying text. This certificationprogramme is the only one that covers all three practice rules and both standbys and demandguarantees.James E. Byrne10 April 2014Upper Puddleby on Marsh1. UCP600: An Analytical Commentary (IIBLP); Official Commentary on the International Standby Practices (IIBLP),Professor Goode et al, The Guide to ICC Uniform Rules for Demand Guarantees (URDG 758) (ICC Publishing).v

AcknowledgementsThis Book is the product of talks, seminars, and programmes on ISP98, UCP600, URDG 758,and on standby letters of credit and independent guarantees. It has been prepared with theactive assistance of my editors, Spencer R. Nelson and Peter Traisak, both graduates ofGeorge Mason University School of Law and former students without whose help, this bookwould not have come to print for several years, if ever.I also acknowledge the assistance of the following professionals who reviewed one or morechapters of this book. Their advice and insights are gratefully acknowledged but any errors aresolely the responsibility of the author: Buddy BAKER, Head of Trade Services Sales, FifthThird Bank (USA); Sam JEBAMONY Standby LC Unit Manager, JPMorgan Chase (USA);Khalil MATAR Senior Manager, Business Audit, Alinma Bank (Saudi Arabia); Vincent M.MAULELLA Associate Director, IIBLP; Donald SMITH President, Global Trade AdvisoryLtd (USA); Jeremy SMITH Documentary Risk Advisor, Lloyds TSB Bank plc (UK).I also express my thanks to the staff of the Institute whose daily efforts on my behalf werecritical in bringing this work to life: my secretary Kathleen Blumberg who has typed, retyped,sorted through my impenetrable edits, all the while bringing to her work a bright and cheerydisposition; the editor of Documentary Credit World, Christopher S. Byrnes, whose editorialand proofing skills have prevented many errors from slopping past; James E. Byrne, Jr. whohas ably handled the production and layout of this book; Matthew J. Brown, AssociateCounsel of the IIBLP, who has provided editorial advice on many of the chapters; andChristopher Sandler who has designed the cover and assisted with layout. Above all, I thankmy wife, Maria T. Byrne, whose patience and encouragement have enabled me to spend thetime and energy necessary to master this subject and to write this book.In writing a book of this nature, it is necessary to draw on prior work and teaching, which Ihave done extensively. As a result, it is necessary to acknowledge the many people who haveassisted in forming my thought process regarding standby letters of credit and independentguarantees over the past 30 years. They include James G. Barnes of Baker & McKenzie, myable companion and fellow traveler in the process of unfolding ISP98, the ISP98 Model Forms,and the revision of UCC Article 5; Vincent M. Maulella, my companion in our work andprograms throughout the world for many years; Professor Boris Kozolchyk of the Center forNational Law Center for Inter-American Free Trade and the University of Arizona in our workon the UN LC Convention; the many bankers and lawyers with whom I have worked on manyprojects over the years, and the hundreds of students and participants in my classes andseminars who have forced me to clarify and articulate my notions about this subject.The support of George Mason University School of Law and its Center for Law &Economics is also gratefully acknowledged.vi

SUMMARY OF CONTENTSSUMMARY OF CONTENTS .viiTABLE OF CONTENTS. ixChapter One: Independent Undertakings . 1Chapter Two: Obligations of Parties to an Independent Undertaking . 45Chapter Three: Timely Presentation of Documents . 93Chapter Four: Examination and Compliance of Documents Presented . 121Chapter Five: Honour and Dishonour. 173Chapter Six: Miscellaneous Issues . 194Questions & Answers . 213Index. 262vii

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TABLE OF CONTENTSDedication. iiiPreface. vChapter One: Independent Undertakings . 11.1Types of LCs and Their Characteristics . 11.1.1 Types of Independent Undertakings/LCs . 31.1.2 Common Characteristics of all Independent Undertakings. 41.1.2.1Documentary Promises. 41.1.2.2Independence. 51.1.2.3Payment on Underlying Transaction . 71.1.2.4Not a Consumer Transaction . 81.1.2.5Binding and Irrevocable . 81.1.2.6Definite Promise. 91.2Independent Undertakings Distinguished from Dependent Undertakings . 101.2.1 Traditional or True Guarantees . 101.2.2 Bonds or Indemnities . 111.2.3 Insurance Undertakings . 121.2.4 Commercial or Financial Contracts . 121.2.5 Negotiable Instruments . 131.3Types of Standbys and Demand Guarantees. 131.4Practice Rules . 141.4.1 What is Practice? . 141.4.2 Uniform Customs and Practice for Documentary Credits (“UCP600”) . 161.4.3 International Standby Practices (“ISP98”). 191.4.4 Uniform Rules for Demand Guarantees (“URDG 758”) . 201.4.5 Uniform Rules for Bank-to-Bank Reimbursements (“URR 725”). 211.4.6 Practice Rules Overview . 211.5LC Law . 221.5.1 The Relationship Between LC Law and Practice . 221.5.2 Sources of LC Law . 221.5.2.1Statutes . 231.5.2.2The Supreme People’s Court of the People’s Republic of China . 241.5.2.3Judicial Decisions. 251.5.2.4Bank Regulations . 251.5.3 Litigation . 261.6Forms and Standardization . 261.6.1 SWIFT Messages. 261.6.2 ISP98 Model Forms . 271.6.3 Other Forms . 281.7Standbys vs. Demand Guarantees . 281.7.1 Definitions . 291.7.2 Secondary Differences between Standbys and Demand Guarantees . 301.7.3 Historical Evolution. 301.7.3.1Evolution of Sta

Professor Goode et al, The Guide to ICC Uniform Rules for Demand Guarantees (URDG 758) (ICC Publishing). vi . Acknowledgements This Book is the product of talks, seminars, and programmes on ISP98, UCP600, URDG 758, and on standby letters of credit and independent guarantees. It has been prepared with the

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