- Anti Money Laundering
- automatic extension
- bill of lading
- Counter Terrorist Financing
- financial crime
- Financial Guarantee
- Independent Guarantee
- LC Law
- Red Flags
- Standby LC
- Trade Based Financial Crime Compliance
- tranport documents
- wrongful dishonor
For the 13th consecutive year, the Institute of International Banking Law & Practice conducted its one-day Guarantee & Standby Forum in Singapore. This Executive Summary provides an overview of topics discussed and debated by leading professionals at this year’s event.
Traps and Challenges in Guarantee & Standby Practice
Guarantees with overly lengthy wording continue to be problematic. One panelist reported seeing guarantees as long as six pages and yet are unclear whether they are independent undertakings. These types of guarantees are more prone to injunction. The longer the text, the more likely the instrument contains contradictory phrasing, suggesting in some places that the guarantee is independent and dependent in others. Often, clients already have their own wording that they insist be used for bank-issued guarantees. Especially challenging are instances where the beneficiary is a government agency. Banks may have no option other than to issue the guarantee as is, or pass on the business.
Standby Text Around the World
Panelists took up discussion of questionable clauses and text seen in standbys from different regions of the world. One clause, described by panelists as a cash-out or walk-out clause, was roundly considered unnecessary during discussion. Another clause referencing requirements for the issuing bank’s debt rating was viewed as inappropriate wording for a standby. Another clause calling for a statement bearing a “legally binding” signature was also criticized. Other problematic text discussed included one standby needlessly requiring presentation of a draft and another with ambiguous transferability conditions. Panelists noted that another standby harmed the autonomy principle because its expiry was not defined. One UCP600 standby text attempting to omit Article 36 failed in its attempt to reframe force majeure provisions, according to some commenters. Another standby oddly called for issuance of a new standby in case the original standby was partially drawn by the beneficiary.
Spotlight on Advance Payment Guarantees
Conference delegates were informed of a troublesome trend seen in Central Asia of standbys containing an operative clause. Although the standby had been issued, there was a clear trigger. Bankers may chide the inattentive beneficiary for accepting such an instrument but a trick was inserted into the standby. Panelists strongly advised specialists to review standby and guarantee instruments from top to bottom. Other featured discussion focused on line-by-line analysis of verbose counter guarantee text and its needless wording. Delegates were also presented a case study on pre-signed draw documents.
SWIFT Update for Guarantees and Standbys
A significant upgrade to the functionality and format of the 760 series of message types for guarantees and standbys will go live in November 2020. Conference delegates were briefed on the timeline, availability of training resources, enhanced message structures, and scope & format specifications of the new messages.
Key Issues in Recent Guarantee & Standby Cases
In Singapore and certain other jurisdictions, unconscionability has become an additional ground for enjoining payment under performance bonds and bank guarantees. Judges have not defined unconscionability, but have described it as something short of fraud that includes elements of abuse, unfairness, and dishonesty. Panelists took up discussion of recent Singapore cases BWN and Ryobi Tactics dealing with unconscionability. They are among about 40 court cases that have been decided in Singapore on unconscionability in recent years. Delegates were briefed on Chinese cases decided under the 2016 PRC Independent Guarantee Provisions. Since 2018, 17 standby LC cases have been decided but none of the decisions have been about standby fraud. In 3M Co., a US court denied a motion for a preliminary injunction against a standby issuer and vacated a temporary restraining order which had been in place against it for 22 months. One lesson emerging from the case is where back-to-back standbys call for a simple demand for payment, a claim of material fraud being more likely than not will be difficult to prove. The Santos case from Australia dealt with whether a demand for payment was purportedly signed by an authorised representative of the Beneficiary. In the latest case taking up interpretation of the principle of strict compliance, the Judge concluded that the demand did not strictly comply with the provisions of the bank guarantee.
For a list of recently decided standby, demand guarantee, and commercial LC cases, click here. For the regularly recurring segment Litigation Digest in which current cases are analyzed and discussed, subscribe to Documentary Credit World the trade finance industry's longest running and only monthly publication.
More on Demand Guarantee and Standby Letters of Credit
For a back to the basics look at the various types of guarantees and standbys, visit our recent blog post on the topic. For guarantee and standby LC users in the Americas, the annual Standby & Guarantee Forum is approaching in New York this October 31st, followed by the Letter of Credit Law Summit the following day. Join us for these long running trade finance conferences which gather bankers, corporates, lawyers, and lawmakers together for interactive learning experiences.
To see pictures from the recent events in Asia, visit our photo page.
Finally, for a useful book designed to help those regularly using guarantees and standby LCs, there is IIBLP's own Standby & Demand Guarantee Practice: Understanding UCP600, ISP98, and URDG 758.