When is the guarantee issued according to ISDGP?
At the ICC Banking Commission 2021 Annual Meeting held 31 March the ICC Banking Commission National Committees voted to approve the International Standard Demand Guarantee Practice (ISDGP) for URDG 758.
The approval of the ISDGP was the end of a three-year journey and it may be interesting to take a closer look at the journey. At least for some of the topics raised.
One topic that is of interest – both from a ISDGP perspective and in general is when the guarantee is actually deemed “issued”.
It is an issue that is regulated in URDG 758 sub-article 4(a) which simply states:
“A guarantee is issued when it leaves the control of the guarantor.”
The good question is what it means in practice that “it leaves the control of the guarantor”?
Draft one of if ISDGP did not really answer that. It merely stated that:
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Once a guarantee is issued and has left the control of the guarantor, its terms govern even if a guarantor erred for all or part of its issuance. It can only be changed via an amendment with the consent of the guarantor(s) and the beneficiary (or beneficiaries) or the counter-guarantor and the beneficiary to it.
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In other words, it addresses what follows after it leaves the control of the guarantor.
However, in Draft two some real “meat” is added. It reads:
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Transmitting the text of the guarantee to an advising party with an instruction to advise that guarantee to the beneficiary does not mean that the guarantee is issued. Where it has accepted to act upon the instructions received from the guarantor, the advising party acts as an agent of the guarantor and, as such, acts under the control of its principal. The same applies in the case where a second advising party is instructed and accepts to act upon those instructions, for that party is likewise an agent of the guarantor’s agent. It is only when the guarantee leaves the control of the advising party that it is deemed to be issued for the purpose of Article 4(a) of the URDG.
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What is being said here, is that when the advising party (or second advising party) is an agent of the guarantor, then transmitting the guarantee to that party does not mean that it is issued.
In Draft three, although drafted a bit different, the same position is upheld. It reads:
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Transmission by the guarantor of the text of the guarantee to a person with an instruction to advise that guarantee to the beneficiary does not meet the requirement for issue. Where it has accepted to act upon the instructions received from the guarantor, the advising party acts as an agent of the guarantor. The same applies in the case where a second advising party is instructed and accepts to act upon those instructions, for that party is likewise an agent of the guarantor’s agent. It is only when the guarantee leaves the control of the advising party or, as the case may be, the second advising party, that it is deemed to be issued for the purpose of Article 4(a).
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So, at that point in time, it seemed to have matured and found a balance.
However, in the Final version of the ISDGP more elements – and fewer – come into play. It reads:
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For the purpose of article 4(a), control is not restricted to the physical possession of the guarantee. The guarantor’s transmission of the original, signed guarantee in paper form to its agent, with instructions for transmission to the beneficiary, does not meet the requirement for issue, as the agent acts under the guarantor’s control. Unless otherwise specified in the guarantee, external legal counsel representing the guarantor and courier companies entrusted with the delivery of the guarantee are generally deemed to be an agent of the guarantor, whilst the applicant or the instructing party is not the guarantor’s agent.
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Gone is the reference to advising party (and second advising party) – however, “external legal counsel representing the guarantor” and “courier companies” are now defined as agents of the guarantor… So, what about advising party (and second advising party)? The changes made to the Final version are of course based on comments from the ICC National Committees. Basically, the issue is if the party to which the guarantee is handed over to is an agent of the guarantor. What was found was that different countries have different approaches when defining an "agent". In other words, whether or not the advising party is an agent of the guarantor will depend ….
Most likely, in 99,9% of all guarantees this is and academic question that has no relevance. Generally, all parties will deem the guarantee as issued once it physically leaves the guarantor; by SWIFT or by mail or is handed over to the applicant. However, for the remaining 0,1% it may make the world of difference. For example, if a demand is made, and the guarantee – from the perspective of the guarantor – is not issued.
Therefore, this is one of the paragraphs that guarantors should carefully reflect on to ascertain that they have the appropriate processes in place.
And while at the topic; the Final version of the ISDGP does have more to say about the issue of “issue”. All covered in paragraphs 67- 71. Here is an overview:
Paragraph 67 makes it clear that the creation of the guarantee in the guarantor’s internal system and its signing by any authorised signatory does not mean that the guarantee is issued.
Paragraph 68 addresses the situation where the guarantee has left the control of the guarantor by mistake. In such case it is deemed to have been irrevocably issued.
Paragraph 69 states that the guarantee is not issued if the beneficiary has obtained a copy of the guarantee from the applicant (or any other person before the guarantor has issued guarantee).
Paragraph 70 (is quoted above and) states that passing the guarantee over to an agent with instructions for transmission to the beneficiary, does not mean that the guarantee has left the control of the guarantor. Examples of agents mentioned are “external legal counsel representing the guarantor” and “courier companies” (entrusted with the delivery of the guarantee). The paragraph also states that the applicant or the instructing party is not the guarantor’s agent.
Last, but not least, paragraph 71 makes reference to URDG 758 article 15 and sub-article 4(c) and states that the beneficiary is permitted to present a demand from the time when the guarantee leaves the guarantor’s control.
For the issue of when a guarantee is issued (i.e., when it leaves the control of the guarantor), as can be seen from above, there are for sure many elements to consider. As mentioned, in far most of the cases, this is an academic question as the guarantee is simply issued and all relevant parties agree to that. However, with ISDGP there is now a documented practice to regulate the various scenarios _ when relevant. For example, paragraph 69 is very welcome, as an applicant may well provide the beneficiary with a draft of the guarantee (while discussing the guarantee text with the guarantor), and the beneficiary may get the impression that it is issued while it is not. Having this documented in ISDGP should also guide guarantors to mark guarantee drafts clearly as that…
This was a look at the “journey” ISDGP has taken towards paragraph 70 as well as an elaboration of the paragraphs that relate to when a guarantee is actually issued.
I hope you liked it.
Take care of yourself and others and the ISDGP …. it is still young and need care to grow strong. Let’s make that effort together.
Kim