Demand guarantees, standby letters of credit and Article 111 CO

Why traders need guarantees

Guarantees enter the life of a trading house in several forms. A buyer that pays in advance for a cargo of steel asks for an advance payment guarantee, which secures repayment if the trader fails to deliver. A state-owned buyer of fuel or fertilizer in a tender requires a bid bond and, after the award, a performance guarantee. A seller that delivers on open account may ask the buyer for a payment guarantee or a standby letter of credit. Port authorities, customs offices and charterers ask for guarantees as well. For the trader, each guarantee is an off-balance sheet liability that consumes credit line at its bank. For the bank, it is a contingent exposure that may be called at any time within its validity on a simple written demand. The guarantee is therefore at once a cheap instrument, since no money moves unless it is called, and a dangerous one, since the call cannot easily be stopped.

URDG 758 and the demand guarantee

The ICC's Uniform Rules for Demand Guarantees, Publication 758, entered into force on 1 July 2010. They were approved by the ICC Banking Commission in December 2009 and replaced URDG 458 of 1992. UNCITRAL has endorsed them, and the World Bank and the International Federation of Consulting Engineers (FIDIC) have adopted them in their model guarantee forms.¹ URDG 758 consists of 35 articles. They define a demand guarantee as a signed undertaking providing for payment on presentation of a complying demand (Art. 2 URDG 758). They confirm that the guarantee is independent of the underlying relationship and of the application for its issue (Art. 5 URDG 758) and that guarantors deal with documents only (Art. 6 URDG 758).²

The main innovation of URDG 758 in favour of the applicant is the supporting statement. Unless the guarantee expressly excludes it, a demand must be supported by a statement of the beneficiary indicating in what respect the applicant is in breach of its obligations under the underlying relationship (Art. 15(a) URDG 758). The statement need not be proven and the guarantor does not examine its truth. It does, however, force the beneficiary to commit itself in writing to a specific breach, which matters later if the applicant alleges abuse. Article 23 URDG 758 regulates the "extend or pay" demand, in which a beneficiary asks for an extension of the guarantee in the alternative to payment. The guarantor may suspend payment for up to 30 calendar days while the applicant decides whether to agree. Article 26 deals with force majeure.³ The commentary on the rules was written by Georges Affaki, who chaired the drafting group, and Roy Goode, the leading English authority on the subject.⁴

Notes

1. ICC, "ICC unveils guide to the Uniform Rules for Demand Guarantees", 28 June 2011, https://iccwbo.org/media-wall/news-speeches/icc-unveils-guide-to-the-uniform-rules-for-demand-guarantees/; ICC Digital Library, Guide to ICC Uniform Rules for Demand Guarantees URDG 758 , chapter 4, https://library.iccwbo.org/content/tfb/BOOKS/BK_0058/BK_0058_05_Chapter04.htm (approval by the Banking Commission in December 2009). The press release states that the URDG were first published in 1992. ↩
2. ICC, Uniform Rules for Demand Guarantees, ICC Publication No. 758 (Paris 2010), Arts. 2, 5 and 6, as set out in ICC, Guide to ICC Uniform Rules for Demand Guarantees URDG 758 (above), chapter 4 (demand guarantee as "any signed undertaking, however named or described, providing for payment on presentation of a complying demand"; guarantors deal with documents). ↩
3. ICC, URDG 758 , Arts. 15, 23 and 26, as set out in ICC, Guide to URDG 758 (above), chapter 4 (supporting statement indicating "in what respect the applicant is in breach"; suspension of payment for up to 30 calendar days on an extend-or-pay demand; force majeure). ↩
4. ICC, press release of 28 June 2011 (above). ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of August 2025.