Counter Standby/Counter Guarantee Practice: The Problems of Nomenclature

Counter guarantee practice grew out of the murky suspicions in the 1960s and 70s that led Mid Eastern beneficiaries to devise strategies to defeat the attempts of European and North American banks to favour their clients in letter of credit type transactions. The perception, not entirely inaccurate, was that the banks were not prepared to honour their undertakings when their clients complained that the drawings were unfair, abusive, or fraudulent. Moreover, even where the “foreign” banks expressed the intention of honouring a presentation that complied on its face, courts in the applicants’ countries were often prepared to issue injunctions or stop payment orders on the basis of allegations of letter of credit fraud or abusive drawing.

As a result, the Mid Eastern buyer of goods or services insisted on undertakings issued by banks that were proximate and unsympathetic to claims of buyer abuse. Before their “local” banks would issue such undertakings for “foreign” entities, however large, they needed firm promises of reimbursement. Hence, the sellers’ banks issued their counter guarantees in favor of the “local” banks.

Although North American banks did not usually issue demand guarantees, they were soon induced to issue an equivalent product, the Counter Standby to complement their standby letters of credit.