Presenting a live 90‐minute webinar with interactive Q&A Letters of Credit Stand by Letters Letters of Credit, Stand‐by Letters and Bank Demand Guarantees Crafting Credit Instruments for Domestic and International Financing Transactions Today’ s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, DECEMBER 20, 2011 Today s faculty features: Kevin J. Connolly, Shareholder, Anderson Kill & Olick, New York Isaac E. Druker, Shareholder, Anderson Kill & Olick, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
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Presenting a live 90‐minute webinar with interactive Q&A
Letters of Credit Stand by Letters Letters of Credit, Stand‐by Letters and Bank Demand GuaranteesCrafting Credit Instruments for Domestic and International Financing Transactions
Kevin J. Connolly, Shareholder, Anderson Kill & Olick, New York
Isaac E. Druker, Shareholder, Anderson Kill & Olick, New York
The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
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DisclaimerDisclaimerThe views expressed by the participantsThe views expressed by the participants in this program are not those of the participants’ employers, their clients, orparticipants employers, their clients, or any other organization. The opinions expressed do not constitute legal advice, or risk management advice. The views discussed are for educational
l d id d l fpurposes only, and provided only for use during this session.
15th Century Italy laid the foundations of the first international b ki tbanking system.
• A merchant could deposit bullion in Rome, travel to Adrianopolis intravel to Adrianopolis, in the shadow of Istanbul, and draw his money from a correspondent infrom a correspondent in order to fund the caravan
The DocumentsThe Documents• Unless the credit specifies p
otherwise, the bill of lading must be “clean”
• A bill of lading or other “transport document” thattransport document that takes exception for damaged containers or like evidence that the contents have been tainted is not cleantainted is not clean
• Banks do not accept a document package with transport documents so noted unless the creditnoted unless the credit expressly stipulates the notations that are permitted.
Conforming DocumentsConforming Documents• Proof of insurance is
t i d lnot required unless specified in the letter of creditI ti f• Incorporation of contract term by reference does not affect draws under theaffect draws under the L/C
• L/C transaction is based on the DOCUMENTSon the DOCUMENTS and critically the four corners of the L/C
Commercial Letter of CreditCommercial Letter of Credit• Serves to identify an L/C y
that is expected to serve as the payment facility for the contract
• Identifies the bearer as a• Identifies the bearer as a financially-responsible party recognized as such by correspondent banks y pat the remote location
• The Seller in such a transaction can discount the bill of exchange forthe bill of exchange for cash more readily
to the enactment in theto the enactment in the United States of the Glass-Steagall Act.
• This prohibited pcommercial banks from selling insurance or underwriting securities, prohibited investmentprohibited investment banks from accepting demand deposits or selling insurance, and k t i ikept insurance companies out of banking
the enactment of Glass-Steagall, commercial banks had found a way
d th t i t faround the strictures of the statute
• They issued letters of credit that provided thatcredit that provided that no draws could be made absent a default by the account partyby the account party under some other obligation
Governing CodeGoverning Code• Standby letters ofStandby letters of
credit began with a problem: they are square pegs in round q p gholes
• The Uniform Customs and Practices forand Practices for Documentary Credits were for years employed as the e p oyed as t egoverning regime for standbys.
UCP 600UCP 600• “Credit” means an irrevocable definite• Credit means an irrevocable, definite
undertaking of the issuer to “honor” a presentationp
• “Honor” means– For a sight credit, by making payment– For a deferred credit, to incur the bank’s own
obligation and to pay the same at maturityFor an acceptance credit to accept a bill of– For an acceptance credit, to accept a bill of exchange or draft drawn by the beneficiary and to pay the acceptance at maturity
i i d bcommissioned by the ICC to fix the problems caused byproblems caused by US banks’ continued insistence on using th UCP tthe UCP to govern standby credits
t db i “i d d t” d• It is an “absolute” commitment
t fstandby is “independent” and the rights and defenses of the parties do not depend on
– issuer’s right to receive reimbursement
to perform– Acceptance– Sight Payment– Deferred Payment
Th i i t treimbursement– the beneficiary’s right to receive
payment pursuant to the contract– reference to any other document
in the standbyth i ’ t l
• The issuer is not a guarantor and is not liable for
– the performance or breach of the underlying agreement
– Accuracy genuineness or effect– or even the issuer’s actual knowledge that there has been a breach (or performance) of the underlying contract or reimbursement agreement
Accuracy, genuineness or effect of any document presented under the standby
– the acts or omissions of others, even if those others are selected and instructed by the issuerand instructed by the issuer
• Issuer is not required to conform to any law other than the law of the place of presentment
ISP 98ISP 98• Standby letters of credit • The standby should specify y
generally require that the beneficiary draw a bill of exchange and present it with a certificate by the
y p ythe medium of presentment– If no medium is specified,
then paper documents must be presented
fbeneficiary– Certificates might declare that
an event of default had occurred under the “value transaction” and other
– However, if the standby is payable on simple demand and the beneficiary is a bank of S.W.I.F.T. participant, the presentment may be made bytransaction and other
conditions (notice, lapse of time) entitling beneficiary to draw
– More modern practice is for
presentment may be made by S.W.I.F.T., tested telex, or other “similar authenticated means”
– Issuer may always permit l t i t t i itMore modern practice is for
beneficiary simply to certify that it is entitled to present the draft under the standby
ISP 98ISP 98• Standby letters of credit • The standby should specify y
generally require that the beneficiary draw a bill of exchange and present it with a certificate by the
y p ythe medium of presentment– If no medium is specified,
then paper documents must be presented
fbeneficiary– Certificates might declare that
an event of default had occurred under the “value transaction” and other
– However, if the standby is payable on simple demand and the beneficiary is a bank of S.W.I.F.T. participant, the presentment may be made bytransaction and other
conditions (notice, lapse of time) entitling beneficiary to draw
– More modern practice is for
presentment may be made by S.W.I.F.T., tested telex, or other “similar authenticated means”
– Issuer may always permit l t i t t i itMore modern practice is for
beneficiary simply to certify that it is entitled to present the draft under the standby
• No formalities required • Unless the standby q(notarization, officialization, witnesses) unless stipulated in the standby
yrequires the presentation of an electronic record, issuer owes applicant no duty to ascertain thestandby
• If formalities are required, issuer is not required to vet the authenticity of the
duty to ascertain the identity of the person making the presentation– But note that if the standby
i th t tiy
indicia of notarization etc.– Apparent compliance is
sufficient to authorize payment
requires the presentation of a bill of exchange, the issuer is bound by the law of negotiable instruments to make payment only to apayment to make payment only to a holder
ISP 98: Legal DocumentsISP 98: Legal Documents• Unlike the situation with • Issuer’s examination isUnlike the situation with
commercial credits, a standby is not transmuted into an
Issuer s examination is limited to the apparent good order of the documentstransmuted into an
accessory surety bond by requirements for court decrees arbitral
documents• Issuers should examine
their Financial Institution Bonds to seecourt decrees, arbitral
awards, government-issued documents and the like
Institution Bonds to see what insurance they have for defending against claims that thethe like against claims that the nonconformity of the presentation was patent
Demand GuarantiesDemand Guaranties• The Uniform Rules for • Undertaking is given
Demand Guaranties, ICC Document 458, defines these as an undertaking to pay money upon a
g geither– at request of the Principal
and under its liability orAt the request of a bank orto pay money upon a
presentation of a written demand for payment in accordance with the terms f th d t ki
– At the request of a bank or insurance company (the “Instructing Party”) acting on behalf of the Instructing Party’s own client which isof the undertaking
• Other documents (architect’s certificate, judgment or arbitral
Party s own client, which is also a Principal
• The Guaranty is “independent” on the same terms as discussedjudgment or arbitral
Types of Bank GuarantiesypVery similar to surety bond products
• Tender Guaranties correspond t Bid B d i US l
• Maintenance and Warranty G tito Bid Bonds in US parlance
– Generally payable on First Demand
• Performance Guaranties pays an owner if a contractor has not
Guaranties– Functionally similar to the
Performance Guaranty but covers post-completion defects only
– Generally written for much lessan owner if a contractor has not, not timely, not completely or not properly per-formed its contract
– Typically written for 5% to 10% of the contract sum
Generally written for much less than a corresponding performance guaranty
• Repayment/Advance Payment Guaranties
I t d f b i d ith• Retention Guaranties– Instead of retaining 10% of each
progress payment, Owner pays 100% of the value of the work each payment and the contractor
– Instead of being concerned with a credit to cover the difference between the cost of the work and its reasonable value, a contractor could deliver a guaranty for the performance of Work for whicheach payment and the contractor
furnishes a guaranty to substitute for retention
performance of Work for which the Owner has made advance mobilization payments