Difference Between Bank Guarantee & Documentary of letter of credit International customs and practices Summary

1. International Investment
S.Kanwal Noreen

2. Table of content
• Difference Between Bank Guarantee &
Documentary of letter of credit
• International customs and practices
• Summary

3. Common aspects
• Both are issued by the request of applicant in
favor of the beneficiary , when the complying
documents are presented.

4. Documentary of letter of credit
• The undertaking of issuing bank is to effect
payment , when beneficiary has fulfilled the
basic commercial contract and complied
documents are presented.
• The purpose of L/C is Payment.

5. Documentary of letter of credit
• The issuing bank will take the primary liability
to effect the payment.
• Required Documents are commercial doc. i.e.
– Transport doc
• CP600 does not stipulate the governing laws
or jurisdiction when disputes under letter of
credit happens.

6. Bank Guarantee
• A letter of guarantee is probably operative
only if the principle fails to fulfill the
commercial contract & default certificates are
presented.
• The purpose of L/G is Guarantee.
• Certificate documents required (which can
prove the default of principles)

7. Bank Guarantee
• Demand guarantee bears the same features as
L/C.
• Accessory Guarantee , the guarantor bank will
only take the payment liability when the
applicant fails to compensate the loss
incurred.

8. Bank Guarantee
• Under URD758, the governing laws or
jurisdiction for letter of guarantee business
are clearly indicate happens.
– The governing law of the place of the business of
guarantor of instructing party shall be adopted.
– In case of more than one business places,
the place where guarantee or counter guarantee
has been issued will be applicable.

9. International customs and practices of
L/G
• Bond
• Guarantee
• Surety ship guarantee
• Payment undertaking

10. International customs and practices of
L/G
• In 1978, ICC formulated a promulgated
Uniform Rules for contract Guarantee
– ICC publication No. 325
• In order to unify the form of guarantee and
match with ICC Publication No.325: ICC
further formulated and promulgated Contract
Guarantee Demonstration Format
– ICC Publication No.406

11. International customs and practices of
L/G
Article 9 (Rules of Contract Guarantee) :
• When claim is made on the issuing bank, the
beneficiary should provide:
– Jurisdiction documents
– Arbitration award
– The written certificate
From the applicant certifying that the applicant
consents to claim request and the claim
amount.

12. International customs and practices of
L/G
• ICC publication No.325 is not world widely
accepted.
– As this regulation is too rigid to the beneficiary
and rights and obligations between the applicant
and the beneficiary are unequal.

13. International customs and practices of
L/G
• In 1992: ICC formulated and promulgated
uniform Rules for Demand Guarantees (URDG)
– ICC Publication No.458.
As per URDG458:
• When the beneficiary claim on the issuing
bank , only following documents are required
to present:
– Claim documents
– Default statement

14. International customs and practices of
L/G
• The jurisdiction documents required by ICC publication
No.325 ‘Continues to be effective.
• Afterwards: on the basis of URDG458 in accordance
with the recent practice and development of guarantee
business , the ICC formulated and promulgated uniform
rules for demand guarantees (URDG)
– ICC publication no.758
• which took effect on July 21st, 2010.
URDG has referred and used the style of UCP600
• The regulation concerning the responsibility and rights
of related parties are more clear and accurate.

15. • It needs to point out when URDG758, came
into being URDG458is still valid,
• so in guarantee operation practices , it should
be clearly indicated whether URDG758 or
URDG458Is applicable.

16. International customs and practices of
L/G
• In practice, the demand guarantee is most
frequently used.
• In essence, the regulation in uniform rules for
demands guarantee has many similarities as
that in uniform rules of documentary credit .
• For example:
– demand guarantee constitutes and abstract
payments promises and demand guarantee in an
independent document.

17. International customs and practices of
L/G
• As per article 5 of URDG 758:
– Only if claim documents are compiled with the
demand guarantee clauses , the granter bank
bares the primary liability to effect payment.
• Letter of guarantee documents are separated
from the basic contract between the applicant
and the beneficiary.
• They are also separated from application
conferment by guarantor bank.

18. International customs and practices of
L/G
• As per article 6 of URDG758
– guarantor bank only deals to documents , not
dealing with cargo , services or contract
obligations related to documents.
• Article 7 further stipulates
– The handling of non documents clauses ,
emphasizing that demand guarantee should not
stipulates other conditions that the beneficiary
must meet except expiry date and presentation
period in the form of non documental condition.

19. International customs and practices of
L/G
• Guarantor bank will disregard the non
documental conditions.
– The responsibility of the guarantor bank is to
check the documents & verify the apparent
consistence.
– Demand guarantee is applicable to the principle of
fraud exception.
– The guarantor will suspend payment when he
receives stop payment order from the local court.

20. Summary
• L/G is a written undertaking by the guarantor
at the request of the applicant to the
beneficiary.
• Guaranteeing that the applicant will perform
obligation under the contact signed between
the applicant and the beneficiary.
• Letter of the guarantee and standby L/C bear
the same function to provide security to the
beneficiary.

21. Summary
• The main purpose of the letter of guarantee is
for “assurance but not for payment".
• The foundation for payment under letter of
the guarantee is the claim reimbursement
condition. Which includes:
– Beneficiary identification
– Statement of breach of contract by applicant
– Relative documents.

22. Summary
• Parties to a letter of guarantee include:
– Applicant
– Beneficiary
– Guarantor
– Advising bank
– Counter guarantor
– Confirming bank & Re-issuing bank.

23. Summary
• Letter of guarantee can be divided as follow:
– Conditional L/G & Demand L/G
– Independent L/G and accessory L/G
– Importing L/G
– Tender/bid
– Bond L/G,
– Performance L/G
– Advance payment L/G
– Qualified L/G & maintenance L/G (Exporting L/G).

24. Summary
• Both the bank guarantee and documentary credit
are settlement methods used in international
trade.
• Both are issued at the request of the applicant
– in favor of the beneficiary,
– promising the payment obligation
• (when complying documents are presented).
• However, the biggest difference between
documentary credit is payment method.
• Letter of guarantee is an assurance method.

25. • The document required for payment under
letter of credit:
– commercial document specially transport
documents.
• While those required under letter of
guarantee:
– certificate documents which can prove the default
of principals.

26. • The international customs and practices for the
letter of guarantee used today are the uniform
Rules for Demand Grantees (URDG)
– ICC Publication No. 758
[which took effect on July 1st,2010.]
• when URDG758 came into being
– URDG458 is still valid,
– So in guarantee operation practice, it should be clearly
indicate whether URDG758 or URDG458 is applicable.

27. Thank you