ISP98 Rule 1.04: Analysis and Insights

DCW Editorial Note: This previously unpublished material reflects the thinking and writing of Professor James E. Byrne over the period of multiple years up to his passing in July 2018 in an effort to review and note usage of ISP98 during the first 20 years of the rules’ existence. Several leading bankers, lawyers, and corporate users of ISP98 offered constructive review and contributed valuable input to this material. Throughout this 25th anniversary year of ISP98, DCW will be presenting additional writings of Professor Byrne on various rules. For more on the life and legacy of Professor Byrne, see DCW’s special tribute issue on the IIBLP website.

1. Generally. Rule 1.04 indicates to what and to whom its provisions apply with respect to a standby issued subject to ISP98. The ISP98 system of standby credit practice encompasses not only the original standby itself, but also a host of other inter-related undertakings, including the confirmation, advice, amendment, transfer, acknowledgment of assignment of proceeds, and other similar undertakings. By having been undertaken in relation to a standby subject to these Rules, these related undertakings also become governed by ISP98 except to the extent expressly modified or excluded in the undertaking. It can also affect a number of persons besides the issuer and beneficiary. These other persons include any confirmer, any advisor, a nominated person who elects to act, and an applicant who has authorised the issuance of the standby or otherwise agreed to its application.

2. Background of Rule 1.04. Rule 1.04 was intended to identify the scope of application of ISP98 with more precision than had been the case with various iterations of the UCP. It had been left to guess whether and to what extent practice rules applied to persons who were affected by the standby but who did not expressly agree to their application. The principal underlying Rule 1.04 is that a person who acted under an ISP98 standby was bound by its rules except where varied, as were their undertakings. This approach is complicated by the existence of collateral agreements which may supplement the provisions of ISP98 as between the parties. This situation is most common with respect to the relationship between the applicant and the issuer but can affect any of the relationships indicated as well as the undertakings or agreements involved.

3. These Rules; Rules. Rule 1.04 refers to “Rules”. The word “Rule” or “Rules” is used in three senses in ISP98. The word “Rule” in both singular and plural were deliberately chosen instead of the word “article” or its variations in order to avoid confusion with other practice rules which use the word “Article”.

In the sense used in Rule 1.04, “These Rules” refers to the entire ISP98. Second, as provided in the caption “Rule 1: General Provisions” and other similar headings, it is the title used for each unit of ISP98, including various related subunits. Third, it has been used in the singular (“Rule”) in The Official Commentary on the International Standby Practices and generally from the outset, although not formally in ISP98 itself, as the name of each of the subunits which are not titled “subrules” to avoid confusion in light of the second usage. Hence, ISP98 Rule 1: General Provisions consists of Rule 1.01 through Rule 1.11 inclusive.

4. Terms and Conditions Incorporated. The text of Rule 1.04 provides that “these Rules apply as terms and conditions” to the standby, and other undertakings and respective agreements. This statement is intended to signal that the provisions of ISP98 are to be read as if they were part of the text of the standby except to the extent that they are varied or excluded. While the drafters of ISP98 were mindful of the fact that effective incorporation of standard terms and conditions is an issue for applicable law and not practice rules, the formulation of this rule was intended to provide guidance to courts and arbitral tribunals as to how ISP98 should be interpreted, namely as becoming an integral part of the standby, and other undertaking or agreements to which it relates. Importantly, the incorporation of ISP98 as terms and conditions should signal the intention to apply, and abide by, standard standby practice as formulated in these Rules.

5. Standby; Amendment; Confirmation. Rule 1.04 states that its rules apply as provisions incorporated into the standby unless expressly varied. In this Rule, the word “standby” is used in the sense of an undertaking issued subject to ISP98 as indicated in Rule 1.11(b) (Interpretation of these Rules).1 The undertaking may be named “letter of credit”, “bond”, “(first demand) (bank) (abstract) (independent) guarantee”, or the like.2 It would also apply to a counter standby.3

Whether the term “standby” includes an “amendment” is more complicated. It would include an automatic amendment, and a proposed amendment that has received the consent of the beneficiary.4 Whether the use of the term “standby” includes a proposed amendment depends on the context and the person whose obligation or rights are being discussed.

The word “standby” also includes “confirmation” as implied in Rule 1.11(c)(i) (Interpretation of these Rules)5 and as stated in ISP98 Official Interpretation 1.11:01 (February 2018) (The term “standby” also includes “confirmation” unless the context requires otherwise).

6. To What Undertaking Applicable.
a. Confirmation. Rule 1.04 states that its rules apply as provisions incorporated into any confirmation unless expressly varied. The undertaking embodied in a confirmation is explained in Rule 2.01(d) (Undertaking to Honour by Issuer and Any Confirmer to Beneficiary).6 Unless the confirmation is expressly made subject to other practice rules or excludes ISP98, a confirmation subject to an ISP98 standby is also subject to ISP98.

b. Assignment of Proceeds. Rule 1.04 does not expressly mention an assignment of proceeds nor name the assignee of proceeds as being affected by ISP98. It does, however, state that its Rules apply as terms and conditions to any “other agreement” of the issuer, beneficiary, nominated person, or the confirmer. These terms are broad enough to encompass an assignment of proceeds which is treated in detail in Rules 6.06-6.10. Unless the acknowledgement of a request by the beneficiary to assign proceeds to a third person expressly excludes ISP98 or modifies these provisions, an assignment of proceeds is governed by ISP98.

c. Advice. Rule 1.04 states that its rules apply as provisions incorporated into any advice unless expressly varied. Unless the advice of an ISP98 standby is expressly made subject to other practice rules or expressly excludes ISP98, the advice is also subject to ISP98. The obligations inherent in an advice are stated in Rule 2.05 (Advice of Standby or Amendment).7

d. Nomination. Rule 1.04 states that its rules apply as provisions incorporated into an undertaking of a nominated bank unless expressly varied. Unless the undertaking of a nominated bank of an ISP98 standby is expressly made subject to other practice rules or expressly excludes ISP98, the undertaking is also subject to ISP98. The role and obligation of a nominated person is described in Rule 2.04 (Nomination).8

e. Amendment. Rule 1.04 states that its rules apply as provisions incorporated into an amendment to the standby unless expressly varied. Unless the proposed amendment to an ISP98 standby is expressly made subject to other practice rules or expressly excludes ISP98, the amendment is also subject to ISP98. The obligations inherent in a proposed amendment are discussed in Rule 2.06(b) (When an Amendment is Authorised and Binding).9

f. Transfer. Rule 1.04 states that its rules apply as provisions incorporated into a transfer of the standby unless expressly varied. Unless the transfer of an ISP98 transferred standby is expressly made subject to other practice rules or expressly excludes ISP98, the transfer is also subject to ISP98.

g. Request for Issuance. Rule 1.04 states that its rules apply as provisions incorporated into a request for issuance of a standby unless expressly varied. Unless the agreement between the issuer and applicant of an ISP98 standby is expressly made subject to other practice rules or expressly excludes ISP98, the application is also subject to ISP98.

h. Other Agreement. Rule 1.04 states that its rules apply as provisions incorporated into other agreements collateral to the standby or other undertakings unless expressly varied. This signals the intention of the drafters of ISP98 that the list of agreements and undertakings is not exhaustive.

7. Persons Affected by the Rules. As indicated in this Rule, a standby issued subject to these Rules affects not only the issuer and beneficiary who uses the standby but also any advisor, confirmer, or any other person who agrees to act or does act within the scope of a nomination in the standby.

a. Issuer; Rule 1.04(i). The text of Rule 1.04 refers to the “issuer”.10 “Issuer” is not defined in ISP98 but the undertaking of an issuer is set forth in Rule 2.01(a) – (c) and (e) (Undertaking to Honour by Issuer and Any Confirmer). Rule 1.04(i) states that the rules of ISP98 apply as terms and conditions applicable to the issuer with respect to any undertaking that it makes or authorises which would include the standby, any amendment, advice, confirmation, nomination, agreement with the applicant, or any other agreement. The obligations of an issuer are stated in Rule 2.01(a)–(c) (Undertaking to Honour by Issuer and Any Confirmer to Beneficiary).

b. Beneficiary Who Uses the Standby; Rule 1.04(ii). Rule 1.04(ii) states that the rules of ISP98 apply as terms and conditions applicable to the beneficiary with respect to any undertaking that it makes, authorises or utilises to the extent of utilisation which would include the standby, any amendment, advice, confirmation, nomination, or any other agreement. “Beneficiary” is defined in Rule 1.09(a) (Defined Terms: Definitions).11

c. Advisor; Rule 1.04(iii). Rule 1.04(iii) states that the rules of ISP98 apply as terms and conditions applicable to the advisor with respect to any undertaking that it makes or authorises which would include the advice of the standby or any amendment, advice of confirmation, advice of nomination, or any other agreement. The obligations inherent in an advice are stated in Rule 2.05 (Advice of Standby or Amendment).12

d. Confirmer; Rule 1.04(iv). Rule 1.04(iv) states that the rules of ISP98 apply as terms and conditions applicable to the confirmer with respect to any undertaking that it makes or authorises which would include any amendment to which it elects to consent, advice, confirmation, nomination, agreement with the beneficiary, or any other agreement. “Confirmer” is defined in Rule 1.09(a) (Defined Terms: Definitions).13

e. Nominated Person Who Acts or Agrees to Act; Rule 1.04(v). Rule 1.04(v) states that the rules of ISP98 apply as terms and conditions applicable to a nominated person not authorised to add its confirmation who acts on a nomination or agrees to do so with respect to any undertaking that it makes or authorises which would include the standby, any amendment, advice, undertaking to honour complying documents, nomination, agreement with the applicant, or any other agreement.

f. Applicant Who Authorises Issuance or Agrees to ISP98 Application; Rule 1.04(vi). Rule 1.04(vi) states that the rules of ISP98 apply as terms and conditions applicable to the applicant with respect to any undertaking that it makes or authorises which would include the issuance of the standby, any amendment, advice, confirmation, nomination, or agreement with the issuer, or any other agreement.

The Rule also indicates that, to the extent applicable, its provisions apply to an applicant who “authorises issuance of the standby or otherwise agrees to the application of these Rules”. This provision would encompass the situation where the application expressly provides that the standby will be issued subject to these Rules. It would also conceivably encompass the situation where the standby was issued subject to the Rules and the applicant, after having been given due notice, failed to object. ISP98 addresses some but not all aspects of the legal relationship between the issuer and the applicant. It is to the reimbursement agreement between issuer and applicant that one must look for the complete context of the various obligations and responsibilities between them. For example, it is common for applications, course of dealings, or usage of trade to provide for a different standard of examination than that provided in these Rules. They would prevail over the ISP98 rule with respect to the applicant’s obligation to reimburse as is indicated in Rule 8.01(c) (Right to Reimbursement).14 Although these Rules contain numerous provisions which affect the applicant and its rights and obligations, particularly with regard to reimbursement, the applicant is not a party to the standby and is not in privity with any party other than the issuer. For example, it has no right to object to the amendment of the standby if the issuer decides to amend without applicant instruction or approval (e.g., if the applicant is insolvent) but this action may jeopardise the issuer’s right to reimbursement. In addition, an applicant cannot assert discrepancies directly against a nominated person or the beneficiary.

g. Transferor; Transferee Beneficiary. Rule 1.04 states that ISP98 applies as terms and conditions incorporated into a transfer. As such, the standby must be transferable and effected by a bank authorised to effect the transfer. When a transferable standby is duly transferred, the transferee beneficiary becomes the only person entitled to draw on the standby. Although not mentioned, the same principle would apply to a successor beneficiary where there is a transfer by operation of law under Rules 6.11-6.14.

h. Assignee of Proceeds. While assignment of proceeds is not mentioned in Rule 1.04, it is governed by ISP98, namely Rules 6.06-6.10, and falls within undertakings of the issuer, the beneficiary, and possibly a nominated person. Where there has been an assignment of proceeds, the assignee has no rights to draw on the standby but only to those proceeds available under the scheme of provisions set forth in Rule 6.07(b) (Request for Acknowledgement).15

8. Unless the Context Otherwise Requires or Unless Expressly Modified or Excluded; Variation. The provisions of Rule 1.04 can be varied, that is modified or excluded, by the terms of the standby as is provided in Rule 1.01(c) (Scope and Application).16 Any variation, however, should be considered carefully so as to avoid unintended consequences.17

It is conceivable that the issuer of an undertaking or the parties to the agreement may wish to vary provisions of ISP98. However, variation of Rule 1.04 would render ISP98 inapplicable or considerably alter the manner in which it is applicable. In such a situation, it may be wondered what effect this provision would have on the related undertakings and what is the point of the standby having been issued subject to ISP98.

Endnotes:

1. Rule 1.11(b) (Interpretation of these Rules) states: “In these Rules, “standby letter of credit” refers to the type of independent undertaking for which these Rules were intended, whereas “standby” refers to an undertaking subjected to these Rules.”
2. See TTI Team Telecom International Ltd. v Hutchison 3G UK Ltd. [2003] EWHC 762 (TCC) [England] (performance bond made subject to ISP98, evidencing parties’ intention to establish an independent undertaking), abstracted in 2004 ANNUAL SURVEY OF LETTER OF CREDIT LAW & PRACTICE at 335.
3. See Rule 4.21 (Request to Issue a Separate Undertaking). Unless it is independent, “standby” would not apply to a local undertaking.
4. See Rule 2.06 (When an Amendment is Authorised and Binding).
5. Rule 1.11(c)(i) (Interpretation of these Rules) states: “Unless the context otherwise requires: i. “Issuer” includes a “confirmer” as if the confirmer were a separate issuer and its confirmation were a separate standby issued for the account of the issuer”.
6. Rule 2.01(d) (Undertaking to Honour by Issuer and Any Confirmer to Beneficiary) states: “i. A confirmer undertakes to honour a complying presentation made to it by paying the amount demanded of it at sight or, if the standby so states, by another method of honour consistent with the issuer’s undertaking.
   ii. If the confirmation permits presentation to the issuer, then the confirmer undertakes also to honour upon the issuer’s wrongful dishonour by performing as if the presentation had been made to the confirmer.
   iii. If the standby permits presentation to the confirmer, then the issuer undertakes also to honour upon the confirmer’s wrongful dishonour by performing as if the presentation had been made to the issuer.”
7. Rule 2.05 (Advice of Standby or Amendment) states: “a. Unless an advice states otherwise, it signifies that: i. the advisor has checked the apparent authenticity of the advised message in accordance with standard letter of credit practice; and ii. the advice accurately reflects what has been received. b. A person who is requested to advise a standby and decides not to do so should notify the requesting party.”
8. Rule 2.04 (Nomination) states: “a. A standby may nominate a person to advise, receive a presentation, effect a transfer, confirm, pay, negotiate, incur a deferred payment obligation, or accept a draft. b. Nomination does not obligate the nominated person to act except to the extent that the nominated person undertakes to act. c. A nominated person is not authorised to bind the person making the nomination.”
9. Rule 2.06(b) (When an Amendment is Authorised and Binding) states: “b. If there is no provision for automatic amendment, an amendment binds: i. the issuer when it leaves the issuer’s control; and ii. the confirmer when it leaves the confirmer’s control, unless the confirmer indicates that it does not confirm the amendment.”
10. The term “issuer” appears in SWIFT MT 760 (2019 RELEASE) Sequence B Field 52a (Issuer) and is mandatory. It is defined as “the party that issues the undertaking…” For an explanation of the SWIFT (2019 RELEASE), see the introduction to this Official Commentary.
11. Rule 1.09(a) (Defined Terms: Definitions) “Beneficiary” is defined as “a named person who is entitled to draw under a standby”.
12. Rule 2.05 (Advice of Standby or Amendment) states: “a. Unless an advice states otherwise, it signifies that: i. the advisor has checked the apparent authenticity of the advised message in accordance with standard letter of credit practice; and ii. the advice accurately reflects what has been received. b. A person who is requested to advise a standby and decides not to do so should notify the requesting party.”
13. Under Rule 1.09(a) (Defined Terms: Definitions), “Confirmer” is defined as “a person who, upon an issuer’s nomination to do so, adds to the issuer’s undertaking its own undertaking to honour a standby.”
14. Rule 8.01(c) (Right to Reimbursement) states: “This Rule supplements any applicable agreement, course of dealing, practice, custom or usage providing for reimbursement or indemnification on lesser or other grounds.”
15. Rule 6.07(b) (Request for Acknowledgement) states: “If an assignment is acknowledged: i. the acknowledgment confers no rights with respect to the standby to the assignee who is only entitled to the proceeds assigned, if any, and whose rights may be affected by amendment or cancellation; and ii. the rights of the assignee are subject to: (a) the existence of any net proceeds payable to the beneficiary by the person making the acknowledgment; (b) rights of nominated persons and transferee beneficiaries; (c) rights of other acknowledged assignees; and (d) any other rights or interests that may have priority under applicable law.”
16. Rule 1.01(c) (Scope and Application) states: “An undertaking subject to these Rules may expressly modify or exclude their application.”
17. See, for example, the Australian case Griffin Energy Grp. Pty Ltd. v. ICICI Bank Ltd. [2015] NSWSC 87 [Australia], summarised in 2016 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE at 374, in which three ISP98 standbys for AUD 150 million redefined the ISP98 definition of “banking day” and which resulted in problems for the beneficiary when the expiration date fell on a non-banking day and a required draft was not able to be executed by the deadline in the standby. This drafting exercise resulted in a legal malpractice action against the law firm that drafted the standby in Griffin Energy Group Pty. Ltd. v. Laughland [2016] NSWSC 1057 [Australia], summarised in 2017 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE at 508.