AUGSBURG SUMMER SCHOOL 2019 Independent guarantees (and letters of credit) Prof Charl Hugo Professor of Banking Law and Director of the Centre for Banking Law University of Johannesburg chugo@uj.ac.za

Scope Seminar deals with Introductory issues: letters of credit and the contracts underlying them Introductory issues: independent guarantees and the contracts underlying them Foundations of the law of letters of credit and independent guarantees

Introductory issues: letters of credit Context: international sale Risks and problems faced by the parties Seller Economic risk Political risk Cash flow Buyer Economic risk: quality control Financier Security

Introductory issues: letters of credit Context: international sale Risks and problems faced by the parties Documentary nature Commercial invoice Transport document Insurance document Different certificates

Introductory issues: letters of credit Context: international sale Risks and problems faced by the parties Documentary nature Payment clause Payment in advance Open account Documentary collection (ICC’s URC) Letter of credit (ICC’s UCP)

Documentary collections: D/P Buyer Seller (D) docs (A) docs (F) money (C) money (B) docs Collecting bank Remitting bank (E) money

Letter of credit: payment mandate Buyer Issuing bank sale reimbursement letter of credit Advising bank Nominated bank payment Seller

Letter of credit: deferred payment mandate Buyer Issuing bank sale reimbursement letter of credit Advising bank Nominated bank Seller discounting transaction

Introductory issues: independent guarantees Context: wide – prevalent - construction industry Major contracts – major risks Crucial aspects of construction contracts Parties Employer Contractor Subcontractor Principal agent/engineer

Introduction: Guarantees and the contracts underlying them Context: wide – prevalent - construction industry Major contracts – major risks Crucial aspects of construction contracts Parties Standard form contract Reasons JBCC/GCC/FIDIC/NEC

Introduction: Guarantees and the contracts underlying them Prevalent context: construction industry Large contracts – large risks Crucial aspects of construction contracts Parties Standard form contract Staged contract Payment Stages of completion

Introduction: Guarantees and the contracts underlying them Prevalent context: construction industry Large contracts – large risks Crucial aspects of construction contracts Parties Standard form contract Staged contract Risks From employer’s perspective Failure to perform/perform properly Bankruptcy Damage to works or site

Introduction: Guarantees and the contracts underlying them Prevalent context: construction industry Large contracts – large risks Crucial aspects of construction contracts Parties Standard form contract Staged contract Risks From employer’s perspective From contractor’s perspective Payment Damage to works or site

Introduction: Guarantees and the contracts underlying them Prevalent context: construction industry Large contracts – large risks Crucial aspects of construction contracts Parties Standard form contract Staged contract Risks From employer’s perspective From contractor’s perspective Guarantees and Insurance

Construction guarantee mandate Contractor Issuing bank $10 m guarantee Guarantees performance to max of 10% of contract price construction contract $100 m doc demand Employer

Advance payment guarantee mandate Contractor Issuing bank $10 m upfront $10 m guarantee construction contract $100 m doc demand Employer

Payment guarantee Issuing bank Employer Contractor mandate $10 m guarantee construction contract $100 m doc demand Contractor

Retention guarantee Issuing bank Contractor Employer mandate $10 m guarantee Guarantees payment of retention monies construction contract $100m providing for 10% retention doc demand Employer

Four-party guarantee SA Issuing bank SA Contractor in India Indian Counter guarantee mandate Indian Issuing bank construction contract $100 m doc demand $10 m guarantee Guarantees performance to max of 10% of contract price Employer (Indian)

Foundational principles Letter of credit and demand guarantee is independent of the underlying contract and the mandate To be paid the beneficiary must comply (strictly?) with the terms of the guarantee or the letter of credit To be reimbursed the paying bank must comply (strictly?) with the terms of the guarantee or the letter of credit