Understanding Demand Guarantees Subject to URDG

A guide for applicants on the relationship between URDG, underlying contracts, and beneficiary instructions.

1. What is a Demand Guarantee?

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A Demand Guarantee is an independent undertaking by a guarantor (usually a bank) to pay a beneficiary a specified sum upon presentation of a demand and any other stipulated documents that comply with the terms of the guarantee.

Unlike a traditional suretyship, it is independent of the underlying contract between the applicant and the beneficiary. This independence is its defining characteristic.

2. What are URDG 758?

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URDG 758 stands for the Uniform Rules for Demand Guarantees, published by the International Chamber of Commerce (ICC). They provide a set of internationally recognized rules governing demand guarantees.

When a demand guarantee states it is "subject to URDG 758," these rules become the governing framework for the guarantee's operation, interpretation, and the handling of demands.

They aim to bring clarity, certainty, and uniformity to demand guarantee practices worldwide.

3. The Principle of Independence (URDG's Cornerstone)

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This is the most critical concept. URDG Article 5 explicitly states that a guarantee is independent of the underlying relationship between the applicant and the beneficiary, and also independent of any counter-guarantee.

This means:

• The guarantor (bank) is concerned only with the documents presented, not with the actual performance or breach of the underlying contract.
• The bank's obligation to pay arises solely from a complying demand, regardless of disputes in the underlying contract.
• The applicant cannot instruct the bank to refuse payment based on arguments from the underlying contract, unless fraud is proven.

4. URDG vs. Underlying Contract: What Governs?

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For the applicant, the core question is: "Should I follow URDG or the underlying contract?"

The answer is clear: the guarantee, subject to URDG, governs the bank's obligations and the demand process.

• The guarantor is not a party to, nor bound by, the underlying contract.
• The terms and conditions of the underlying contract are irrelevant to the bank's assessment of a demand, unless specific provisions of the underlying contract are explicitly incorporated by reference into the guarantee itself (which is rare and generally discouraged by banks).
• The applicant's recourse for disputes arising from the underlying contract is against the beneficiary, not the guarantor.

5. URDG vs. Beneficiary's Instructions: Whose Instructions Matter?

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The beneficiary's instructions are crucial for initiating a demand, but they must always conform to two things:

1. The terms and conditions of the guarantee itself.
2. The rules of URDG 758.

If the beneficiary's demand or accompanying documents do not strictly comply with the guarantee's terms (as interpreted by URDG), the bank will refuse payment, even if the beneficiary *believes* their demand is valid under the underlying contract.

For the applicant, this means the focus should be on ensuring the guarantee's terms are clear and precise at the outset, as these are the terms the beneficiary must meet, and the bank will strictly adhere to.

6. Practical Implications for the Applicant

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As an applicant, you should:

• Understand the Independence Principle: Once issued, the guarantee is a separate financial instrument.
• Focus on Guarantee Wording: Ensure the wording of the guarantee, especially the conditions for demand, aligns precisely with your risk assessment and the underlying contract's intent. This is your primary control point.
• Stipulate Clear Documents: If you want specific documents (e.g., an engineer's certificate, a court order) to be presented with a demand, these must be clearly stipulated in the guarantee itself.
• Seek Legal Advice: For complex transactions, always consult legal counsel specializing in international trade and guarantees.
• Prepare for Payment: Be aware that if a complying demand is made, the bank will pay, and your recourse will then be against the beneficiary through the underlying contract dispute resolution mechanisms.

Conclusion: Clarity and Independence

For an applicant, the guiding principle when dealing with a demand guarantee subject to URDG is the independence of the guarantee. The guarantor's role is to verify the compliance of documents, not the facts of the underlying contract.

Therefore, the applicant should ensure the guarantee's terms are meticulously drafted to protect their interests, as these terms, interpreted by URDG, will dictate the payment obligation, not the broader underlying contractual relationship or the beneficiary's mere instructions.