Luís Menezes Leitão The United Nations Convention on Independent Guarantees

Introduction Used collaterals in international commercial practice Used collaterals in international commercial practice Ruled by United Nations Convention on Independent Guarantees and Stand-by Letters of Credit Ruled by United Nations Convention on Independent Guarantees and Stand-by Letters of Credit Entered into force on January 1th 2000 Entered into force on January 1th 2000 Major trading nations reluctant to ratify Major trading nations reluctant to ratify

Scope of application Established in Article 1 of Convention Established in Article 1 of Convention Only applicable to international undertaking (Article 2) Only applicable to international undertaking (Article 2) Is international if places of business of any two of following are in different States: guarantor/issuer, beneficiary, principal/applicant, instructing party, confirmer (Article 4) Is international if places of business of any two of following are in different States: guarantor/issuer, beneficiary, principal/applicant, instructing party, confirmer (Article 4) Does not apply to accessory/conditional guarantees Does not apply to accessory/conditional guarantees

Scope of application Right of parties to international letters of credit other than stand-by letters of credit to "opt into" the Convention (Article 1(2)) Right of parties to international letters of credit other than stand-by letters of credit to "opt into" the Convention (Article 1(2)) Place of business of the guarantor in a contracting State or rules of private international lead to application of the law of a Contracting State. Place of business of the guarantor in a contracting State or rules of private international lead to application of the law of a Contracting State.

Definition of undertaking Independent commitment given by bank/other institution/person to pay to the beneficiary a certain amount upon simple demand or upon demand accompanied by other documents Independent commitment given by bank/other institution/person to pay to the beneficiary a certain amount upon simple demand or upon demand accompanied by other documents In conformity with terms and any documentary conditions In conformity with terms and any documentary conditions These indicate or is to be inferred, that payment is due because: default in the performance of an obligation; another contingency; or for money borrowed or advanced; or on account of any mature indebtedness undertaken by the principal/applicant or another person". (Article 2) These indicate or is to be inferred, that payment is due because: default in the performance of an obligation; another contingency; or for money borrowed or advanced; or on account of any mature indebtedness undertaken by the principal/applicant or another person". (Article 2)

Definition of undertaking Two kinds of independent guarantees: Two kinds of independent guarantees: Independent guarantees upon demand accompanied by other documents Independent guarantees upon demand accompanied by other documents Independent guarantees upon simple demand. Independent guarantees upon simple demand.

The independence of the undertaking An undertaking is independent where the guarantor/issuer's obligation to the beneficiary is not: a) Dependent upon existence or validity of any underlying transaction, or upon any other undertaking or b) Subject to any term or condition not appearing in the undertaking, or any future, uncertain act/event except presentation of documents or another act/event within a guarantor/ issuer's sphere of operations. (Article 3)

The counter-guarantee and the confirmation The term "undertaking" includes "counter- guarantee" and "confirmation of the undertaking" (Article 6(c)) The term "undertaking" includes "counter- guarantee" and "confirmation of the undertaking" (Article 6(c)) Article 6(c) explains the meaning of “ counter-guarantee and “ confirmation ” of an undertaking Article 6(c) explains the meaning of “ counter-guarantee and “ confirmation ” of an undertaking

The different ways to give undertaking. Three diferent ways (Article 2(2)) Three diferent ways (Article 2(2)) a) Upon request or upon instruction of customer ("principal/applicant") of the guarantor/ issuer; b) Upon instruction of another bank/institution/person ("instructing party") that acts at the request of the customer ("principal/applicant") of that instructing party; c) On behalf of the guarantor/issuer

Form of the undertaking Article 7 (2) Article 7 (2) Verbal form is not acceptable Verbal form is not acceptable Any other form is accepted (eg. electronic document) Any other form is accepted (eg. electronic document)

Effects of the undertaking Produces effects since issuance Produces effects since issuance Issuance occurs when and where the undertaking leaves the sphere of control of the guarantor/issuer concerned (Article 7 (1)) Issuance occurs when and where the undertaking leaves the sphere of control of the guarantor/issuer concerned (Article 7 (1)) After its issuance, it is irrevocable (Article 7(4)) After its issuance, it is irrevocable (Article 7(4))

Transfer and assignment of the claim Right of beneficiary to demand payment not possible to assign to third person, unless foreseen in the undertaking (Article 9 (1) of the Convention) Right of beneficiary to demand payment not possible to assign to third person, unless foreseen in the undertaking (Article 9 (1) of the Convention) Proceeds to which the beneficiary may be/become entitled can be assigned to a third person, unless otherwise stipulated/agreed Proceeds to which the beneficiary may be/become entitled can be assigned to a third person, unless otherwise stipulated/agreed Distinction between right to demand payment and proceeds, if payment is made Distinction between right to demand payment and proceeds, if payment is made

Termination of right to demand payment If guarantor/issuer receives statement by the beneficiary of release from liability If guarantor/issuer receives statement by the beneficiary of release from liability If beneficiary and guarantor/issuer agree on the termination If beneficiary and guarantor/issuer agree on the termination If amount available is paid (unless undertaking provides for automatic renewal/automatic increase of the amount available/otherwise provides for continuation) If amount available is paid (unless undertaking provides for automatic renewal/automatic increase of the amount available/otherwise provides for continuation) If validity period of the undertaking expires If validity period of the undertaking expires (Article 11(1))

Termination of right to demand payment Expiry ruled by Article 12 Expiry ruled by Article 12 Stipulation of parties Stipulation of parties If not stipulated, six years after the issuance If not stipulated, six years after the issuance

The demand for payment Ruled by Article 15 of Convention Ruled by Article 15 of Convention Any demand for payment shall be made in a form referred to in paragraph (2) of article 7 and in conformity with the terms and conditions Any demand for payment shall be made in a form referred to in paragraph (2) of article 7 and in conformity with the terms and conditions The demand and any certification (or other document) 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 (unless otherwise stipulated) The demand and any certification (or other document) 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 (unless otherwise stipulated)

Payment The guarantor/issuer when discharging his obligations shall act in good faith and exercise reasonable care having due regard to generally accepted standards of international practice –(Article 14) The guarantor/issuer when discharging his obligations shall act in good faith and exercise reasonable care having due regard to generally accepted standards of international practice –(Article 14)

Set-off Issuer/guarantor may discharge payment obligation by exercising a set-off Issuer/guarantor may discharge payment obligation by exercising a set-off Set-off may not be based on claim assigned by the applicant or instructing party Set-off may not be based on claim assigned by the applicant or instructing party Article 18 Article 18

Exceptions to the payment obligation Any document is not genuine/falsified; Any document is not genuine/falsified; No payment is due, according to demand and supporting documents; or No payment is due, according to demand and supporting documents; or The demand has no conceivable basis. The demand has no conceivable basis. Article 19 Article 19

Exceptions to the payment obligation Exception of no conceivable basis may occur in the following situations (Article 19(2)): Exception of no conceivable basis may occur in the following situations (Article 19(2)): a) The contingency/risk has not materialized; b) The underlying obligation of principal/applicant has been declared invalid by court/arbitral tribunal (unless such contingency falls within risk covered by the undertaking); c) The underlying obligation has been fulfilled d) Fulfilment prevented by willful misconduct of the beneficiary; e) In case of demand under a counter-guarantee, the beneficiary made payment in bad faith as guarantor/issuer

Provisional court measures Injunction restraining the beneficiary from receiving payment and related measures Injunction restraining the beneficiary from receiving payment and related measures The court may: The court may: a) Issue provisional order to the effect that the beneficiary does not receive payment b) Issue provisional order to the effect that the proceeds paid to the beneficiary are blocked

Conflict of laws Undertaking governed by the law of the choice Undertaking governed by the law of the choice Stipulated/demonstrated by terms and conditions of the undertaking/agreed elsewhere by guarantor/issuer and beneficiary (Article 21) Stipulated/demonstrated by terms and conditions of the undertaking/agreed elsewhere by guarantor/issuer and beneficiary (Article 21) When no choice of law, undertaking is governed by the law of the State where the guarantor/issuer has the place of business where the undertaking was issued (Article 22). When no choice of law, undertaking is governed by the law of the State where the guarantor/issuer has the place of business where the undertaking was issued (Article 22).