No.

1/2012

Effects of non-documentary clauses in guarantees regulation under the URDG No. 758
In guarantees, rules allowing automatic changes of the guarantee conditions or payments subject to certain conditions are often included without determining whether and how the occurrence of these conditions is to be documented. From time to time, such arrangements, known as effective clauses, cause

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problems between the parties involved in the guarantee (please see also top@doc 10/2008, serial no. 85). The Uniform Rules for Demand Guarantees, URDG no. 758, which came into force in 2010 creates clarity in this regard. It sets out the principle that the guarantor will deem such condition as not stated and will disregard it if there are no details given about how proof has to be provided. The URDG also regulate cases when non-documentary clauses exceptionally have to be taken into account. Here are two examples for non-documentary clauses in guarantees as well as proposals for the appropriate wording: Example 1 entry into force
Clause in guarantee: The guarantee will enter into force with the signing of the supply. Suggestion for restatement: The guarantee enters into force as soon as a written confirmation that the delivery contract has been signed, is presented to the guarantor.

The warranty is effective upon receipt of the unconditional down payment on the account 1234567 at bank XYZ (not equal to the guarantor bank).

The guarantee enter into force as soon as a written confirmation of bank XYZ stating that the amount of the advance payment amounting to XXXXX has been credited without reserve and for free disposal to the maintained account no. 1234567 is presented to the guarantor.

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Example 2 reduction
Clause in guarantee: The warranty is automatically reduced by X% of each delivery. Suggestion for restatement: The guarantee shall automatically be reduced by X % of the value of each (part) delivery upon presentation to the guarantor of a copy of the copy of the commercial invoice(s) relating to the contract and evidencing the respective goods and of a copy of the relative transport document.

By handing over the goods to the buyer, the guarantee is reduced to X% of the contract value and then secured the warranty obligations of the seller.

As soon as a written confirmation stating that the goods have been delivered to the buyer has been presented to the guarantor, the amount of the guarantee will be reduced by X% of the contractual value.The remaining amount secures the sellers warranty obligations.

First of all, it is preferable to have the guarantee amended so that the

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documentary evidence for the occurrence of a condition is dened precisely. If an amendment of the guarantee conditions is not possible, it is advisable to reach a clarifying agreement with the client. With regard to the above mentioned examples, the wording could be as follows: As to example 1 We will regard the receipt of a request for payment under the guarantee without verication as proof that the prerequisite for entry into force of the guarantee has been met and the guaranteed event has occurred, and will effect payment in compliance with the guarantee conditions. As to example 2 The reduction of the guaranteed amount or the termination of the guarantee requires the written agreement (consent)/acceptance of the beneciary of the guarantee through their bankers. Exemptions According to URDG 758, art. 7 the guarantor has to consider a nondocumentary condition into account if

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fullment of a prior condition can be determined from the guarantors

own records or from an index specied in the guarantee or

the guarantor has to determine if possibly data in a document required

guarantee.

and presented under a guarantee are in conict to the stipulations of the

Guarantors own records are the records of the guarantor showing amounts credited to or debited from accounts held with the guarantor, provided they enable the guarantor to identify the guarantee to which the credits and debits relate (art. 2 URDG 758). Here is an example for the second exceptional case:

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According to the conditions of a payment guarantee, payment is due four weeks after shipment of goods (non-documentary condition). For any request of payment presentation of the unpaid invoice is required. This invoice shows shipment effected one week before claim obviously payment is not yet due according to the non-documentary conditions. Therefore, at this time, claim has to be rejected. Which risks arise from a guarantee including such conditions for you as principal or beneficiary? What are the concrete, possible solutions? On all of these issues the specialists for Cash Management & International Business of Commerzbank will provide you professional support and consulting.

The information in this newsletter is generally based on usage and legal requirements in Germany and is subject to data obtained from sources considered to be reliable, but no representations or warranties are made by Commerzbank with regard to the accuracy or completeness of the data. The opinions and estimates contained herein have been done with due care and diligence and are true and correct to the best of our knowledge at the given time, and are subject to change without notice. This newsletter is for information purposes only. Commerzbank accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of or in any way connected with the use of all or any part of this newsletter. 2012 Commerzbank AG, Frankfurt/Main It is not allowed to replicate and transfer the complete newsletter or parts thereof without permission of Commerzbank AG.