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Indemnity under Article 31 of URDG 758

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Indemnity under Article 31 of URDG 758

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I. Introduction

Article 31 of URDG 758[1] states “The instructing party or, in the case of a counter-guarantee, the counter-guarantor shall indemnify the guarantor against all obligations and responsibilities imposed by foreign laws and usages, including where those foreign laws and usages impose terms into the guarantee or the counter-guarantee that override its specific terms. The instructing party shall indemnify the counter-guarantor that has indemnified the guarantor under this article”, which requires that the instructing party or counter-guarantor, as the case maybe, to indemnify the guarantor against all obligations imposed by foreign laws and usages, even if they override the terms of the guarantee.

II.The case for Article 31

The guarantor is required to abide strictly by the terms of its guarantee, as a general rule. Where it does so and makes payment in compliance with those terms, it is assured of its right to reimbursement by the party from which it received its instructions, be it the instructing party or the counter-guarantor.

However, there are situations where a mandatory law or usage may impose an obligation or a responsibility on the guarantor that it has no choice but to comply with regardless of what the terms of the guarantee may indicate. Examples include stamp duties, licenses to undertake certain activities in regulated sectors, mandatory expiry provisions and so forth, all of which may override possibly conflicting terms of the guarantee or the rules.

a.If that mandatory law or usage is in force in the location of the guarantor’s branch that issued the guarantee, the guarantor is not entitled to indemnity from the instructing party or counter-guarantor for the consequences of such laws or usages in the absence of a specific agreement to this effect. The reason is that the guarantor is presumed to be aware of such laws and usages and to have issued its guarantee only in accordance with their consequences.

b.Conversely, if the obligation or responsibility arises not under the guarantor’s law but under a foreign law or usage that applies to the guarantee regardless of what the terms of that guarantee may indicate, the guarantor is entitled to be indemnified, for all the consequences of such laws and usages, by the party on whose instructions it acted when issuing the guarantee.

III.How to apply Article 31?

In light of the above, the conditions of the application of Article 31 are threefold:

 

a.the obligation or responsibility must arise out of a foreign law or usage;

b.that foreign law and usage must be mandatory; and

c.by applying to the guarantee, that obligation or responsibility must have modified the terms of the guarantee as issued pursuant to the instructions received by the guarantor and caused that guarantor to make a payment or to perform an act other than what it was instructed to do; it is that loss that would lead to indemnity under article 31.

IV.A little bit interpretation for applying Article 31

a.“Foreign laws and usages” refer to the laws and usages of a country other than that in which the guarantor or its issuing branch is located. Any other law is a “foreign law”, including (i) the law of the location of the guarantor’s head office if the guarantee was issued by a branch in another country or (ii) a law chosen by the parties under article 34[2]other than the law of the location of the guarantor or its issuing branch.

b.Mandatory rules refer to national laws that have the effect or overriding contractual provisions, which are not covered by the URDG, since they are a matter for the law of the forum state. These rules fall into two categories: (i) rules that cannot be excluded by the agreement of the parties but which the law of the forum state does not find it necessary to impose on contracts governed by a foreign law, such as contract formalities; and (ii) international mandatory, or super-mandatory, rules that apply regardless of the otherwise applicable law, such as rules on competition policy or consumer protection. The URDG, which take effect by way of contractual incorporation, have effect subject to any mandatory rules. Article 31 does not formally distinguish between domestic and international mandatory rules. It simply assumes that a foreign law applies in a way that imposes obligations on the guarantor and entitles the guarantor to be indemnified against them.

c.“Indemnity against obligations” refer to two situations, where the obligation is to perform a non-monetary act (such as obtaining a license), the instructing party or counter-guarantor is responsible for the costs incurred by the guarantor in performing the act or procuring its performance; and where a guarantor incurs a monetary liability, it is entitled to reimbursement, and a counter-guarantor incurring such obligations is entitled to an indemnity from the instructing party.

d.Article 31 also covers cases where the foreign laws or usages overrides the terms of the guarantee (including, for this purpose, terms derived from the contractual incorporation of the URDG into the guarantee) or imports them into the guarantee.

V.Example of cases

Case a.DEF Bank, at the request of its customer A, arranges for a guarantee to be issued by C Bank, which is located in another country, against DEF Bank’s counter-guarantee. Under the laws of that other country, C Bank is required to obtain a license before issuing a guarantee upon the instructions of a non-resident and to pay a stamp duty on the guarantee.

Remarks: Article 31 does not apply in the above case because the requirements are imposed by C Bank’s own law, not by a foreign law. C bank has no right of indemnity against A, with which it has no direct relationship. The only party from which C bank can claim an indemnity is DEF Bank, and this right depends not on the URDG but on the arrangements between them and the law governing those arrangements. However, the guarantor may well be able to recoup the stamp duty under article 32[3] as charges.

Case b.DEF Bank, at the request of its customer A, arranges for a guarantee to be issued by its correspondent C Bank in favor of B, which is located in another country, against DEF Bank’s counter-guarantee. The guarantee is stated to expire on 1 May and the counter-guarantee on 1 June. Both the guarantee and counter-guarantee are stated to be governed by the laws of the country where C Bank is located. This law requires guarantors and counter-guarantors to prolong their undertaking for a maximum of one year if so demanded by the beneficiary before expiry, regardless of what the undertaking may indicate. On 30 April, B presents an extension request for one year and C Bank extends the guarantee. On 5 May, C Bank informs DEF Bank of the extension and asks for a similar extension under the counter-guarantee, which DEF Bank grants.

Remarks: A is bound by the extension of the counter-guarantee because it is imposed by the law of the location of C Bank – a foreign law for DEF Bank. Any charges imposed by DEF Bank based on the duration of its counter-guarantee commitment will continue to be paid by A through the duration of the extension. 

To be clear, Article 31 did not make the guarantor’s right of indemnity dependent on its ignorance of the foreign law or usage in question, nor do they impose any duty on the guarantor to inform the instructing party or counter-guarantor of the existence of the law or usage. The position of the instructing party in such cases is governed not by article 31 but by the applicable law.

[1] See ICC Uniform Rules of Demand Guarantees (URDG 758).

[2] Article 34 Governing law: “a. Unless otherwise provided in the guarantee, its governing law shall be that of the location of the guarantor’s branch or office that issued the guarantee. b. Unless otherwise provided in the counter-guarantee, its governing law shall be that of the location of the counter-guarantor’s branch or office that issued the counter-guarantee”.

[3] Article 32 Liability for charges: “a. A party instructing another party to perform services under these rules is liable to pay that party's charges for carrying out its instructions. b. If a guarantee states that charges are for the account of the beneficiary and those charges cannot be collected, the instructing party is liable to pay those charges. If a counter‐guarantee states that charges relating to the guarantee are for the account of the beneficiary and those charges cannot be collected, the counter‐guarantor remains liable to the guarantor, and the instructing party to the counter‐guarantor, to pay those charges. c. Neither the guarantor nor any advising party should stipulate that the guarantee, or any advice or amendment of it, is conditional upon the receipt by the guarantor or any advising party of its charges”.