United Nations 1996
C O N T E N T S
EXPLANATORY NOTE BY THE UNCITRAL SECRETARIAT ON THE UNITED NATIONS CONVENTION ON
INDEPENDENT GUARANTEES AND STAND-BY LETTERS OF CREDIT
INTRODUCTION
I. SCOPE OF APPLICATION
II. INTERPRETATION
III. FORM AND CONTENT OF UNDERTAKING
IV. RIGHTS, OBLIGATIONS AND DEFENCES
V. PRESENTATION OF DEMAND AND PAYMENT
VI. CONFLICT OF LAWS
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:
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:
(3) Payment may be stipulated in the undertaking to be made in any form, including:
(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:
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:
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:
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:
(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:
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:
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:
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:
(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:
(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:
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.
* * *
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.
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