Simple Guide to Better Understand Standard Bank Guarantee Practice
International Standard Demand Guarantee Practice
A simple guide to understanding the best practices for demand guarantees, based on the ICC's URDG 758 rules.
What is the ISDGP?
The ISDGP is a set of guidelines that explains how to apply the Uniform Rules for Demand Guarantees (URDG 758). It's not law, but it represents the global best practice for handling demand guarantees.
Key Idea: Its purpose is to create a standard, fair, and efficient process for everyone involved, reducing misunderstandings and disputes. It supplements, but does not change, the URDG rules.
The Key Players
Applicant
The party who requests the guarantee from a bank to secure a contractual obligation (e.g., a construction company).
Beneficiary
The party who is protected by the guarantee and can claim payment if the applicant fails their obligation (e.g., the project owner).
Guarantor
The bank or institution that issues the guarantee and promises to pay the beneficiary upon receiving a compliant demand.
Counter-Guarantor
A bank that provides a guarantee to the guarantor, often used in international transactions to add a layer of security.
Lifecycle of a Demand Guarantee
The ISDGP provides guidance for every stage of a guarantee's life, ensuring consistency and clarity from start to finish.
1. Drafting & Issuing: Guarantees must be clear and precise. They should identify the underlying contract but remain independent. A guarantee is considered 'issued' and irrevocable once it leaves the guarantor's control.
2. Presentation of a Demand: If the applicant fails to perform, the beneficiary makes a "demand" for payment. This must be presented as specified in the guarantee. It must include a statement explaining, in brief, how the applicant breached their obligation.
3. Examination: The guarantor has up to five business days to examine the demand. They check if the submitted documents comply with the guarantee's terms. This is a document-checking exercise, not an investigation of the actual facts of the dispute.
4. Payment or Rejection: If the demand is compliant, the guarantor must pay without undue delay. If it's not compliant (e.g., missing information), the guarantor must reject it and list all discrepancies.
5. Reduction & Expiry: The guarantee's value reduces with each payment. It finally terminates on its expiry date, when a specific event occurs, or when the beneficiary formally releases it.
Key Principles Explained
Independence
A guarantee is separate from the underlying contract between the applicant and beneficiary. The guarantor deals only with documents, not with contract performance or disputes.
Documentary Compliance
The guarantor's decision to pay is based solely on whether the presented documents match the requirements stated in the guarantee. Minor typos that don't alter the meaning shouldn't lead to rejection.
"Extend or Pay"
A beneficiary can present a demand asking the guarantor to either extend the guarantee's validity or pay the amount. This gives the applicant a chance to arrange an extension before a payment is made.
Force Majeure
If an uncontrollable event (like a natural disaster) prevents the guarantor from operating, the guarantee's expiry can be extended for up to 30 days to allow for presentation.
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