CSDG Exam complete training - Master URDG758, ISDGP, ISP98

Understanding their difference is crucial here for the CSDG exam.

• A Demand Guarantee is a primary and independent obligation. Think of it as a direct promise to pay from the guarantor (usually a bank and hence we also call this as Bank guarantees. Be aware that, the guarantees can be issued by any party). The guarantor's duty to pay is triggered by a compliant demand from the beneficiary. They do not investigate the underlying commercial contract between the applicant and the beneficiary. If the documents presented are correct as per the guarantee's terms, the bank pays. This is why we say the Demand guarantees are unconditional. This independence is what makes demand guarantees powerful and is the entire focus of the CSDG certification and the URDG 758 rules.

• A Suretyship Guarantee, on the other hand, is a secondary obligation. This means the guarantor is only liable if it's proven that the principal debtor has defaulted on their primary obligation. The beneficiary must first try to get performance or payment from the debtor and legally establish the default. The guarantee is an "accessory" to the main contract. This is why we say the Suretyship guarantees are conditional. The main condition is “Have the Beneficiary recovered their pending money using all sources, after the failure of the Applicant, by all possible means and available ways”. After all those attempts, come to me as a guarantor and I pay the remaining, if you are really entitled and proved with substantial documents. While common in some legal systems, this is not the focus of our course.

For the CSDG exam, our world revolves almost exclusively around Demand Guarantees.

Types of Demand Guarantees

Demand guarantees are flexible tools used to manage various risks throughout a commercial project or transaction lifecycle. The Guarantees are widely used for any transaction unlike the Letters of Credit. Let's look at the most common types you'll encounter.

• Performance Guarantee

This protects a beneficiary against the non-performance of a contract. If a contractor fails to complete a project according to the contract, the project owner can claim on this guarantee for financial compensation.

• Advance Payment Guarantee

This is used when a buyer pays a seller in advance. The Advance Payment Guarantee protects the buyer's advance payment. If the seller fails to deliver the goods or services after receiving the payment, the buyer can claim under the Advance Payment Guarantee to get their money back.

• Bid Bond Guarantee

This is used during a competitive bidding or tender process. It provides assurance to the project owner that the winning bidder will accept the contract if awarded and will furnish the required performance guarantees. If the winner backs out and ends up not starting the project, the owner can claim on the bid bond to cover the costs of the failed tender.

• Payment Guarantee

This is the reverse of a performance guarantee. It protects a seller against a buyer's failure to pay. If the buyer doesn't pay for the goods or services as agreed, the seller can claim the amount from the buyer's bank under this guarantee. This can also be called as a Commercial Payment Guarantee. Some other ways to secure this is, using a LC, SBLC, Factoring, forfeiting, etc. We will cover SBLC covered under the ISP98 rules, later in this course modules.

• Financial Guarantee

This is a broader type that guarantees the repayment of a financial obligation, such as a loan. For instance, a parent company might provide a financial guarantee to a bank that is lending money to its subsidiary as a Project loan.

• Retention Money Guarantee

In many projects, especially construction, the owner holds back a percentage of the payment (called "retention money") to ensure any defects that appear later are fixed. A contractor can provide this guarantee favoring the owner to get the retention money released early, while the owner remains protected.

• Warranty Guarantee

This secures the beneficiary against the applicant's failure to honor warranty obligations. If a machine breaks down during its warranty period and the seller fails to fix it, the buyer can claim on this guarantee to cover the cost of repairs.

• Insurance Guarantee

Functionally similar to bank guarantees, these are simply issued by insurance companies instead of banks. They serve the same purpose of securing performance or financial obligations.

Customs Guarantee:

This is provided to a customs authority. It guarantees that an importer/exporter will pay the required customs duties, taxes, or penalties. It allows for the quick release of goods from a port before the final duty amount is settled, thereby facilitating trade. This can also be issued for storing and releasing the goods from the Customs bonded warehouse.

Subcontract Guarantee:

In large projects, a main contractor might hire smaller subcontractors. This guarantee is typically issued by the main contractor in favor of the subcontractor to guarantee payment for their work, giving the subcontractor financial security. This can also be serving vice-versa. That means, the Sub-contractor’s failure and loss due to that to the Mani contractor will be covered.

Court/Arbitration Guarantee:

This is used in legal proceedings. For example, if a court orders a defendant's assets to be frozen, the defendant can offer a court guarantee from their bank. This guarantees payment of a potential judgment, allowing the defendant's assets to be released.

The first and most important point about the URDG Scope is that these rules are applied by choice. For URDG 758 to govern a guarantee, its text must explicitly state that it is subject to them. For example, it must contain wording like: "This guarantee is subject to the Uniform Rules for Demand Guarantees, ICC Publication No. 758." Without this, the rules simply don't apply.

A practical question that often arises is about different versions. Article 1 clarifies that if a guarantee issued today simply says it is "subject to URDG" without specifying a version number, it is automatically deemed to be subject to the latest version in force. This means URDG 758 (the 2010 revision) is the Default Version, which avoids any confusion with older rules.

The Effect of Incorporating URDG

Once URDG is incorporated, it becomes legally Binding on all parties. This means the Applicant (the party requesting the guarantee, like a contractor), the Guarantor (the bank issuing the guarantee), and the Beneficiary (the party protected by the guarantee, like a project owner) are all bound by the rules.

However, URDG is flexible. Parties can agree to modify or exclude certain articles. For example, they can change the time for examining documents from five days to three by simply stating so in the guarantee text.

This also directly impacts the Instructing Party. The Instructing Party is simply the entity giving the instruction to issue the guarantee, which is usually the Applicant. Article 1 states that when an Instructing Party asks for a URDG guarantee, they are automatically accepting all the rights and obligations the rules place on them, such as the duty to repay their bank.

URDG in Guarantees and Counter-Guarantees

Now we come to a critical area: the relationship between guarantees and counter-guarantees.

First, what is a Counter-Guarantee? It is a separate undertaking, essentially a guarantee from one bank to another.

Example: Imagine a French company needs a guarantee in Brazil. Their French bank may issue a counter-guarantee to a Brazilian bank. This instructs the Brazilian bank to issue the final guarantee to the Brazilian beneficiary and promises to repay the Brazilian bank if it has to pay a claim. It's a "guarantee for a guarantee."

With that in mind, Article 1 sets two very clear rules on Conditional URDG Adoption:

If the final guarantee issued by the Brazilian bank is subject to URDG as per the instruction of the Counter guarantor, then the counter-guarantee from the French bank must also be subject to URDG. The counter-guarantee must state this separately.

Conversely, if the counter-guarantee from the French bank is subject to URDG, this does not automatically make the final guarantee subject to the rules.

Each undertaking is independent. The choice to apply URDG must be made separately for each instrument in the chain.

Article 29 - Disclaimer for acts of another party