Transferring independent guarantees – a discussion

September 1st, 2021
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In terms of art 9 of the United Nations Convention on Independent Guarantees and Stand-by Letters of Credit, UN Doc A/RES/50/48 (1995) (the Convention), the right to demand payment in terms of an independent guarantee shall be transferable only if such a guarantee itself stipulates that it is transferable. Article 33 of the International Chamber of Commerce’s Uniform Rules of Demand Guarantees (URDG 758) also state that a demand guarantee shall be transferrable only if it states that it shall be transferrable. Unlike the URDG 758 and the International Standby Practices (ISP 98), which do not have a force of law, the Convention becomes legally binding once adopted by member states (Grace Longwa Kayembe The Fraud Exception in Bank Guarantee (LLM thesis, University of Cape Town, 2008)).

Considering the context provided, this contribution will provide a critical evaluation of the practice of transferring independent guarantees.

Defining an independent guarantee

An independent or demand guarantee is an irrevocable, independent, and signed undertaking which creates an obligation of payment upon the presentation of a complying demand (Charl Hugo ‘Demand Guarantees in the People’s Republic of China and the Republic of South Africa’ (2019) 6 BRICS Law Journal 4 at 8).

A ‘complying demand’ refers to a ‘demand that meets the requirements of a complying presentation’, and ‘complying presentation’ refers to a ‘presentation that is in accordance with … the terms and conditions of that guarantee’, the rules applicable to the demand guarantee and also, it refers to a presentation, which complies with the practice standards of international demand guarantees (Hugo (op cit) at 9).

  • The principle of independence

An important principle of demand guarantees is the independence principle. In terms of this principle, the guarantee is deemed wholly independent from the underlying contract between the contracting parties (it may be a construction agreement or a contract of sale) (Hugo (op cit) at 13-14)). This means that whatever dispute may rise between the debtor and the creditor shall have no effect on the obligation to pay in terms of the guarantee, the only exception to this general rule being where fraud by the beneficiary is an issue (Hugo (op cit) at 15). The independence principle is consequential to the ‘pay first, argue later’ rule in the sense that payment ought to be made regardless of a dispute arising from an agreement other than the guarantee itself (Cayle Selwyn Lupton A Comparative Legal Perspective on the Impact of Good or Bad Faith on the Independence of Documentary Credits and Demand Guarantees (LLM dissertation, University of Johannesburg, 2018)).

  • The principle of strict compliance

One other important principle of demand guarantees is the principle of strict compliance (Kayembe (op cit) at 52). This principle simply entails that when a complying demand has been made by the beneficiary of the guarantee, the guarantor has to honour the arrangement by making the payment demanded and also, such a guarantor is entitled to refuse to pay where the demand made does not strictly comply with the terms of the guarantee (TL Marange Towards the recognition of the illegality exception under documentary credits in South Africa (LLM dissertation, North-West University, 2019)). If the demand made is compliant at face value, the guarantor can pay the beneficiary without looking beyond the documents provided for compliance (Kayembe (op cit) at 53).

The practice of transferring independent guarantees     

The practice of transferring independent guarantees is a concept, which was introduced by the URDG 758 (Nino Chipashvili ‘The Banks Guarantee Under the Uniform Rules for Demand Guarantees’ (2014) European Scientific Journal 69). A transferrable guarantee refers to a guarantee, which may be made available by a guarantor to a new beneficiary at the instance or request of the existing beneficiary (art 33(c) of the URDG 758 and Chipashvili (op cit) at 73). Transferring a guarantee typically occurs in a situation where the contractual position of the initial beneficiary in the underlying agreement has also been transferred to another person (Roeland F Bertrams Bank Guarantees in International Trade 4ed (Kluwer Law International 2013)).

Before the discussion on the practice of transferring independent guarantees is dealt with, it must be noted that the transfer of rights to demand payment must be distinguished from the assignment of proceeds. An assignment does not grant a right to draw or demand payment; it is basically a right to enjoy the proceeds, which result from the drawing of a guarantee by the beneficiary (James E Byrne The Official Commentary on the International Standby Practices (Institute of International Banking Law and Practice 1998)). On the other hand, a transfer applies to a right to demand payment and to receive such demanded payment.

A demand guarantee may be transferrable. It is, however, only transferrable if it states in itself that it is transferrable, in which case it may be transferred more than once and also, only the amount available at time of transfer will be subject to the transfer (meaning that the guarantee cannot be transferred partially) (art 33(a) of the URDG 758  and J Gloss ‘Transferability of Rights Under Demand Guarantees in German Law’ (https://tradeandforfaiting.blogspot.com, accessed 7-7-2020)). I, therefore, submit that in accordance with the governing rules, an independent guarantee can only be transferred if it states in itself that it shall be transferrable.

The Convention further states that where a guarantee states in itself that it is transferrable, no one (except to the extent of the consensus reached) may effect the transfer if the undertaking does not expressly authorise such a person (art 9 of the Convention (op cit)).

Transferring a guarantee basically means that the title of the beneficiary in terms of the guarantee is changed to whoever the rights to demand payment are being transferred to (Chipashvili (op cit) at 73). The initial beneficiary is consequently termed a transferor of the rights and the new beneficiary is the transferee (art 33(c) of the URDG 758). In terms of the rules of transferring a demand guarantee, the name and signature of the transferee (the new beneficiary) may be used in any other document (Chipashvili (op cit) at 73 and art 33(f) of the URDG 758).

Even if an undertaking expressly states that it is transferrable, the guarantor is under no obligation to give effect to a request of having the guarantee transferred, unless it is to the extent and the manner consented to by the guarantor (art 33(b) of the URDG 758). This means that a demand guarantee is transferred only on the terms and conditions stipulated and agreed to by the guarantor. For purposes of fairness, the refusal to transfer an independent guarantee by a guarantor must be based on justified grounds. Additionally, a counter-guarantee cannot be transferred (art 33(a) of the URDG 758).

The fact that a guarantee is transferred only in accordance with the terms and conditions agreed to by a guarantor indicates the fact that the URDG 758 provides protection to a guarantor in the sense that such a guarantor ‘can withhold its consent to a transfer … of a guarantee, even if the guarantee provides that it is transferable’ (Sefton Fross ‘Understanding the Uniform Demand Guarantee Rules No. 758’ (https://seftonfross.com/, accessed 11-8-2021)). I, therefore, submit that the fact that a guarantee indicates that it is transferrable does not mean the guarantor is obliged to consent to the transfer.

When a demand guarantee is being transferred, the transferor must transfer the rights to demand payment and also, such transferor must notify the guarantor about the acquisition of the rights by the new beneficiary (Chipashvili (op cit) at 73). All the changes pertaining to the guarantee must be included in the undertaking and must be agreed to by the guarantor and the transferor of rights (Chipashvili (op cit) at 73).

The ramification of transferring a demand guarantee is the fact that the transferee (who is subsequently the beneficiary) acquires the right to demand payment on its own accord and without the cooperation of the transferor; this also means that such transferee can make a request for the issuing of a second guarantee if necessary (Catherine Nommick ‘A first demand guarantee is not transferrable when the beneficiary of such guarantee is split-up’ (www.soulier-avocats.com, accessed 20-6-2020)). For example, if a person has acquired the right(s) to demand payment in terms of an independent guarantee, such person has the right to demand payment on their own terms and without having to seek cooperation of the previous beneficiary.

In terms of the practice of transferring demand guarantees, the transferor must notify the guarantor by furnishing same with a signed statement asserting the fact that the right(s) and obligations acquired in terms of the underlying relationship have been acquired by the transferee (who is deemed the new beneficiary) (art 33(d)(ii) of the URDG 758). The signed statement confirms the identity of the parties concerned (the initial beneficiary who is termed the transferor of rights, the transferee who is termed the subsequent beneficiary as well as the guarantor).

Conclusion

Generally, an independent or demand guarantee is transferrable. It is, however, transferrable only if it states that it is transferrable. No unauthorised person may transfer an independent guarantee or rights to demand payment in terms of an independent guarantee if it does not state that it is transferrable, except to the extent of the consensus reached. An independent guarantee is transferred only in accordance with the terms and conditions stipulated by the guarantor.

The consequence of transferring an independent guarantee is the fact that the titles of the transferor and transferee change (the initial beneficiary gets removed and a new beneficiary is inserted). The new beneficiary can transact in the capacity as a beneficiary without having to seek cooperation of the transferor (the initial beneficiary).

Mpho Titong LLB (NWU) is an LLM candidate at the North-West University in Potchefstroom. 

This article was first published in De Rebus in 2021 (Sept) DR 18.

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