Independent vs. Accessory Guarantees – a Tale of Two Cases: Shanghai Shipyard and Bank Audi

Different jurisdictional interpretations of guarantee law reinforce the need for practice rules in demand guarantee transactions.

As a financial services attorney in the United States for nearly 50 years, I still have a lot to learn about the way the rest of the world uses so-called demand or bank guarantees and argues about whether they are independent or accessory undertakings. For historical reasons and regulatory concerns, U.S. banks seldom issue bank guaranties. The regulations have been modernized to allow U.S. banks to issue bank guarantees, but they must be payable against presentation of documents under a recognized regime such as the UCC Article 5, the ISP, the UCP, the eUCP, or the UNCITRAL Convention.1 U.S. banks are not to issue undertakings based on nondocumentary conditions or the resolution of facts or legal disputes between the applicant and the beneficiary.2 The rest of the world does not have the same bank regulatory regime as does the U.S. when it comes to banks issuing guarantees.

James Barnes, dean of the U.S. letter of credit bar, authored an article in 20133 citing the problems of the French and the British determining whether an undertaking is independent or accessory:

“Is it a demand guarantee?” This was the title of a December 2004 DC Insight article by Georges Affaki, in which he noted then that in France there had been over 300 decisions dealing solely with whether an undertaking should be characterized as independent (suretyship or independent guarantee). The article describes this type of litigation as a European “sport” inducing drafters of guarantee texts to burden and lengthen them with meticulous details as to their character. It concludes with recommendations to incorporate the URDG and to use published URDG templates (then ICC publication no. 503).

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