DRAFT
Commentary for UN Convention on International Independent Guarantees and
Standby Letters of Credit
The purpose of this Commentary is to deal with apparent inconsistencies between the Convention and Article 5 of the Uniform Commercial Code. This Commentary has been prepared by a Committee made up of representatives of the Uniform Law Commission and the American Law Institute. The Committee has received useful advice from Canadian and Mexican letter of credit experts who are involved with the consideration of the Convention in their respective countries.
Since the Convention is short and quite general, it does not deal with many topics covered in Article 5 of the UCC or in the Uniform Customs and Practices (UCP) or the International Standby Practices (ISP 98). When an undertaking incorporates one of the trade practice documents (such as ISP 98 or UCP 600), the trade practice so incorporated will fill any omission that is left by the Convention if the trade practice covers the omission. Paragraph 5 of the Secretariat’s Commentary to the Convention is in accord with this; it notes that the Convention “gives legislative support to the autonomy of the parties to apply agreed rules of practice such as the [UCP].” In some cases no practice will be incorporated by the undertaking and in others the incorporated practice will have no provision; when that is so the Commentary below generally directs one to “other law.” Other law might be the applicable rules of contract or they might be Article 5 of the Uniform Commercial Code.
The following commentary is divided according to the Articles of the Convention:
Article 1. Scope of application
(1) This Convention applies to an
international undertaking referred to in article 2:
(a) If the place of business of the guarantor/issuer
at which the undertaking is issued is in a
(b) If the rules of private international law
lead to the application of the law of a
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.
An undertaking’s incorporation of the UCP or ISP is not the adoption of “other law” as that term is used in Article 1, but such incorporation might well change the rule that would otherwise prevail under the Convention.
To understand the relationship
between Article 1 and Articles 21 and 22 consider the following example. Assume
that
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:
(a) At the request or on the instruction of the
customer ("principal/applicant") of the guarantor/issuer;
(b) On the instruction of another bank,
institution or person ("instructing party") that acts at the request
of the customer ("principal/applicant") of that instructing party; or
(c) On behalf of the guarantor/issuer itself.
(3) Payment may be stipulated in the
undertaking to be made in any form, including:
(a) Payment in a specified currency or unit of
account;
(b) Acceptance of a bill of exchange (draft);
(c) Payment on a deferred basis;
(d) Supply of a specified item of value.
(4) The undertaking may stipulate that the
guarantor/issuer itself is the beneficiary when acting in favour of another
person.
The undertakings brought within the Convention by Article 2 include the variant of standby letters of credit known as “direct pay” letters, as stated in the Secretariat’s commentary in paragraph 8, but do not include commercial letters of credit.
The limitation in Article 2 to undertakings that require payment upon presentation of a “demand,” possibly accompanied with “documents,” is the same as the limitation imposed in Article 5 of the UCC by Sections 5-102(a)(10) and 5-103(d). That an issuer not be burdened with the duty of a conventional guarantor – to make an independent investigation of default – is a critical distinction between letters of credit and independent guarantees on the one hand and dependent or conventional guarantees on the other. Paragraph 9 of the Secretariat’s Commentary similarly states that 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.”
Article 6. Definitions
For the purposes of this Convention and
unless otherwise indicated in a provision of this Convention or required by the
context:
(a) "Undertaking" includes
"counter-guarantee" and "confirmation of an undertaking";
(b) "Guarantor/issuer" includes
"counter-guarantor" and "confirmer";
(c) "Counter-guarantee" means 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, indicating, or from which it is to
be inferred, that payment under that other undertaking has been demanded from,
or made by, the person issuing that other undertaking;
(d) "Counter-guarantor" means the
person issuing a counter-guarantee;
(e) "Confirmation" of an undertaking
means an undertaking added to that of the guarantor/issuer, and authorized by
the guarantor/issuer, providing the beneficiary with the option of demanding
payment from the confirmer instead of from the guarantor/issuer, upon simple
demand or upon demand accompanied by other documents, in conformity with the
terms and any documentary conditions of the confirmed undertaking, without
prejudice to the beneficiary's right to demand payment from the
guarantor/issuer;
(f) "Confirmer" means the person
adding a confirmation to an undertaking;
(g)
"Document"
means a communication made in a form that provides a complete record thereof.
That “Document” is defined broadly enough to include digital documents does not by itself authorize one who is making presentment under the Convention to present documents in non-paper form. Thus where there is no authority in the undertaking or in the relevant practice to authorize the use of a digital document, the presentation of a digital document would render the presentation non complying both under the Convention and under Article 5 of the UCC.
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 8 does not exclude the possibility that a party’s rights under the Convention may be altered by implication. For example, both the UCC and UCP contemplate that a beneficiary’s presentation under and in conformity with an amended letter of credit may constitute the beneficiary’s agreement to the amendment. See Section 5-106, comment 2, UCP Article 10c and ISP98 section 2.06c.ii. Article 8 is not different.
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.
The statement in paragraph (2) that an issuer’s payment to an assignee would, in the circumstances there stated, lead to the discharge of its obligation to pay, does not determine whether the issuer would have an obligation to pay nor does it determine whether payment to the assignor in similar circumstances would discharge any obligation it might have under the undertaking. Those matters are left to other law.
Article 11. Cessation of right to demand payment
(1) The right of the beneficiary to demand
payment under the undertaking ceases when:
(a) The guarantor/issuer has received a
statement by the beneficiary of release from liability in a form referred to in
paragraph (2) of article 7;
(b) The beneficiary and the guarantor/issuer
have agreed on the termination of the undertaking in the form stipulated in the
undertaking or, failing such stipulation, in a form referred to in paragraph
(2) of article 7;
(c) The amount available under the undertaking
has been paid, unless the undertaking provides for the automatic renewal or for
an automatic increase of the amount available or otherwise provides for
continuation of the undertaking;
(d) The validity period of the undertaking
expires in accordance with the provisions of article 12.
(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.
The last sentence is consistent with Article 5 of the UCC, as stated in Paragraph 34 of the Secretariat’s Commentary.
Article 12. Expiry
The validity period of the undertaking
expires:
(a) At the expiry date, which may be a specified
calendar date or the last day of a fixed period of time stipulated in the
undertaking, provided that, if the expiry date is not a business day at the
place of business of the guarantor/issuer at which the undertaking is issued,
or of another person or at another place stipulated in the undertaking for
presentation of the demand for payment, expiry occurs on the first business day
which follows;
(b) If expiry depends according to the
undertaking on the occurrence of an act or event not within the
guarantor/issuer's sphere of operations, when the guarantor/issuer is advised
that the act or event has occurred by presentation of the document specified
for that purpose in the undertaking or, if no such document is specified, of a
certification by the beneficiary of the occurrence of the act or event;
(c) If the undertaking does not state an expiry
date, or if the act or event on which expiry is stated to depend has not yet
been established by presentation of the required document and an expiry date
has not been stated in addition, when six years have elapsed from the date of
issuance of the undertaking.
The rules in the Convention on expiration of an undertaking that does not have an expiration date or an undertaking that claims “perpetual” life are inconsistent with those in Section 5-106. Under Article 12 these letters expire in 6 years; under Section 5-106 letters claiming to be perpetual expire after 5 years and those without a date expire after 1 year.
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.
Despite the explicit reference to good faith and to reasonable care, the standard of conduct stated in this Article is consistent with the standard stated in Section 5-108. Note that the duty of good faith is imposed on the issuer’s duties in Section 5-108 by Section 1-304 of the UCC. Exercise of “reasonable care” would not be a defense under Article 14, 15 and 17 for an issuer who dishonored a presentation that strictly complied (absent fraud or the circumstances stated in Article 19) or for an issuer who honored a presentation that did not strictly conform.
Observance of the relevant standard practice constitutes the exercise of reasonable care. Paragraph 38 of the Secretariat’s Commentary similarly states that the standard of conduct “is to be defined by reference to generally accepted standards of international practice.” However, it also “prohibits any exemption of the guarantor from liability for a lack of good faith or gross negligence.”
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.
Consistent with Section 5-110, a false or inaccurate certification under paragraph 3 does not justify dishonor. (Of course, the beneficiary’s fraudulent behavior might give the issuer a right to dishonor under Article 19.) Whether the beneficiary’s giving of a false or inaccurate certification gives a claim for damages or other remedy and to whom is left to other law such as Section 5-110, cf. Paragraph 40 of the Secretariat’s Commentary
Paragraph 2 does not override normal letter of credit practice that might allow for presentation to a nominated bank or to a confirmer in circumstances consistent with international practice.
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:
(a) Examine the demand and any accompanying
documents;
(b) Decide whether or not to pay;
(c) If the decision is not to pay, issue notice
thereof to the beneficiary.
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.
Whether documents are consistent with one another has to be judged by the applicable international practice that might be incorporated in the undertaking. For example UCP500 Article 13a required that documents not be “inconsistent” with one another; UCP600 Article 14d requires that they not “conflict” and ISP 98 and Article 5 of the UCC have no analogous requirement.
Article 16 does not specify the consequences of an issuer’s failure to give notice or to give its reasons for dishonor in the notice. Where an issuer under the Convention fails to give adequate notice, a court may choose to apply Section 5-108(c) and so preclude the issuer from using any unstated reasons to justify its dishonor.
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.
The Convention does not deal with the issuer’s right of reimbursement.
Article 19. Exception to payment obligation
(1) If it is manifest and clear that:
(a) Any document is not genuine or has been
falsified;
(b) No payment is due on the basis asserted in
the demand and the supporting documents; or
(c) Judging by the type and purpose of the
undertaking, the demand has no conceivable basis, 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:
(a) The contingency or risk against which the
undertaking was designed to secure the beneficiary has undoubtedly not
materialized;
(b) The underlying obligation of the
principal/applicant has been declared invalid by a court or arbitral tribunal,
unless the undertaking indicates that such contingency falls within the risk to
be covered by the undertaking;
(c) The underlying obligation has undoubtedly
been fulfilled to the satisfaction of the beneficiary;
(d) Fulfilment of the underlying obligation has
clearly been prevented by willful misconduct of the beneficiary;
(e) 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 counterguarantee
relates.
(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.
The effect of Article 19 against the beneficiary is substantially the same as the fraud rule stated in Section 5-109(a). Paragraph 46 of the Secretariat’s Commentary states that the purpose of Article 19 is to provide 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,” and that the “definition encompasses fact patterns covered in different legal systems by notions such as ‘fraud’ or ‘abuse of right.’”
Since Article 19 is silent as to the rights of the issuer against other parties, such as holders in due course, a court may choose to apply Section 5-109 where there are claims by or against such persons.