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International investment

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S
SYEDA KANWAL NOREEN

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

1 of 27
International Investment S.Kanwal Noreen
Table of content • Difference Between Bank Guarantee & Documentary of letter of credit • International customs and practices • Summary
Common aspects • Both are issued by the request of applicant in favor of the beneficiary , when the complying documents are presented.
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.
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.
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)
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.
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.
International customs and practices of L/G • Bond • Guarantee • Surety ship guarantee • Payment undertaking
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
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.
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.
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
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.
• 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.
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.
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.
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.
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.
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.
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.
Summary • Parties to a letter of guarantee include: – Applicant – Beneficiary – Guarantor – Advising bank – Counter guarantor – Confirming bank & Re-issuing bank.
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).
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.
• 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.
• 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.
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  • 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.

Editor's Notes

  1. As this regulation is too rigid to the beneficiary and rights and obligations between the applicant and the beneficiary are unequal.
  2. Doc. In ICC publication 325, are not compulsory to present.
  3. 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.