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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
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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
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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
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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
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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)
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Documentary collections: D/P
Buyer Seller (D) docs (A) docs (F) money (C) money (B) docs Collecting bank Remitting bank (E) money
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Letter of credit: payment
mandate Buyer Issuing bank sale reimbursement letter of credit Advising bank Nominated bank payment Seller
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Letter of credit: deferred payment
mandate Buyer Issuing bank sale reimbursement letter of credit Advising bank Nominated bank Seller discounting transaction
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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
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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
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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
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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
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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
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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
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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
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Advance payment guarantee
mandate Contractor Issuing bank $10 m upfront $10 m guarantee construction contract $100 m doc demand Employer
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Payment guarantee Issuing bank Employer Contractor mandate
$10 m guarantee construction contract $100 m doc demand Contractor
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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
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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)
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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
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