Luís Menezes Leitão Luís Menezes Leitão

The United Nations The United Nations Convention on Convention on

Independent GuaranteesIndependent Guarantees

IntroductionIntroduction

Used collaterals in international Used collaterals in international commercial practicecommercial practice

Ruled by Ruled by United Nations Convention United Nations Convention on Independent Guarantees and on Independent Guarantees and Stand-by Letters of CreditStand-by Letters of Credit

Entered into force on January 1th Entered into force on January 1th 20002000

Major trading nations reluctant to Major trading nations reluctant to ratifyratify

Scope of applicationScope of application

Established in Article 1 of ConventionEstablished in Article 1 of Convention Only applicable to international Only applicable to international

undertaking (Article 2)undertaking (Article 2) Is international if places of business of Is international if places of business of

any two of following are in different any two of following are in different States: States: guarantor/issuer, beneficiary, guarantor/issuer, beneficiary, principal/applicant, instructing party, principal/applicant, instructing party, confirmer (Article 4)confirmer (Article 4)

Does not apply to Does not apply to accessory/conditional guaranteesaccessory/conditional guarantees

Scope of applicationScope of application

Right of parties to international Right of parties to international letters of credit other than stand-by letters of credit other than stand-by letters of credit to "opt into" the letters of credit to "opt into" the Convention (Article 1(2))Convention (Article 1(2))

Place of business of the guarantor in Place of business of the guarantor in a contracting State or rules of private a contracting State or rules of private international lead to application of international lead to application of the law of a Contracting State.the law of a Contracting State.

Definition of undertakingDefinition of undertaking Independent commitment given by Independent commitment given by

bank/other institution/person to pay to the bank/other institution/person to pay to the beneficiary a certain amount upon simple beneficiary a certain amount upon simple demand or upon demand accompanied by demand or upon demand accompanied by other documentsother documents

In conformity with terms and any In conformity with terms and any documentary conditionsdocumentary conditions

These indicate or is to be inferred, that These indicate or is to be inferred, that payment is due because: default in the payment is due because: default in the performance of an obligation; another performance of an obligation; another contingency; or for money borrowed or contingency; or for money borrowed or advanced; or on account of any mature advanced; or on account of any mature indebtedness undertaken by the indebtedness undertaken by the principal/applicant or another person". principal/applicant or another person". (Article 2)(Article 2)

Definition of undertakingDefinition of undertaking

Two kinds of independent guarantees:Two kinds of independent guarantees: Independent guarantees upon Independent guarantees upon

demand accompanied by other demand accompanied by other documentsdocuments

Independent guarantees upon simple Independent guarantees upon simple demand. demand.

The independence of the undertakingThe independence of the undertaking

An undertaking is independent where the An undertaking is independent where the guarantor/issuer's obligation to the beneficiary guarantor/issuer's obligation to the beneficiary is not:is not:

a) Dependent upon existence or validity of any a) Dependent upon existence or validity of any underlying transaction, or upon any other underlying transaction, or upon any other undertaking orundertaking or

b) Subject to any term or condition not appearing b) Subject to any term or condition not appearing in the undertaking, or any future, uncertain in the undertaking, or any future, uncertain act/event except presentation of documents or act/event except presentation of documents or another act/event within a guarantor/ issuer's another act/event within a guarantor/ issuer's sphere of operations.sphere of operations.

(Article 3)(Article 3)

The counter-guarantee and the The counter-guarantee and the confirmationconfirmation

The term "undertaking" includes The term "undertaking" includes "counter-guarantee" and "counter-guarantee" and "confirmation of the undertaking""confirmation of the undertaking" (Article 6(c))(Article 6(c))

Article 6(c) explains the meaning of Article 6(c) explains the meaning of ““counter-guarantee and counter-guarantee and ““confirmatioconfirmationn ”” of an undertaking of an undertaking

The different ways to give The different ways to give undertaking.undertaking.

Three diferent ways (Article 2(2))Three diferent ways (Article 2(2))

a) a) Upon request or upon instruction of customer Upon request or upon instruction of customer ("principal/applicant") of the guarantor/ issuer;("principal/applicant") of the guarantor/ issuer;

b) b) Upon instruction of another Upon instruction of another bank/institution/person ("instructing party") bank/institution/person ("instructing party") that acts at the request of the customer that acts at the request of the customer ("principal/applicant") of that instructing ("principal/applicant") of that instructing party; party;

c) On behalf of the guarantor/issuerc) On behalf of the guarantor/issuer

Form of the undertakingForm of the undertaking

Article Article 7 (2)7 (2) Verbal form is not acceptableVerbal form is not acceptable Any other form is accepted (eg. Any other form is accepted (eg.

electronic document)electronic document)

Effects of the undertakingEffects of the undertaking

Produces effects since issuanceProduces effects since issuance Issuance occurs when and where the Issuance occurs when and where the

undertaking leaves the sphere of undertaking leaves the sphere of control of the guarantor/issuer control of the guarantor/issuer concernedconcerned ( (Article 7 (1))Article 7 (1))

After its issuance, it is irrevocable After its issuance, it is irrevocable (Article 7(4))(Article 7(4))

Transfer and assignment of the Transfer and assignment of the claimclaim

Right of beneficiary to demand Right of beneficiary to demand payment not possible to assign to third payment not possible to assign to third person, unless foreseen in the person, unless foreseen in the undertaking (undertaking (Article 9 (1) of the Article 9 (1) of the Convention)Convention)

Proceeds to which the beneficiary may Proceeds to which the beneficiary may be/become entitled can be assigned to be/become entitled can be assigned to a third person, unless otherwise a third person, unless otherwise stipulated/agreedstipulated/agreed

Distinction between right to demand Distinction between right to demand payment and proceeds, if payment is payment and proceeds, if payment is mademade

Termination of right to demand Termination of right to demand paymentpayment

If guarantor/issuer receives statement by If guarantor/issuer receives statement by the beneficiary of release from liabilitythe beneficiary of release from liability

If beneficiary and guarantor/issuer agree on If beneficiary and guarantor/issuer agree on the terminationthe termination

If amount available is paid (unless If amount available is paid (unless undertaking provides for automatic undertaking provides for automatic renewal/automatic increase of the amount renewal/automatic increase of the amount available/otherwise provides for available/otherwise provides for continuation)continuation)

If validity period of the undertaking expiresIf validity period of the undertaking expires(Article 11(1))(Article 11(1))

Termination of right to demand Termination of right to demand paymentpayment

Expiry ruled by Article 12Expiry ruled by Article 12 Stipulation of partiesStipulation of parties If not stipulated, six years after the If not stipulated, six years after the

issuanceissuance

The demand for paymentThe demand for payment

Ruled by Article 15 of ConventionRuled by Article 15 of Convention Any demand for payment shall be made in Any demand for payment shall be made in

a form referred to in paragraph (2) of a form referred to in paragraph (2) of article 7 and in conformity with the terms article 7 and in conformity with the terms and conditionsand conditions

The demand and any certification (or other The demand and any certification (or other document) shall be presented, within the document) shall be presented, within the time that a demand for payment may be time that a demand for payment may be made, to the guarantor/issuer at the place made, to the guarantor/issuer at the place where the undertaking was issued (unless where the undertaking was issued (unless otherwise stipulated) otherwise stipulated)

PaymentPayment

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

Set-offSet-off

Issuer/guarantor may discharge Issuer/guarantor may discharge payment obligation by exercising a payment obligation by exercising a set-off set-off

Set-off may not be based on claim Set-off may not be based on claim assigned by the applicant or assigned by the applicant or instructing partyinstructing party

Article 18Article 18

Exceptions to the payment Exceptions to the payment obligationobligation

Any document is not Any document is not genuine/falsified;genuine/falsified;

No payment is due , according to No payment is due , according to demand and supporting documents; demand and supporting documents; oror

The demand has no conceivable The demand has no conceivable basis.basis.

Article 19Article 19

Exceptions to the payment Exceptions to the payment obligationobligation

Exception of no conceivable basis may occur in Exception of no conceivable basis may occur in the following situations (Article 19(2)):the following situations (Article 19(2)):

a) The contingency/risk has not materialized;a) The contingency/risk has not materialized;b) The underlying obligation of principal/applicant b) The underlying obligation of principal/applicant

has been declared invalid by court/arbitral has been declared invalid by court/arbitral tribunal (unless such contingency falls within risk tribunal (unless such contingency falls within risk covered by the undertaking);covered by the undertaking);

c) The underlying obligation has been fulfilledc) The underlying obligation has been fulfilledd) d) FulfilmentFulfilment prevented by willful misconduct of the prevented by willful misconduct of the

beneficiary;beneficiary;e) In case of demand under a counter-guarantee, e) In case of demand under a counter-guarantee,

the beneficiary made payment in bad faith as the beneficiary made payment in bad faith as guarantor/issuerguarantor/issuer

Provisional court measuresProvisional court measures

Injunction restraining the beneficiary Injunction restraining the beneficiary from receiving payment and related from receiving payment and related measuresmeasures

The court may:The court may:a) Issue provisional order to the effect a) Issue provisional order to the effect

that the beneficiary does not receive that the beneficiary does not receive paymentpayment

b) Issue provisional order to the effect b) Issue provisional order to the effect that the proceeds paid to the that the proceeds paid to the beneficiary are blockedbeneficiary are blocked

Conflict of lawsConflict of laws

Undertaking governed by the law of the Undertaking governed by the law of the choicechoice

Stipulated/demonstrated by terms and Stipulated/demonstrated by terms and conditions of the undertaking/agreed conditions of the undertaking/agreed elsewhere by guarantor/issuer and elsewhere by guarantor/issuer and beneficiary (Article 21)beneficiary (Article 21)

When no choice of law, undertaking is When no choice of law, undertaking is governed by the law of the State where the governed by the law of the State where the guarantor/issuer has the place of business guarantor/issuer has the place of business where the undertaking was issued (Article where the undertaking was issued (Article 22).22).