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Navigating Non-Compliant Demands: A Guide to Corrections Under Demand Guarantees

Demand guarantees are crucial instruments in international trade, providing security and assurance to beneficiaries. However, the intricacies of these instruments can sometimes lead to discrepancies and non-compliant demands, causing delays and potential disputes. Fortunately, the International Standard Demand Guarantee Practice (ISDGP) provides clear guidelines on how to rectify such situations. Understanding Non-Compliance A demand is deemed non-compliant when it fails to adhere to the specific terms and conditions outlined in the guarantee. This could range from simple errors in documentation to more substantial deviations from the agreed requirements. When a guarantor identifies a non-compliant demand, they must reject it, triggering a process for potential correction. The Beneficiary's Right to Correct Crucially, the ISDGP acknowledges the beneficiary's right to rectify non-compliance. Even if the guarantee explicitly excludes Article 17(b), the beneficiary is still permit...
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Bank Guarantees (BGs) vs. Standby Letters of Credit (SBLCs)

This article provides a detailed comparison between Bank Guarantees (BGs) and Standby Letters of Credit (SBLCs), focusing on their key characteristics.

Definitions:

  • Bank Guarantee (BG): A financial instrument issued by a bank on behalf of a client (often called the "guarantor"). It acts as a promise from the bank to pay a specific sum to a third party (the "beneficiary") if the client fails to fulfill its obligations under an underlying contract.
  • Standby Letter of Credit (SBLC): A commitment issued by a bank on behalf of a client. It promises to pay the beneficiary upon presentation of specific documents that demonstrate the client's failure to fulfill its obligations under the underlying contract.

Purpose:

  • BGs: Primarily used to secure obligations within a domestic context, such as:
    • Performance Guarantees: Ensuring the completion of a construction project.
    • Payment Guarantees: Securing payment for goods or services.
    • Bid Bonds: Guaranteeing that a bidder will enter into a contract if awarded.
  • SBLCs: Primarily used in international trade transactions to:
    • Ensure payment: Safeguard the seller in case the buyer defaults.
    • Support creditworthiness: Enhance the buyer's credit standing with suppliers.
    • Provide financial guarantees: Back up various contractual obligations.

Functionality:

  • BGs:
    • Secondary Obligation: The bank's liability is secondary to the client's primary obligation.
    • Payment is triggered by a demand from the beneficiary, often without the need for extensive documentation to prove the client's default.
  • SBLCs:
    • Primary Obligation: The bank's liability is direct and independent of the underlying contract.
    • Payment is triggered upon presentation of specific documents by the beneficiary that demonstrate the client's failure to fulfill its obligations. This requires stricter adherence to documentary requirements.

Usage:

  • BGs: Common in construction, leasing, and infrastructure projects within a country.
  • SBLCs: Widely used in international trade transactions, such as:
    • Import/Export transactions
    • Sale of goods
    • Service contracts
    • Project finance

Governing Rules:

  • BGs: Primarily governed by the ICC's Uniform Rules for Demand Guarantees (URDG).
  • SBLCs: Primarily governed by the ICC's International Standby Practices (ISP) or the Uniform Customs and Practice for Documentary Credits (UCP).

Documentation:

  • BGs: Generally require minimal documentation, often focusing on the terms of the guarantee itself, such as the amount, validity period, and conditions for payment.
  • SBLCs: Require more extensive documentation, including:
    • Detailed descriptions of the underlying contract.
    • Precise specifications of the documents required for payment (e.g., invoices, bills of lading, certificates of performance).



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