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UNITED NATIONS CONVENTION
ON INDEPENDENT GUARANTEES AND STAND-BY LETTERS OF CREDIT
United Nations 1996
C O N T E N T S
CHAPTER I. SCOPE OF APPLICATION
CHAPTER II. INTERPRETATION
CHAPTER III. FORM AND CONTENT OF UNDERTAKING
CHAPTER IV. RIGHTS, OBLIGATIONS AND DEFENCES
CHAPTER V. PROVISIONAL COURT MEASURES
CHAPTER VI. CONFLICT OF LAWS
CHAPTER VII. FINAL CLAUSES
CHAPTER I. SCOPE OF APPLICATION
Article 1. Scope of application
(1) This Convention applies to an international undertaking referred to in
article 2:
(a) If the place of business of the guarantor/issuer at which the undertaking is issued is in a Contracting State, or
(b) If the rules of private international law lead to the application of the law of a Contracting State,
unless the undertaking excludes the application of the Convention.
(2) This Convention applies also to an international letter of credit not falling within article 2 if it expressly states that it is subject to this
Convention.
(3) The provisions of articles 21 and 22 apply to international undertakings
referred to in article 2 independently of paragraph (1) of this article.
Article 2. Undertaking
(1) For the purposes of this Convention, an undertaking is an independent commitment, known in international practice as an independent guarantee or as a
stand-by letter of credit, given by a bank or other institution or person ("guarantor/issuer") to pay to the beneficiary a certain or determinable amount
upon simple demand or upon demand accompanied by other documents, in conformity
with the terms and any documentary conditions of the undertaking, indicating, or
from which it is to be inferred, that payment is due because of a default in the
performance of an obligation, or because of another contingency, or for money
borrowed or advanced, or on account of any mature indebtedness undertaken by the
principal/applicant or another person.
(2) The undertaking may be given:
(a) At the request or on the instruction of the customer ("principal/applicant") of the guarantor/issuer;
(b) On the instruction of another bank, institution or person ("instructing party") that acts at the request of the customer ("principal/applicant") of that instructing party; or
(c) On behalf of the guarantor/issuer itself.
(3) Payment may be stipulated in the undertaking to be made in any form, including:
(a) Payment in a specified currency or unit of account;
(b) Acceptance of a bill of exchange (draft);
(c) Payment on a deferred basis;
(d) Supply of a specified item of value.
(4) The undertaking may stipulate that the guarantor/issuer itself is the beneficiary when acting in favour of another person.
Article 3. Independence of undertaking
For the purposes of this Convention, an undertaking is independent where the
guarantor/issuer's obligation to the beneficiary is not:
(a) Dependent upon the existence or validity of any underlying transaction, or
upon any other undertaking (including stand-by letters of credit or
independent guarantees to which confirmations or counter-guarantees relate); or
(b) Subject to any term or condition not appearing in the undertaking, or to
any future, uncertain act or event except presentation of documents or another
such act or event within a guarantor/issuer's sphere of operations.
Article 4. Internationality of undertaking
(1) An undertaking is international if the places of business, as specified in
the undertaking, of any two of the following persons are in different States:
guarantor/issuer, beneficiary, principal/applicant, instructing party,
confirmer.
(2) For the purposes of the preceding paragraph:
(a) If the undertaking lists more than one place of business for a given
person, the relevant place of business is that which has the closest
relationship to the undertaking;
(b) If the undertaking does not specify a place of business for a given person
but specifies its habitual residence, that residence is relevant for
determining the international character of the undertaking.
CHAPTER II. INTERPRETATION
Article 5. Principles of interpretation
In the interpretation of this Convention, regard is to be had to its
international character and to the need to promote uniformity in its application
and the observance of good faith in the international practice of independent
guarantees and stand-by letters of credit.
Article 6. Definitions
For the purposes of this Convention and unless otherwise indicated in a
provision of this Convention or required by the context:
(a) "Undertaking" includes "counter-guarantee" and "confirmation of an
undertaking";
(b) "Guarantor/issuer" includes "counter-guarantor" and "confirmer";
(c) "Counter-guarantee" means an undertaking given to the guarantor/issuer of
another undertaking by its instructing party and providing for payment upon
simple demand or upon demand accompanied by other documents, in conformity
with the terms and any documentary conditions of the undertaking, indicating,
or from which it is to be inferred, that payment under that other undertaking
has been demanded from, or made by, the person issuing that other undertaking;
(d) "Counter-guarantor" means the person issuing a counter-guarantee;
(e) "Confirmation" of an undertaking means an undertaking added to that of the
guarantor/issuer, and authorized by the guarantor/issuer, providing the
beneficiary with the option of demanding payment from the confirmer instead of
from the guarantor/issuer, upon simple demand or upon demand accompanied by
other documents, in conformity with the terms and any documentary conditions
of the confirmed undertaking, without prejudice to the beneficiary's right to
demand payment from the guarantor/issuer;
(f) "Confirmer" means the person adding a confirmation to an undertaking;
(g) "Document" means a communication made in a form that provides a complete
record thereof.
CHAPTER III. FORM AND CONTENT OF UNDERTAKING
Article 7. Issuance, form and irrevocability of undertaking
(1) Issuance of an undertaking occurs when and where the undertaking leaves the
sphere of control of the guarantor/issuer concerned.
(2) An undertaking may be issued in any form which preserves a complete record
of the text of the undertaking and provides authentication of its source by
generally accepted means or by a procedure agreed upon by the guarantor/issuer
and the beneficiary.
(3) From the time of issuance of an undertaking, a demand for payment may be
made in accordance with the terms and conditions of the undertaking, unless the
undertaking stipulates a different time.
(4) An undertaking is irrevocable upon issuance, unless it stipulates that it is
revocable.
Article 8. Amendment
(1) An undertaking may not be amended except in the form stipulated in the
undertaking or, failing such stipulation, in a form referred to in paragraph (2)
of article 7.
(2) Unless otherwise stipulated in the undertaking or elsewhere agreed by the
guarantor/issuer and the beneficiary, an undertaking is amended upon issuance of
the amendment if the amendment has previously been authorized by the
beneficiary.
(3) Unless otherwise stipulated in the undertaking or elsewhere agreed by the
guarantor/issuer and the beneficiary, where any amendment has not previously
been authorized by the beneficiary, the undertaking is amended only when the
guarantor/issuer receives a notice of acceptance of the amendment by the
beneficiary in a form referred to in paragraph (2) of article 7.
(4) An amendment of an undertaking has no effect on the rights and obligations
of the principal/applicant (or an instructing party) or of a confirmer of the
undertaking unless such person consents to the amendment.
Article 9. Transfer of beneficiary's right to demand payment
(1) The beneficiary's right to demand payment may be transferred only if
authorized in the undertaking, and only to the extent and in the manner
authorized in the undertaking.
(2) If an undertaking is designated as transferable without specifying whether
or not the consent of the guarantor/issuer or another authorized person is
required for the actual transfer, neither the guarantor/issuer nor any other
authorized person is obliged to effect the transfer except to the extent and in
the manner expressly consented to by it.
Article 10. Assignment of proceeds
(1) Unless otherwise stipulated in the undertaking or elsewhere agreed by the
guarantor/issuer and the beneficiary, the beneficiary may assign to another
person any proceeds to which it may be, or may become, entitled under the
undertaking.
(2) If the guarantor/issuer or another person obliged to effect payment has
received a notice originating from the beneficiary, in a form referred to in
paragraph (2) of article 7, of the beneficiary's irrevocable assignment, payment
to the assignee discharges the obligor, to the extent of its payment, from its
liability under the undertaking.
Article 11. Cessation of right to demand payment
(1) The right of the beneficiary to demand payment under the undertaking ceases
when:
(a) The guarantor/issuer has received a statement by the beneficiary of
release from liability in a form referred to in paragraph (2) of article 7;
(b) The beneficiary and the guarantor/issuer have agreed on the termination of
the undertaking in the form stipulated in the undertaking or, failing such
stipulation, in a form referred to in paragraph (2) of article 7;
(c) The amount available under the undertaking has been paid, unless the
undertaking provides for the automatic renewal or for an automatic increase of
the amount available or otherwise provides for continuation of the
undertaking;
(d) The validity period of the undertaking expires in accordance with the
provisions of article 12.
(2) The undertaking may stipulate, or the guarantor/issuer and the beneficiary
may agree elsewhere, that return of the document embodying the undertaking to
the guarantor/issuer, or a procedure functionally equivalent to the return of
the document in the case of the issuance of the undertaking in non-paper form,
is required for the cessation of the right to demand payment, either alone or in
conjunction with one of the events referred to in subparagraphs (a) and (b) of
paragraph (1) of this article. However, in no case shall retention of any such
document by the beneficiary after the right to demand payment ceases in
accordance with subparagraph (c) or (d) of paragraph (1) of this article
preserve any rights of the beneficiary under the undertaking.
Article 12. Expiry
The validity period of the undertaking expires:
(a) At the expiry date, which may be a specified calendar date or the last day
of a fixed period of time stipulated in the undertaking, provided that, if the
expiry date is not a business day at the place of business of the
guarantor/issuer at which the undertaking is issued, or of another person or
at another place stipulated in the undertaking for presentation of the demand
for payment, expiry occurs on the first business day which follows;
(b) If expiry depends according to the undertaking on the occurrence of an act
or event not within the guarantor/issuer's sphere of operations, when the
guarantor/issuer is advised that the act or event has occurred by presentation
of the document specified for that purpose in the undertaking or, if no such
document is specified, of a certification by the beneficiary of the occurrence
of the act or event;
(c) If the undertaking does not state an expiry date, or if the act or event
on which expiry is stated to depend has not yet been established by
presentation of the required document and an expiry date has not been stated
in addition, when six years have elapsed from the date of issuance of the
undertaking.
CHAPTER IV. RIGHTS, OBLIGATIONS AND DEFENCES
Article 13. Determination of rights and obligations
(1) The rights and obligations of the guarantor/issuer and the beneficiary
arising from the undertaking are determined by the terms and conditions set
forth in the undertaking, including any rules, general conditions or usages
specifically referred to therein, and by the provisions of this Convention.
(2) In interpreting terms and conditions of the undertaking and in settling
questions that are not addressed by the terms and conditions of the undertaking
or by the provisions of this Convention, regard shall be had to generally
accepted international rules and usages of independent guarantee or stand-by
letter of credit practice.
Article 14. Standard of conduct and liability of guarantor/issuer
(1) In discharging its obligations under the undertaking and this Convention,
the guarantor/issuer shall act in good faith and exercise reasonable care having
due regard to generally accepted standards of international practice of
independent guarantees or stand-by letters of credit.
(2) A guarantor/issuer may not be exempted from liability for its failure to act
in good faith or for any grossly negligent conduct.
Article 15. Demand
(1) Any demand for payment under the undertaking shall be made in a form
referred to in paragraph (2) of article 7 and in conformity with the terms and
conditions of the undertaking.
(2) Unless otherwise stipulated in the undertaking, the demand and any
certification or other document required by the undertaking shall be presented,
within the time that a demand for payment may be made, to the guarantor/issuer
at the place where the undertaking was issued.
(3) The beneficiary, when demanding payment, is deemed to certify that the
demand is not in bad faith and that none of the elements referred to in
subparagraphs (a), (b) and (c) of paragraph (1) of article 19 are present.
Article 16. Examination of demand and accompanying documents
(1) The guarantor/issuer shall examine the demand and any accompanying documents
in accordance with the standard of conduct referred to in paragraph (1) of
article 14. In determining whether documents are in facial conformity with the
terms and conditions of the undertaking, and are consistent with one another,
the guarantor/issuer shall have due regard to the applicable international
standard of independent guarantee or stand-by letter of credit practice.
(2) Unless otherwise stipulated in the undertaking or elsewhere agreed by the
guarantor/issuer and the beneficiary, the guarantor/issuer shall have reasonable
time, but not more than seven business days following the day of receipt of the
demand and any accompanying documents, in which to:
(a) Examine the demand and any accompanying documents;
(b) Decide whether or not to pay;
(c) If the decision is not to pay, issue notice thereof to the beneficiary.
The notice referred to in subparagraph (c) above shall, unless otherwise
stipulated in the undertaking or elsewhere agreed by the guarantor/issuer and
the beneficiary, be made by teletransmission or, if that is not possible, by
other expeditious means and indicate the reason for the decision not to pay.
Article 17. Payment
(1) Subject to article 19, the guarantor/issuer shall pay against a demand made
in accordance with the provisions of article 15. Following a determination that
a demand for payment so conforms, payment shall be made promptly, unless the
undertaking stipulates payment on a deferred basis, in which case payment shall
be made at the stipulated time.
(2) Any payment against a demand that is not in accordance with the provisions
of article 15 does not prejudice the rights of the principal/applicant.
Article 18. Set-off
Unless otherwise stipulated in the undertaking or elsewhere agreed by the
guarantor/issuer and the beneficiary, the guarantor/issuer may discharge the
payment obligation under the undertaking by availing itself of a right of
set-off, except with any claim assigned to it by the principal/applicant or the
instructing party.
Article 19. Exception to payment obligation
(1) If it is manifest and clear that:
(a) Any document is not genuine or has been falsified;
(b) No payment is due on the basis asserted in the demand and the supporting
documents; or
(c) Judging by the type and purpose of the undertaking, the demand has no
conceivable basis,
the guarantor/issuer, acting in good faith, has a right, as against the
beneficiary, to withhold payment.
(2) For the purposes of subparagraph (c) of paragraph (1) of this article, the
following are types of situations in which a demand has no conceivable basis:
(a) The contingency or risk against which the undertaking was designed to
secure the beneficiary has undoubtedly not materialized;
(b) The underlying obligation of the principal/applicant has been declared
invalid by a court or arbitral tribunal, unless the undertaking indicates that
such contingency falls within the risk to be covered by the undertaking;
(c) The underlying obligation has undoubtedly been fulfilled to the
satisfaction of the beneficiary;
(d) Fulfilment of the underlying obligation has clearly been prevented by
wilful misconduct of the beneficiary;
(e) In the case of a demand under a counter-guarantee, the beneficiary of the
counter-guarantee has made payment in bad faith as guarantor/issuer of the
undertaking to which the counter-guarantee relates.
(3) In the circumstances set out in subparagraphs (a), (b) and (c) of paragraph
(1) of this article, the principal/applicant is entitled to provisional court
measures in accordance with article 20.
CHAPTER V. PROVISIONAL COURT MEASURES
Article 20. Provisional court measures
(1) Where, on an application by the principal/applicant or the instructing
party, it is shown that there is a high probability that, with regard to a
demand made, or expected to be made, by the beneficiary, one of the
circumstances referred to in subparagraphs (a), (b) and (c) of paragraph (1) of
article 19 is present, the court, on the basis of immediately available strong
evidence, may:
(a) Issue a provisional order to the effect that the beneficiary does not
receive payment, including an order that the guarantor/issuer hold the amount
of the undertaking, or
(b) Issue a provisional order to the effect that the proceeds of the
undertaking paid to the beneficiary are blocked, taking into account whether
in the absence of such an order the principal/applicant would be likely to
suffer serious harm.
(2) The court, when issuing a provisional order referred to in paragraph (1) of
this article, may require the person applying therefor to furnish such form of
security as the court deems appropriate.
(3) The court may not issue a provisional order of the kind referred to in
paragraph (1) of this article based on any objection to payment other than those
referred to in subparagraphs (a), (b) and (c) of paragraph (1) of article 19, or
use of the undertaking for a criminal purpose.
CHAPTER VI. CONFLICT OF LAWS
Article 21. Choice of applicable law
The undertaking is governed by the law the choice of which is:
(a) Stipulated in the undertaking or demonstrated by the terms and conditions
of the undertaking; or
(b) Agreed elsewhere by the guarantor/issuer and the beneficiary.
Article 22. Determination of applicable law
Failing a choice of law in accordance with article 21, the undertaking is
governed by the law of the State where the guarantor/issuer has that place of
business at which the undertaking was issued.
CHAPTER VII. FINAL CLAUSES
Article 23. Depositary
The Secretary-General of the United Nations is the depositary of this
Convention.
Article 24. Signature, ratification, acceptance, approval, accession
(1) This Convention is open for signature by all States at the Headquarters of
the United Nations, New York, until 11 December 1997.
(2) This Convention is subject to ratification, acceptance or approval by the
signatory States.
(3) This Convention is open to accession by all States which are not signatory
States as from the date it is open for signature.
(4) Instruments of ratification, acceptance, approval and accession are to be
deposited with the Secretary-General of the United Nations.
Article 25. Application to territorial units
(1) If a State has two or more territorial units in which different systems of
law are applicable in relation to the matters dealt with in this Convention, it
may, at the time of signature, ratification, acceptance, approval or accession,
declare that this Convention is to extend to all its territorial units or only
one or more of them, and may at any time substitute another declaration for its
earlier declaration.
(2) These declarations are to state expressly the territorial units to which the
Convention extends.
(3) If, by virtue of a declaration under this article, this Convention does not
extend to all territorial units of a State and the place of business of the
guarantor/issuer or of the beneficiary is located in a territorial unit to which
the Convention does not extend, this place of business is considered not to be
in a Contracting State.
(4) If a State makes no declaration under paragraph (1) of this article, the
Convention is to extend to all territorial units of that State.
Article 26. Effect of declaration
(1) Declarations made under article 25 at the time of signature are subject to
confirmation upon ratification, acceptance or approval.
(2) Declarations and confirmations of declarations are to be in writing and to
be formally notified to the depositary.
(3) A declaration takes effect simultaneously with the entry into force of this
Convention in respect of the State concerned. However, a declaration of which
the depositary receives formal notification after such entry into force takes
effect on the first day of the month following the expiration of six months
after the date of its receipt by the depositary.
(4) Any State which makes a declaration under article 25 may withdraw it at any
time by a formal notification in writing addressed to the depositary. Such
withdrawal takes effect on the first day of the month following the expiration
of six months after the date of the receipt of the notification of the
depositary.
Article 27. Reservations
No reservations may be made to this Convention.
Article 28. Entry into force
(1) This Convention enters into force on the first day of the month following
the expiration of one year from the date of the deposit of the fifth instrument
of ratification, acceptance, approval or accession.
(2) For each State which becomes a Contracting State to this Convention after
the date of the deposit of the fifth instrument of ratification, acceptance,
approval or accession, this Convention enters into force on the first day of the
month following the expiration of one year after the date of the deposit of the
appropriate instrument on behalf of that State.
(3) This Convention applies only to undertakings issued on or after the date
when the Convention enters into force in respect of the Contracting State
referred to in subparagraph (a) or the Contracting State referred to in
subparagraph (b) of paragraph (1) of article 1.
Article 29. Denunciation
(1) A Contracting State may denounce this Convention at any time by means of a
notification in writing addressed to the depositary.
(2) The denunciation takes effect on the first day of the month following the
expiration of one year after the notification is received by the depositary.
Where a longer period is specified in the notification, the denunciation takes
effect upon the expiration of such longer period after the notification is
received by the depositary.
DONE at New York, this eleventh day of December one thousand nine hundred and
ninety-five, in a single original, of which the Arabic, Chinese, English,
French, Russian and Spanish texts are equally authentic.
IN WITNESS WHEREOF the undersigned plenipotentiaries, being duly authorized by
their respective Governments, have signed the present Convention.
* * *
Explanatory note by the UNCITRAL secretariat on the
United Nations Convention on Independent Guarantees and Stand-by Letters of
Credit*
Introduction
1. The United Nations Convention on Independent Guarantees and Stand-by Letters
of Credit was adopted and opened for signature by the General Assembly by its
resolution 50/48 of 11 December 1995.1 The Convention was prepared by the United
Nations Commission on International Trade Law (UNCITRAL).2
* This note has been prepared by the secretariat of the United Nations
Commission on International Trade Law (UNCITRAL) for informational purposes. It
is not an official commentary on the Convention.
1 The draft Convention was prepared by the Working Group on
International Contract Practices at its thirteenth to twenty-third sessions.
(For the reports of those sessions, see the following volumes of the UNCITRAL
Yearbook: Yearbook, Volume XXI: 1990 (United Nations publication, Sales No.
E.91.V.6), document A/CN.9/330; Yearbook, Volume XXII: 1991 (United Nations
publication, Sales No. E.93.V.2), documents A/CN.9/342 and A/CN.9/345; Yearbook,
Volume XXIII: 1992 (United Nations publication, Sales No. E.94.V.7), documents
A/CN.9/358 and A/CN.9/361; Yearbook, Volume XXIV: 1993 (United Nations
publication, Sales No. E.94.V.16), document A/CN.9/374 and Corr.1; Yearbook,
Volume XXV: 1994(United Nations publication, Sales No. E.95.V.20), documents
A/CN.9/388 and A/CN.9/391; and "Yearbook, volume XXVI: 1995" (to be issued
subsequently as a United Nations sales publication), documents A/CN.9/405 and
A/CN.9/408.) The deliberations of UNCITRAL on the draft Convention are reflected
in the report on the work of its twenty-eighth session (1995) (Official Records
of the General Assembly, Fiftieth Session, Supplement No. 17 (A/50/17), paras.
11-201), annex I of which contains the draft Convention as submitted by the
Commission to the General Assembly.
2 UNCITRAL is an intergovernmental body of the General Assembly that
prepares international commercial law instruments designed to assist the
international community in modernizing and harmonizing laws dealing with
international trade. Other legal instruments prepared by UNCITRAL include the
following: United Nations Convention on Contracts for the International Sale of
Goods (Official Records of the United Nations Conference on Contracts for the
International Sale of Goods, Vienna, 10 March-11 April 1980 (United Nations
publication, Sales No. E.82.V.5), part I); Convention on the Limitation Period
in the International Sale of Goods, 1974 (New York) (Official Records of the
United Nations Conference on Prescription (Limitation) in the International Sale
of Goods, New York, 20 May-14 June 1974 (United Nations publication, Sales No.
E.74.V.8), part I); United Nations Convention on the Carriage of Goods by Sea,
1978 (Hamburg) (Official Records of the United Nations Conference on the
Carriage of Goods by Sea, Hamburg, 6-31 March 1978 (United Nations publication,
Sales No. E.80.VIII.1), document A/CONF.89/13, annex I); United Nations
Convention on the Liability of Operators of Transport Terminals in International
Trade (A/CONF.152/13, annex); UNCITRAL Arbitration Rules (Official Records of
the General Assembly, Thirty-first Session, Supplement No. 17 (A/31/17), para.
57); UNCITRAL Notes on Organizing Arbitral Proceedings ("Yearbook, volume
XXVIII: 1996" (to be issued subsequently as a United Nations sales publication),
document A/CN.9/423); UNCITRAL Conciliation Rules (Official Records of the
General Assembly, Thirty-fifth Session, Supplement No. 17(A/35/17), para. 106);
Model Law on International Commercial Arbitration (1985) (Official Records of
the General Assembly, Fortieth Session, Supplement No. 17 (A/40/17, annex I);
United Nations Convention on International Bills of Exchange and International
Promissory Notes (General Assembly resolution 43/165, annex, of 9 December
1988); Model Law on International Credit Transfers (1992) (Official Records of
the General Assembly, Forty-seventh Session, Supplement No. 17(A/47/17); annex
I); UNCITRAL Model Law on Procurement of Goods, Construction and Services (1994)
(Official Records of the General Assembly, Forty-ninth Session, Supplement No.
17 and corrigendum (A/49/17 and Corr.1), annex I); and UNCITRAL Model Law on
Electronic Commerce (Official Records of the General Assembly, Fifty-first
Session, Supplement No. 17 (A/51/17), annex I).
2. The Convention is particularly designed to facilitate the use of independent
guarantees and stand-by letters of credit where only one or the other of those
instruments is traditionally in use. The Convention also solidifies recognition
of common basic principles and characteristics shared by the independent
guarantee and the stand-by letter of credit. In order to emphasize the common
umbrella of rules provided for both independent guarantees and stand-by letters
of credit and to overcome divergences that may exist in terminology, the
Convention uses the neutral term "undertaking" to refer to both types of
instruments.
3. Independent undertakings covered by the Convention are basic tools of
international commerce. They are used in a variety of situations. For example,
they are used to secure performance of contractual obligations including
construction, supply and commercial payment obligations; to secure repayment of
an advance payment in the event that such repayment is required; to secure a
winning bidder's obligation to enter into a procurement contract; to ensure
reimbursement of payment under another undertaking; to support issuance of
commercial letters of credit and insurance coverage; and to enhance
creditworthiness of public and private borrowers. Yet familiarity with one or
the other instrument covered by the Convention is not universal; there is an
absence of legislative provisions dealing with them, practices concerning the
two types of instruments have differed in certain respects, and important
questions confronting users, practitioners and courts in the daily life of these
instruments are beyond the power of the parties to settle contractually.
4. By establishing a harmonized set of rules for the two types of instruments
covered, the Convention will provide greater legal certainty in their use for
day-to-day commercial transactions, as well as marshal credit for public
borrowers. Also, by making a single legal regime available to both independent
guarantees and stand-by letters of credit, the Convention will facilitate the
issuance of both instruments in combination with each other, for example, the
issuance of a stand-by letter of credit to support the issuance of a guarantee,
or the reverse case. The Convention will further facilitate "syndications" of
lenders, by allowing them to combine more easily both types of instruments.
Lenders participating in a syndication can spread credit risk among themselves,
which enables them to extend larger volumes of credit.
5. The Convention gives legislative support to the autonomy of the parties to
apply agreed rules of practice such as the Uniform Customs and Practice for
Documentary Credits (UCP), formulated by the International Chamber of Commerce
(ICC), or other rules that may evolve to deal specifically with stand-by letters
of credit, and the Uniform Rules for Demand Guarantees (URDG, also formulated by
ICC). In addition to being essentially consistent with the solutions found in
rules of practice, the Convention supplements their operation by dealing with
issues beyond the scope of such rules. It does so in particular regarding the
question of fraudulent or abusive demands for payment and judicial remedies in
such instances. Furthermore, the deference of the Convention to the specific
terms of independent guarantees and stand-by letters of credit, including any
rules of practice incorporated therein, enables the Convention to work in tandem
with rules of practice such as UCP and URDG.
6. It should be noted that, strictly speaking, an independent guarantee or
stand-by letter of credit is an undertaking given to a beneficiary. Accordingly,
the focus of the Convention is on the relationship between the guarantor (in the
case of an independent guarantee) or the issuer (in the case of a stand-by
letter of credit) (hereinafter referred to as "guarantor/issuer") and the
beneficiary. The relationship between the guarantor/issuer and its customer (the
principal, in the case of an independent guarantee, or the applicant, in the
case of a stand-by letter of credit, hereinafter referred to as
"principal/applicant") largely falls outside the scope of the Convention. The
same may be said of the relationship between a guarantor/issuer and its
instructing party (the instructing party being, for example, a bank, requesting,
on behalf of its customer, the guarantor/issuer to issue an independent
guarantee).
7. Provided below is a summary of the main features and provisions of the
Convention.
I. SCOPE OF APPLICATION
A. Types of instruments covered
8. The scope of application of the Convention is confined to instruments of the
type understood in practice as independent guarantees (referred to as, e.g.
"demand", "first demand", "simple demand" or "bank" guarantees) or stand-by
letters of credit (article 2(1)). Those instruments can be covered by the
umbrella of the Convention because they share a wide area of common use. Both
types of instruments, which are payable upon presentation of any stipulated
documents, are used to secure against the possibility that some contingency may
occur (e.g. a breach of a contract). It may be noted that another major use in
particular of stand-by letters of credit is as an instrument to effectuate
payment of mature indebtedness ("financial" or "direct pay" stand-by letters of
credit).
9. In the undertakings covered by the Convention the guarantor/issuer promises
to pay the beneficiary upon a demand for payment. The demand may, depending upon
the terms of the undertaking, be either a "simple" demand or one having to be
accompanied by the other documents called for in the guarantee or stand-by
letter of credit. The guarantor/issuer's obligation to pay is triggered by the
presentation of a demand for payment in the form, and with any supporting
documents, as may be required by the independent guarantee or stand-by letter of
credit. The guarantor/issuer is not called on to investigate the underlying
transaction, but is merely to determine whether the documentary demand for
payment conforms on its face to the terms of the guarantee or stand-by letter of
credit. Because of this characteristic the instruments covered by the Convention
are referred to commonly as being "independent" and "documentary" in nature.
10. Reflecting practice, various types of scenarios are envisaged in which an
undertaking may be given, including at the request of the customer
("principal/applicant"), on the instruction of another entity or person
("instructing party") acting at the request of the customer of the instructing
party, or on behalf of the guarantor/issuer itself (article 2(2)).
11. Full freedom is given to the parties to exclude completely the coverage of
the Convention (article 1), with the result that another law becomes applicable.
Since the Convention, if it is applicable, is to a large extent suppletive
rather than mandatory, wide breadth is given to exclude or alter the rules of
the Convention in any given case.
B. Coverage of counter-guarantees and confirmations
12. The Convention is designed to include coverage of the "counter-guarantee". A
counter-guarantee is defined in the Convention (article 6(c)) in the same
essential terms as the basic notion of "undertaking", namely, as an undertaking
given to the guarantor/issuer of another undertaking by its instructing party
and providing for payment upon simple demand or upon demand accompanied by other
documents, in conformity with the terms and any documentary conditions of the
undertaking (counter-guarantee).
13. Apart from this general treatment of counter-guarantees as "undertakings",
the Convention provides a specific provision on counter-guarantees in the
context of fraudulent or abusive demands for payment; in that context
counter-guarantees may raise questions distinct from those raised by other
undertakings covered by the Convention (see paragraph 48, below).
14. The Convention also includes in its scope confirmations of undertakings,
i.e. an undertaking added to that of, and authorized by, the guarantor/issuer. A
confirmation gives the beneficiary an option of demanding payment from the
confirmer as an alternative to demanding payment from the guarantor/issuer. By
requiring authorization of the guarantor/issuer, the Convention does not
recognize as confirmations "silent" confirmations, i.e. confirmations added
without the assent of the guarantor/issuer.
C. Instruments outside scope of Convention
15. The Convention does not apply to "accessory" or "conditional" guarantees,
i.e. guarantees in which the payment obligation of the guarantor involves more
than the mere examination of a documentary demand for payment. Thus, the
Convention does not annul or affect such other instruments in any way, nor does
it regulate or discourage their use in any way. Whether it would be preferable
to use in any given case an independent undertaking of the type covered by the
Convention, or another type of instrument, would depend on the commercial
circumstances at play and the particular interests of the parties involved.
16. Letters of credit other than stand-by letters of credit are not covered by
the Convention. However, the Convention does recognize a right of parties to
international letters of credit other than stand-by letters of credit to "opt
into" the Convention (article 1(2)). That provision has been included in
particular because the Convention provides a set of rules that parties to
commercial letters of credit may wish in their own judgement to take advantage
of, in view of the broad common ground between commercial and stand-by letters
of credit, and in view of the occasional difficulties in determining whether a
letter of credit is of a stand-by or commercial variety.
D. Definition of "independence"
17. While it is widely recognized that undertakings of the type covered by the
Convention are "independent", there has been a lack of uniformity
internationally in the understanding and recognition of that essential
characteristic. The Convention will promote such uniformity by providing a
definition of "independence" (article 3). That definition is phrased in terms of
the undertaking not being dependent upon the existence or validity of the
underlying transaction, or upon any other undertaking. The latter reference, to
other undertakings, clarifies the independent nature of a counter-guarantee from
the guarantee that it relates to and of a confirmation from the stand-by letter
of credit or independent guarantee that it confirms.
18. In addition, to fall within the scope of the Convention, an undertaking must
not be subject to any terms or conditions not appearing in the undertaking. It
is specified that, to fall within the Convention, an undertaking should not be
subject to any future, uncertain act or event, with the exception of
presentation of a demand and other documents by the beneficiary or of any other
such act or event that falls within the "sphere of operations" of the
guarantor/issuer. That is in line with the notion that the role of the
guarantor/issuer in the case of independent undertakings is one of paymaster
rather than investigator.
E. "Documentary" character of undertakings covered
19. As an adjunct to being "independent" from the underlying transaction, the
undertakings covered by the Convention possess a "documentary" character. This
means that the duties of the guarantor/issuer when faced with a demand for
payment are limited to examining the demand for payment and any supporting
documents to ascertain whether the demand and other documents submitted conform
"facially" with what is called for under the terms of the independent guarantee
or stand-by letter of credit. The effect of this rule is that undertakings
possessing "non-documentary conditions" are outside the scope of the Convention.
The only conditions which would not have to be documentary in nature would
relate to acts or events within the sphere of operations of the
guarantor/issuer. A simple example of the latter would be a determination by the
guarantor/issuer as to whether a required monetary deposit had been made in a
designated account maintained with that guarantor/issuer.
F. Definition of internationality
20. The Convention limits its application to undertakings that are
international. Internationality is determined on the basis of the places of
business, as specified in the undertaking, of any two of the following being in
different States: guarantor/issuer, beneficiary, principal/applicant,
instructing party, confirmer (article 4(1)). Special rules are provided for the
case of an undertaking listing more than one place of business for a party, as
well as for the case of a party not having a "place of business" as such, but
only a habitual residence (article 4(2)).
G. Connecting factors for application of the Convention
21. The Convention applies to international undertakings in either one of two
ways. The first way is linked to the location of the guarantor/issuer in a State
party to the Convention ("Contracting State") (article 1(1)(a)). The second way
in which the Convention applies is if the rules of private international law
lead to the application of the law of a Contracting State (article 1(1)(b)).
22. The Convention provides an additional layer of harmonization of law in this
field, in that its chapter VI (Conflict of laws, articles 21 and 22) supplies
the rules to be followed by courts of Contracting States in identifying in any
given case the law applicable to an independent guarantee or a stand-by letter
of credit. Those rules apply whether or not in a particular case it turns out
that the Convention is the applicable substantive law for the independent
guarantee or stand-by letter of credit in question (see paragraphs 52 and 53,
below).
II. INTERPRETATION
23. The Convention contains a general rule that interpretation of the Convention
should be with a view to its international character and the need to promote
uniformity in its application (article 5). In addition, interpretation is to
have regard for the observance of good faith in international practice.
Abstracts of any court decisions or arbitral awards applying and interpreting a
provision of the Convention will be included in the case collection system
called case law on UNCITRAL texts (CLOUT).
III. FORM AND CONTENT OF UNDERTAKING
24. The Convention provides rules on several aspects of the form and content of
undertakings, as summarized below.
A. Issuance
25. On the question of the point of time and place of issuance (i.e. when and
where the obligations of the guarantor/issuer to the beneficiary become
operative), the Convention promotes certainty in an area traditionally of some
uncertainty owing to the existence of differing notions. The Convention rule is
that issuance occurs when and where the undertaking leaves the sphere of control
of the guarantor/issuer (e.g. when it is sent to the beneficiary)(article 7(1)).
In addition, the Convention defines issuance in terms of its practical effect.
Once issued, the undertaking is available for payment in accordance with its
terms and is irrevocable.
26. As is customary in legal texts of UNCITRAL, the Convention establishes a
flexible and forward-looking form requirement for issuance. By requiring a form
that preserves a complete record of the text of the undertaking, rather than
referring to "written" form, the Convention accommodates issuance in a
non-paper-based medium (e.g. by means of electronic data interchange). It does
so by referring to issuance in any form that preserves a complete record of the
text of the undertaking and provides a generally acceptable or specifically
agreed means of authentication (article 7(2)).
27. The Convention does not deal with the question of capacity to issue
undertakings (i.e. who is permitted to be a guarantor/issuer). That question,
which raises regulatory or other legal implications that differ from country to
country, is left to national law.
B. Amendment
28. Legislative recognition is given by the Convention to the rule of practice
that amendment of an undertaking requires acceptance by the beneficiary in order
to take effect, unless it is otherwise stipulated (article 8(3)). The Convention
takes cognizance of the possibility that an amendment might be authorized in
advance by the beneficiary. In such cases, the amendment takes effect upon
issuance (article 8(2)).
29. In one of the few provisions of the Convention that directly addresses the
relationship between the principal/applicant and the guarantor/issuer, it is
made clear that an amendment has no effect on the rights and obligations of the
principal/applicant, or for that matter of an instructing party or of a
confirmer, unless such other person consents to the amendment (article 8(4)).
C. Transfer and assignment
30. The Convention reflects the distinction drawn in practice between, on the
one hand, transfer to another person of the original beneficiary's right to
demand payment and, on the other hand, assignment of the proceeds of the
undertaking, if payment is made. In the case of assignment of proceeds, as
contrasted with transfer, the right to demand payment remains with the original
beneficiary, the assignee being given only the right to receive the proceeds of
payment if such payment occurs.
31. Regarding transfer, the Convention endorses the dual requirement, found in
UCP, that the undertaking itself must state that it is transferable, and that,
in addition, any actual transfer must be consented to by the guarantor/issuer
(article 9). The rationale is that a change in the person who is to present the
demand for payment and any accompanying documents may increase the risk assumed
by the guarantor/issuer (e.g. if the guarantor/issuer would feel that the
proposed transferee was less reliable or familiar than the originally designated
beneficiary). For that reason guarantor/issuers are given the opportunity to
consent to any given transfer.
32. Regarding assignment of proceeds, the beneficiary of the undertaking may,
unless otherwise stipulated in the undertaking or elsewhere agreed, assign the
proceeds (article 10(1)). If the beneficiary assigns the proceeds and if the
guarantor/issuer or another person obliged to effect payment has received a
notice originating from the beneficiary, payment to the assignee discharges the
obligor, to the extent of its payment, from liability under the undertaking
(article 10(2)).
D. Cessation of right to demand payment
33. The Convention gives legislative effect to notions of cessation of the right
to demand payment that are widely followed in practice, though not yet
universally recognized in national laws or judicial precedents. Under the
Convention (article 11), the events that trigger cessation include: a statement
by the beneficiary releasing the guarantor/issuer; a termination of the
undertaking agreed by the guarantor/issuer; full payment of the amount
stipulated in the undertaking, unless the undertaking provided for automatic
renewal or increase of the amount available; expiry of the validity period of
the undertaking. By affirming that the presentation of the demand for payment
has to occur prior to the expiry of the undertaking, the Convention will help to
overcome any remaining uncertainty as to that question.
34. A degree of uncertainty still surrounds, in some jurisdictions, the question
of the effect of retention of the instrument embodying the undertaking as
regards definitive cessation of the right to demand payment. The Convention, in
line with what is regarded widely as the best practice, provides that in no case
does retention of the instrument prolong the right to demand payment if the
amount available has already been paid or if the undertaking has expired
(article 11(2)). Apart from those two contexts, the parties remain free to
stipulate a requirement of return of the undertaking in order to terminate the
right to demand payment.
E. Expiry
35. The Convention provides (article 12) that the validity period of an
undertaking expires in the following ways: at the expiry date, which may be a
fixed date or the last day of a fixed period stipulated in the undertaking; if
expiry is linked to the occurrence of an act or event, upon presentation of the
document called for in the undertaking to indicate the occurrence of the act or
event, or, if no such document is called for, by presentation by the beneficiary
of certification for that purpose; or after six years from issuance, if no
expiry date has been stipulated or if a stipulated expiry act or event has not
occurred.
IV. RIGHTS, OBLIGATIONS AND DEFENCES
A. Determination of rights and obligations
36. The rights and obligations of the guarantor/issuer and the beneficiary are
determined by the terms and conditions of the undertaking (article 13(1)).
Express reference is made in the Convention to rules of practice, general
conditions or usages (e.g. UCP, URDG) to which the undertaking is specifically
made subject. This is in line with a main purpose of the Convention, to give
legislative support to the right of commercial parties to incorporate such rules
of practice, conditions or usages. That approach ensures that the Convention
will remain a living instrument, sensitive to developments in practice,
including future revisions of rules of practice such as UCP and URDG and the
development of other international rules of practice.
37. The flexible linking of the Convention to the needs and evolving usages and
standards of commercial practice is also referred to elsewhere in the
Convention. For example, in the interpretation of the terms and conditions of an
undertaking and in settling questions not addressed by the Convention, regard is
to be had to generally accepted international rules and usages of independent
guarantee or stand-by letter of credit practice (article 13(2)).
38. Similarly, the standard of conduct of the guarantor/issuer, based on good
faith and the exercise of reasonable care, is to be defined by reference to
generally accepted standards of international practice of independent guarantees
and stand-by letters of credit (article 14(1)). While the Convention leaves open
the possibility of stipulating a standard somewhat lower than the generally
applicable standard of care, it clearly prohibits any exemption of the guarantor
from liability for lack of good faith or gross negligence.
B. Demand by beneficiary
39. As regards the beneficiary, the process of demanding and obtaining payment
involves presenting a demand for payment and any accompanying documents in
accordance with the terms of the undertaking. In view of the documentary
character of the demand, the form requirements of the Convention applicable to
the undertaking itself (see paragraph 27, above) apply to the demand (article
15(1)). The place of presentation is at the counters of the guarantor/issuer at
the place of issuance, unless some other place or person is stipulated for
payment purposes (article 15(2)).
40. In addition, the Convention provides (article 15(3)) that by virtue of
making a demand the beneficiary implicitly certifies that the demand is not made
in bad faith and that none of the circumstances exist that would justify
non-payment in accordance with the provisions of the Convention on fraudulent or
abusive demands for payment (see paragraphs 47 and 48, below).
C. Examination of demand and payment
41. The duty of the guarantor/issuer is to examine the demand and any
accompanying documents to determine whether they are in facial conformity with
the terms and conditions of the undertaking and consistent with one another
(article 16(1)). That determination is to have due regard to the applicable
standard of international practice, a formulation that ensures that the
Convention takes account of developments in practice as regards the notion of
facial conformity.
42. In a provision expressly subject to variation by the terms of the
undertaking, the guarantor/issuer is given a "reasonable time", up to a maximum
of seven days, to examine the demand and to decide whether to pay (article
16(2)). Thus, what is deemed a "reasonable time" may well be less than seven
days, but in no case more than seven days, unless some different period is
stipulated. This takes into account that the time needed for examination of the
demand would depend upon the nature of each case (e.g. volume and complexity of
documents to be examined).
43. If a decision is taken not to pay, the guarantor/issuer is required to
promptly so notify the beneficiary, indicating the grounds therefor (article
16(2)). If the demand is determined to be conforming, payment is to be made
promptly, or at any later time stipulated in the undertaking.
44. The Convention recognizes that the guarantor/issuer may, unless the
undertaking provides otherwise, discharge the payment obligation by exercising a
right of set-off that is generally available under the applicable law (article
18). However, the Convention does not recognize any such right of set-off with
respect to claims assigned by the principal/applicant or instructing party, as
such a possibility would risk undermining the purpose of the undertaking.
D. Fraudulent or abusive demands for payment
45. A main purpose of the Convention is to establish greater uniformity
internationally in the manner in which guarantor/issuers and courts respond to
allegations of fraud or abuse in demands for payment under independent
guarantees and stand-by letters of credit. That has been a particularly
troublesome and disruptive area in practice because allegations of fraud have a
tendency to arise when there is a dispute as to the performance of an underlying
contractual obligation. That difficulty and the resulting uncertainty have been
compounded further because of the divergent notions and ways with which such
allegations have been treated both by guarantor/issuers and by courts approached
for provisional measures to block payment.
46. The Convention helps to ameliorate the problem by providing an
internationally agreed general definition of the types of situations in which an
exception to the obligation to pay against a facially compliant demand would be
justified (article 19(1)). The definition encompasses fact patterns covered in
different legal systems by notions such as "fraud" or "abuse of right". The
definition refers to situations in which it is manifest and clear that any
document is not genuine or has been falsified, that no payment is due on the
basis asserted in the demand or that the demand has no conceivable basis.
47. For additional precision, the Convention provides illustrative examples of
cases in which a demand would be deemed to have no conceivable basis (article
19(2); e.g. the underlying obligation has been undoubtedly fulfilled to the
satisfaction of beneficiary; the fulfilment of the underlying obligation clearly
has been prevented by wilful misconduct of beneficiary; in the case of a demand
under a counter-guarantee, the beneficiary of the counter-guarantee has made
payment in bad faith as guarantor/issuer of the undertaking to which the
counter-guarantee relates).
48. The Convention, by entitling but not imposing a duty on the
guarantor/issuer, as against the beneficiary, to refuse payment when confronted
with fraud or abuse (article 19(1)), strikes a balance between different
interests and considerations at play. By allowing discretion to the
guarantor/issuer acting in good faith, the Convention is sensitive to the
concern of guarantor/issuers over preserving the commercial reliability of
undertakings as promises that are independent from underlying transactions.
49. At the same time, the Convention affirms that the principal/applicant, in
the situations referred to, is entitled to provisional court measures to block
payment (article 19(3)). This recognizes that it is the proper role of courts,
and not of guarantors/issuers, to investigate the facts of underlying transactions. Furthermore, the Convention does not annul any rights that the
principal/applicant may have in accordance with its contractual relationship
with the guarantor/issuer to avoid reimbursement of payment made in contravention of the terms of that contractual relationship.
V. PROVISIONAL COURT MEASURES
50. Apart from entitling a principal/applicant or an instructing party to provisional court measures blocking payment or freezing proceeds of an
undertaking in the types of cases referred to above, the Convention establishes
a standard of proof to be met in order to obtain such provisional measures
(article 20(1)). That standard refers to ordering of provisional measures on the
basis of immediately available strong evidence of a high probability that the
fraudulent or abusive circumstances are present. Reference is also made to
consideration of whether the principal/applicant would be likely to suffer
serious harm in the absence of the provisional measures and to the possibility
of the court requiring security to be posted.
51. While authorizing provisional court measures in the cases concerned, the
Convention minimizes the use of judicial procedures to interfere in undertakings
by limiting the granting of provisional court measures to those types of cases,
with one additional type of case. Provisional court orders blocking payment or
freezing proceeds are also authorized in the case of use of an undertaking for a
criminal purpose (article 20(3)).
VI. CONFLICT OF LAWS
52. As noted above (paragraph 22), the Convention contains in chapter VI conflict of law rules to be applied by the courts of Contracting States in order
to identify the law applicable to international undertakings as defined in
article 2, regardless of whether in any given case the Convention itself would
prove to be the applicable law. Those conflict of laws rules recognize a choice
of law stipulated in the undertaking or demonstrated by its terms or conditions,
or agreed elsewhere by the guarantor/issuer and the beneficiary (article 21).
53. In the absence of a choice of law as described above, the Convention provides for application to the undertaking of the law of the State where the
guarantor/issuer has that place of business at which the undertaking was issued
(article 22).
VII. FINAL CLAUSES
54. The final clauses (articles 23-29) contain the usual provisions relating to
the Secretary-General of the United Nations as depositary and providing that the
Convention is subject to ratification, acceptance or approval by those States
that have signed it by 11 December 1997, that it is open to accession by all
States that are not signatory States and that the text is equally authentic in
Arabic, Chinese, English, French, Russian and Spanish.
55. In view of its largely suppletive character, as well as of the right of
parties to exclude the Convention in its entirety, no reservations are permitted. The Convention enters into force one year from the date of deposit of
the fifth instrument of ratification, acceptance, approval or accession.
* * *
Further information may be obtained from:
UNCITRAL Secretariat
Vienna International Centre
P.O. Box 500
A-1400 Vienna
Austria
Telephone: (43-1) 26060-4060 or 4061
Telefax: (43-1) 26060-5813
Telex: 135612 uno a
E-mail: uncitral@unov.un.or.at
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