Guarantees And Stanby L/C

Question 1

Guarantee

Answer 1

Usually issued by a guarantor(mainly a bank or government organisation) in favour of the buyer(the importer) on behalf of the seller(the exporter)

But guarantee can also be issued by the bank of the seller in favour of the buyer as in the case if an advance payment guarantee

Question 2

Conditional guarantees

Answer 2

Excluded from URDG 758

A number if specialist businesses and insurance companies provide performance guarantees as ‘conditional guarantees’ under the normal rules of English contract law

Specified in the underlying contract which will specify the issuer of the guarantee, the purpose of the guarantee and in whose favour it has been issued

Are secondary obligations to pay and are subject to the usual rules concerning guarantees

Question 3

Unconditional guarantees

Answer 3

Banks generally only issue unconditional guarantees where the obligation of the bank issuing the guarantee is independent of the underlying contract or reason for default.

These are also known as demand guarantees

Are primary obligations to pay

Question 4

Advantages and risks of unconditional guarantees

Answer 4

Advantage
Governing rules-URDG 758, ISP 98, UCP 600
Simplicity-simple claim
No impact of working capital

Disadvantages
Independence of commercial contracts
Legal issues-unfamiliar jurisdiction
Potential dispute-unjustified claims
Creation of a contingent liability
Similarities with cash deposit
Language issues

Question 5

Types of contract guarantees

Answer 5

Tender or bid guarantees
Advance payment guarantees
Performance guarantees
Warranty and retention guarantees
Payment guarantees

Other guarantees not directly related to sales contract

Credit replacement guarantees-for overseas joint ventures
Guarantees for missing bills of lading
Guarantees for other purposes-legal cost, obligation of businesses to official bodies

Question 6

URDG 758 few points

Answer 6

Party issuing a guarantee is not liable for the accuracy, genuineness or validity of documents.

Guarantors are required to examine a demand within ‘FIVE BUSINESS DAYS’ following the day of presentation to determine whether it is a complying demand

Question 7

Expiry of guarantee

Answer 7

Guarantee can only be cancelled with the consent of all parties

Many guarantees dosent include expiry date, known as open ended guarantees

An expiry date dosent apply if a guarantee is subject to a local law that dictates it can be ignored. If so then guarantee will expire after certain period of time(eg 30days) after the original expiry date

URDG 758 states, if no expiry date then the guarantee shall terminate after the lapse of three years from the date of issue and the counter guarantee shall terminate 30 calendar days after the guarantee terminates

Question 8

Standby letters of credit

Answer 8

A standby letters of credit is used to protect against non-performance or non-payment

Powerful tool in the hands of a beneficiary, once complying presentation is made payment is made to beneficiary

Maybe subject to UCP 600 or ISP 98. UCP600 could cause problems so therefore must clearly state when created whether its subject to UCP600 or ISP98

Question 9

ISP 98 rules for Standby L/C

Answer 9

Irrevocable
Enforceable

Issuers obligation to pay is to be decided on only by the examination of required documents

Different to UCP 600, ISP98 provides automatic amendment- automatic amendment may be increased or decreased in value or may have the expiry date extended without the need for consent

Event of dishonour must be noticed within seven days

Unlike UCP600, ISP98 dosent allow partially transferred but may be transferred more than once

Standby L/C must mention expiry date or permit the issuer to terminate the standby upon reasonable notice or payment