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A DCW reader asked about the impact of a specific clause in a counter guarantee issued by a US bank under ISP98 and Saudi law. This clause raises concerns about the presentation of documents and potential payment restrictions
From June 2013's DCW
A DCW Reader Writes:
May I have your opinion on the following query:
A Counter Guarantor Bank issued its Counter Guarantee in favor of a Guarantor (Bank). The Counter Guarantee is subject to ISP98, whereas the Guarantee that will be issued by the Guarantor is subject to Saudi Law.
Guarantee is payable against presentation of a simple demand.
The Counter Guarantor (domiciled in USA) incorporated the following paragraph in their Counter Guarantee indemnity:
a) What is the impact of this paragraph on the document (simple demand)?
b) Is there any requirement of a document/certificate that should be presented by the Guarantor to the Counter Guarantor in the event that there is a call for payment?
I am aware of the ICC Guidance Paper on the Use of Sanction Clauses for Trade Related but am unsure if it is useful in this situation.
DCW Responds: The ICC Paper discourages inclusion of such clauses in independent undertakings but this Paper is not binding on anyone, nor can it change the fact that banks are subject to local regulations and must comply with them.
This clause merely puts the bank on notice of this point. If the documents presented as the local bank under the counter standby violate any applicable US regulation (which would include terrorist financing, drug financing, payment to someone on the list of persons or companies to whom payment cannot be made, etc.), then the bank is prohibited from making payment. Since the demand would typically state that payment was demanded by the local beneficiary of the local undertaking, the issue would only arise to the extent that the details of the payment were apparent from the documentation presented which would include the name of the local beneficiary, any details about the underlying transaction, and any other information available. This information would be apparent from the counter standby if not the simple demand.
To avoid difficulties, one should also monitor the local beneficiaries to ascertain that they and the local transactions are not prohibited by Saudi regulations.
The applicability of Saudi law does not affect the fact that the issuer of the counter standby is subject to the laws of the country in which it operates.
Comments to all queries posed are not necessarily those of DCW and are not provided as legal advice. If legal advice or other expert assistance is required, the service of a competent professional should be sought.
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This Executive Summary provides an overview of topics discussed and debated by leading professionals at the conference.
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