Page 16 – Letter of Credit Consultancy Services

Latest Version of UCP: What are the Differences Between UCP 400, UCP 500 and UCP 600

Ozgur Eker (CDCS) Commercial Letter of Credit Rules, Rules 20 October 20186 April 2019Letter of Credit Rules, UCP 600

Almost all of the letters of credit issued in swift format having a clause under field “40E: Applicable Rules” telling us that the letter of credit subject to “UCP Latest Version“.

In this post, I explain the meaning of UCP and its latest version.

What Does UCP Mean?

UCP is the short form of Uniform Customs and Practice for Documentary Credits.

UCP is the set of international rules that govern the letter of credit transactions throughout the world.

It would be necessary to state that some professionals mistakenly use UCPDC abbreviation instead of UCP. Correct usage should be UCP for the Uniform Customs and Practice for Documentary Credits not UCPDC.

What is the Latest Version of UCP?

First international letter of credit rules published nearly 80 years ago in year 1933. Since then letter of credit rules have been revised regularly by ICC ( International Chamber of Commerce).

Let us have a look at the UCP history below,

1933 – Uniform Customs and Practice for Commercial Documentary Credits
1951 Revision – Uniform Customs and Practice for Commercial Documentary Credits
1962 Revision – Uniform Customs and Practice for Documentary Credits
1974 Revision – Uniform Customs and Practice for Documentary Credits
1983 Revision – Uniform Customs and Practice for Documentary Credits (UCP 400)
1993 Revision – Uniform Customs and Practice for Documentary Credits (UCP 500)
2007 Revision – Uniform Customs and Practice for Documentary Credits (UCP 600)

As indicated above 2007 Revision of the letter of credit rules are the latest version of the Uniform Customs and Practice for Documentary Credits.

Why Banks Give Reference to the Latest Version of UCP in Letters of Credit?

Banks, who do not want to create any ambiguity when issuing letters of credit, should always mention that letters of credit that they have issued is subject to “UCP Latest Version“.

If issuing banks would not act as explained above, by not giving express reference to the exact version of letter of credit rules when issuing letters of credit, then one of the letter of credit parties may indicate that they would like to use other version of Uniform Customs and Practice for Documentary Credits when fulfilling their obligations.

How to Buy UCP 600 Online?

Ozgur Eker (CDCS) Commercial Letter of Credit Rules, Rules 20 October 20186 April 2019Letter of Credit Rules, UCP 600

It is vital importance for each professional, who deals with letters of credit, to work with right sources and reference publications.

UCP 600 and ISBP 2013 are the only official rule books that govern commercial letter of credit transactions. They are published by ICC Banking Commission.

Standby letter of credit rules are known as ISP 98.

All other publications, even published by ICC, will not be regarded as an official letter of credit rules books.

I have just received a message from one of my followers. She would like to know more about UCP 600 and she wants to know where to buy UCP 600 from internet.

Here is her message:

Dear team from “Letter of Credit.biz”
I would like to first of all introduce myself as a person who is constantly looking for more information on letters of credit. I am always interested on those issues and for me, LC´s are very important tools in my work.
I always looked for UCP 600 rules on internet, but I just found some website with many commentaries. But Is there an neutral book just with the rules as they are? And where can I buy it?
In case this book is not on sale, where can I download it from internet?
Thanks a lot!
Laura

Dear Laura,

Please select your reference books from ICC publications, because the more you walk away from official ICC publications, the closer you get to the confusion.

For commercial letters of credit you should buy UCP 600 and ISBP 2013 as a reference books.

These two publications are the only official ICC publications that govern the letters of credit rules.

You can buy UCP 600 e-book version from this link : UCP 600 e-book and you can buy ISBP 2013 e-book version from this link : ISBP 2013 e-book

For standby letters of credit you should buy ISP 98. You can buy ISP 98 e-book version from this link : ISP 98 e-book

UCP 600 and ISP 98 are neutral rule books. ISBP 2013 is more like an explanation book of UCP 600 supported with examples.

UCP 600

Ozgur Eker (CDCS) Commercial Letter of Credit Rules, Rules 19 October 201818 April 2021Letter of Credit Rules, UCP 600

What is UCP 600?

UCP 600 is the latest version of the rules that govern letters of credit transactions worldwide.

UCP 600 is prepared by International Chamber of Commerce’s (ICC) Commission on Banking Technique and Practice.

Its full name is 2007 Revision of Uniform Customs and Practice for Documentary Credits, UCP 600, and (ICC Publication No. 600).

The ICC Commission on Banking Technique and Practice approved UCP 600 on 25 October 2006. The rules have been effective since 1 July 2007.

UCP 500 was the rules that had been in implementation before UCP 600.

There are several significant differences exist between UCP 600 and UCP 500. Some of these differences are as follows;

The number of articles reduced from 49 to 39 in UCP 600;
In order to reach a standard meaning of terms used in the rules and prevent unnecessary repetitions two new articles have been added to the UCP 600. These newly added articles are Article 2 “Definitions” and Article 3 “Interpretations”. These articles bring more clarity and precision in the rules;
A definitive description of negotiation as “purchase” of drafts of documents;
New provisions, which allow for the discounting of deferred payment credits;
The replacement of the phrase “reasonable time” for acceptance or refusal of documents by a maximum period of five banking days.

History of UCP

First uniform rules published by ICC in 1933. Revised versions were issued in 1951, 1962, 1974, 1983 and 1993.

1933 – Uniform Customs and Practice for Commercial Documentary Credits
1951 Revision – Uniform Customs and Practice for Commercial Documentary Credits
1962 Revision – Uniform Customs and Practice for Documentary Credits
1974 Revision – Uniform Customs and Practice for Documentary Credits
1983 Revision – Uniform Customs and Practice for Documentary Credits
1993 Revision – Uniform Customs and Practice for Documentary Credits

Currently majority of letters of credit issued everyday is subject to latest version of the UCP.

This widely acceptance is the key sign that shows the importance of the UCP, which are the most successful private rules for trade ever developed.

eUCP

Most of the presentations are being made in paper or traditional format still in today’s letters of credit environment.

However, as telecommunication technology is expanding its borders, it is highly expected that in the very near future traditional processes will be substituted with the electronic paperless transactions.

In order to establish set of rules that governs electronic presentations the ICC Banking Commission established a Working Group consisting of experts in the UCP, electronic trade, legal issues and related industries, such as transport, to prepare the appropriate rules for electronic and mixed presentations.

Supplement to the Uniform Customs and Practice for Documentary Credits for Electronic Presentation or “eUCP” is the result of the efforts of this committee.

The eUCP is not a revision of the UCP.

The UCP will continue to provide the industry with rules for paper letters of credit for many years.

The eUCP is a supplement to the UCP that, when used in conjunction with the UCP, will provide the necessary rules for the presentation of the electronic equivalents of paper documents under letters of credit.

ISP 98 – International Standby Practices

Ozgur Eker (CDCS) Rules, Standby Letter of Credit Rules 18 October 20186 April 2019ISP 98, Letter of Credit Rules, Standby Letter of Credit Rules

ISP 98: Standby Letters of Credit Rules

ISP 98 is the set of rules that governs standby letters of credit. They have been published by ICC Banking Commission. ISP 98 – International Standby Practices ICC Publication No. 590 , 1998 Edition. ISP 98 is in force as of January 1, 1999

ISP 98 – International Standby Practices is the title of the book that is published by ICC to govern the standby letters of credit transactions (SBLC ).

ISP 98 consists of 76 pages in total. Full details of ISP 98 for ordering considerations are as follows : ISP 98 – International Standby Practices ICC Publication No. 590 , 1998 Edition. ISP 98 is in force as of January 1, 1999.

How to Buy ISP 98?

ISP 98 is both available by e-book format and hard copy. It is sold under online ICC Bookstores. You can buy ISP 98 from this link.

Benefit of ISP 98 – International Standby Practices

ISP 98 International Standby Practices was written exclusively for standby letters of credit.

Prior to ISP 98 standby letters of credit were issued under commercial letters of credit rules. This was not an effective way as standby letters of credit and commercial letters of credit have significant differences with regards to scope and practice.

ISP 98 has been reduced the cost and time of drafting, limit problems in handling and avoid countless disputes and unnecessary litigation that have resulted from the absence of internationally agreed rules on standby letters of credit.

International Standby Practices fills an important gap in the market place.

The 98 Rules in International Standby Practices (ISP98) offer a precise and detailed framework for practitioners dealing with standby letters of credit.

Developed by the Institute of International Banking Law and Practice, endorsed and published by the International Chamber of Commerce (ICC), ISP98 is the standardized text for the use of standbys worldwide.

ISP98 Rules

contain precise definitions of key terms such as “original” and “automatic amendment”
cover in detail the standby process from “Obligations” to “Syndication”
provide neutral rules acceptable in most situations
save both time and money in negotiating and drafting standby terms
help avoid litigation and unexpected loss
propose basic definitions should the standby involve presentation of documents by electronic means
provide international standards for the use of this fast growing financial instrument

Rule 1 General Provisions
Rule 2 Obligations
Rule 3 Presentations
Rule 4 Examination
Rule 5 Notice, Preclusion, and Disposition of Documents
Rule 6 Transfer, Assignment, and Transfer by Operation of Law
Rule 7 Cancellation
Rule 8 Reimbursement Obligations
Rule 9 Timing
Rule 10 Syndication/Participation

What are the Differences Between Standby Letters of Credit and Commercial Letters of Credit?

Ozgur Eker (CDCS) Commercial Letter of Credit, Letter of Credit Types, Standby Letter of Credit 18 October 20186 April 2019Commercial Letter of Credit, Letter of Credit Types, Stand-by Letter of Credit

Standby letters of credit and commercial letters of credit are two main documentary credit types used in international trade transactions.

A standby letter of credit is a bank’s undertaking of fulfilling the applicant’s obligations.

In case, the applicant can’t fulfill contractual obligations against the beneficiary of the standby letter of credit, then the beneficiary can apply to the issuing bank for full compensation.

A commercial letter of credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.

Commercial letters of credit are mainly used as a primary payment method in export and import of the tangible goods in international trade.

Table 1: Differences Between Standby Letter of Credit and Commercial Letter of Credit

Common Characteristics of Standby Letters of Credit and Commercial Letters of Credit:

Both standby and commercial letters of credit;

are irrevocable and conditional payment promises, which is given by a trusted financial institution mostly by a bank.
independent payment mechanisms, whatever contracts they may base.
are governed by ICC’s rules, ISP 98 and UCP 600, respectively.
have a documentary nature.

Types of Standby Letters of Credit

Ozgur Eker (CDCS) Letter of Credit Types, Standby Letter of Credit 17 October 20186 April 2019Stand-by Letter of Credit

What are the Main Types of Stand-by Letters of Credit?

In this post after giving the standby letter of credit (SBLC) definition, we will have a look at the role and structure of the SBLC.

Later on we explain types of standby letters of credit such as performance standby letter of credit, advance payment standby letter of credit, bid bond / tender bond standby letter of credit, counter standby letter of credit, financial standby letter of credit, insurance standby letter of credit, commercial standby letter of credit.

Definition: A standby letter of credit is a bank’s undertaking of fulfilling the applicant’s obligations.

A standby letter of credit is issued as a collateral and is therefore not intended to be used as a primary payment method unlike a commercial letter of credit.

Standby letters of credit will be liquefied only if the applicant default of its responsibilities under the underlying contract.

Standby letters of credit can be seen as a mixture of “commercial letters of credit” and “demand guarantees”. Standby letters of credit have the same structure as the commercial letters of credit, whereas their role is almost identical to the demand guarantees.

Structure: According to ISP 98, International Standby Practices, “A standby is an irrevocable, independent, documentary, and binding undertaking when issued and need not so state.”.

These are also the main characteristics of the commercial letters of credit.

Usage: The role of a standby letter of credit is that the issuer will “stand by” to perform in the event of the account party’s non-performance or default.

Types of Standby Letters of Credit:

A “Performance Standby” supports an obligation to perform other than to pay money, including for the purpose of covering losses arising from a default of the applicant in completion of the underlying transactions.
An “Advance Payment Standby” supports an obligation to account for an advance payment made by the beneficiary to the applicant.
A “Bid Bond/Tender Bond Standby” supports an obligation of the applicant to execute a contract if the applicant is awarded a bid.
A “Counter Standby” supports the issuance of a separate standby or other undertaking by the beneficiary of the counter standby.
A “Financial Standby” supports an obligation to pay money, including any instrument evidencing an obligation to repay borrowed money.
A “Direct Pay” Standby supports payment when due of an underlying payment obligation typically in connection with a financial standby without regard to a default.
An “Insurance Standby” supports an insurance or reinsurance obligation of the applicant.
A “Commercial Standby” supports the obligations of an applicant to pay for goods or services in the event of non-payment by other methods.

Sources: ISP 98 preface.

Stand-by Letters of Credit

Ozgur Eker (CDCS) Letter of Credit Types, Standby Letter of Credit 17 October 20186 April 2019Stand-by Letter of Credit

Classification of Letters of Credit

Documentary credits, however named, have certain characteristics in common.

First of all, they are separate transactions by their nature from the underlying contracts on which they may be based.

Secondly, documentary credits deal with the documents only but not with the goods, services and/or other performances to which the documents may relate.

Letters of credit can balance the risks of the parties because the irrevocable payment guarantee is given by an independent and reliable third party, which fulfills its irrevocable payment obligation against the presentation of conforming documents.

These common characteristics have been stated in both of the latest documentary credit rules; UCP 600 and ISP 98.

Documentary credits can be divided into two main categories: Commercial letters of credit and standby letters of credit.

A-) Commercial Letters of Credit:

Commercial letters of credit are mainly used as a primary payment method in export and import of the tangible goods in international trade.

Exporter is the beneficiary of the commercial letter of credit transaction, where importer is the applicant.

Applicant, after negotiating the certain terms of the credit with the beneficiary, applies to his bank in order the letter of credit to be issued.

If issuing bank accepts the applicant’s request and issues the credit, it becomes the institution that gives the irrevocable payment undertaking to the beneficiary.

Issuing bank’s payment obligation under a commercial letter of credit is a separate undertaking from the transaction that occurs between the applicant and the beneficiary.

Beneficiary of the commercial letter of credit can acquire the payment from the issuing bank if he complies with the rules and the stipulations of the credit and be able to supply the required documents without discrepancies.

In all other situations beneficiary will not be paid by the issuing bank unless discrepancies are accepted by the applicant. Even in that case the issuing bank is the sole decider whether or not to pay to the beneficiary the letter of credit amount.

B-) Standby Letters of Credit:

Standby letters of credit can be considered as a slightly modified version of the commercial letters of credit.

Standby letters of credit share the documentary and abstract character of the commercial letters of credit. Also irrevocable payment undertaken is given by an independent reliable institution.

The main difference between the standby and commercial letters of credit is the usage intention.

Generally, a standby letter of credit is used to support the applicant’s position in a contractual relationship, where the applicant is expected to fulfill an obligation.

In case, the applicant can’t fulfill contractual obligations against the beneficiary of the standby letter of credit, then the beneficiary can apply to the issuing bank for full compensation.

It should be stressed once more that standby letters of credit are separate transactions from the underlying contracts on which they may be based.

The standby letter of credit serves as a secondary payment mechanism, which means that as long as the applicant fulfills his contractual obligations, the standby letter of credit will not be utilized.

Standby letters of credit have their own rules since 1999.

ISP 98 – International Standby Practices, ICC Publication No. 590 is published by International Chamber of Commerce to govern the standby letters of credit.

However it is possible to issue standby letters of credit subject to UCP 600.

Standby letters of credit have very similar characteristics with the demand guarantees, which are issued subject to the Uniform Rules for Demand Guarantees, ICC publication No : 758.

Is It Possible to Confirm a Bank Guarantee?

Ozgur Eker (CDCS) Bank Guarantees, Confirmed Letter of Credit, Letter of Credit Types 17 October 20186 April 2019Bank Guarantee, Confirmation, Confirmed Letter of Credit, Counter Guarantee

In this article following topics will be explained:

What is the definition of confirmation in letters of credit?
What are the advantages of confirmation?
Is possible to confirm a bank guarantee?
If confirmation does not exist in bank guarantee transactions, what is the alternative?
What are the differences between confirmed letter of credit and counter-guarantee?

What is the Definition of Confirmation in Letters of Credit?

Letter of credit rules define confirmation as a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation.

Honour means either to pay at sight if the credit is available by sight payment, or to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment, or to accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.

Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.

We understand from the above definitions that confirming banks and issuing banks are equally responsible for against the beneficiaries under letter of credit rules.

A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its confirmation to the credit.

Even if the issuing bank does not pay the credit amount against the complying presentation, the confirming bank has to pay either to the beneficiary or another nominated bank.

What are the Advantages of Confirmation?

By paying a confirmation fee and having the letter of credit confirmed, beneficiary will be able to eliminate insolvency risk of the issuing bank.
By the help of the confirmation, beneficiary could avoid country risk of the issuing bank.
Beneficiary may be able to receive the reimbursement faster under confirmed letters of credit.

Is Possible to Confirm a Bank Guarantee?

It is not possible to confirm a bank guarantee, because latest version of bank guarantee rules, URDG 758, do not contain any confirmation definition.

If Confirmation Does Not Exist in Bank Guarantee Transactions, What is the Alternative?

In bank guarantee transactions, counter-guarantee is an alternative approach to the confirmation.
Counter-guarantee defined under bank guarantee rules and confirmation is defined under letter of credit rules.
Please keep in mind that confirmation and counter-guarantee are not the same concepts, as there are structural differences exist between a counter-guarantee and a confirmation.

What are the Differences Between Confirmed Letter of Credit and Counter-Guarantee?

Original letter of credit and confirmed letter of credit are the same document, covering the same terms and conditions. Confirming banks add their confirmations to the very same credit, which was originally issued by the issuing banks.
Counter-guarantee, on the other hand, is issued by the instructed bank, which is usually located in the same country as the principal, in order to persuade guarantor bank, which is usually located in the same country as the beneficiary, to issue a bank guarantee in favor of the beneficiary. As a result counter-guarantee and bank guarantee are two separate and independent facilities.

Conclusion:

It is not possible to confirm a bank guarantee as per URDG 758, which is the latest version of bank guarantee rules. Instead of confirmation, bank guarantee rules define counter-guarantee. But confirmation and counter-guarantee are not the same concepts.

What are the Differences Between Bank Guarantees and Letters of Credit?

Ozgur Eker (CDCS) Bank Guarantees, Letter of Credit Basics 16 October 20186 April 2019Bank Guarantee, Letter of Credit Transaction

Demand guarantee is an irrevocable undertaking issued by a bank according to instructions received from the principal, to pay the beneficiary any sum that may be demanded by that beneficiary up to a maximum amount specified in the guarantee, upon presentation of complying demand with the terms of the bank guarantee.

Commercial letter of credit, which is used in international export and import transactions, is also an irrevocable and definite undertaking of the issuing bank to honour a complying presentation.

Although these two trade finance instruments share almost identical definitions, there are major differences exist between letters of credit and bank guarantees.

Today I explain the main differences between letters of credit (L/Cs) and bank guarantees (BGs).

Primary Payment Option vs Secondary Payment Option:

One of the main differences between a bank guarantee and commercial a commercial letter of credit is the means of payment.

Under a commercial letter of credit, the beneficiary gets the payment when he completes his duties and makes a complying presentation.

For example, the exporter, who is the beneficiary of a commercial letter of credit, will be getting paid only after he ships the goods to the importer and makes a complying presentation to the issuing bank or confirming bank as per letter of credit terms and conditions.

Contrary to the commercial letter of credit, under a bank guarantee, the beneficiary will be entitled to claim a payment from the guarantor bank only if the applicant defaults on his duties at the underlying contract, which was established between the beneficiary and applicant before the the bank guarantee has been issued.

Bank guarantee is a secondary payment option and can be activated only at unexpected situations, in particular where applicants could not fulfill their contractual obligations.

Commercial letter of credit is a primary payment option and is expected to be utilized by the beneficiary upon completion of his contractual obligations.

Payment under a bank guarantee is an unusual case, whereas payment under a commercial letter of credit is an ordinary act.

Applicable Rules : UCP 600 and URDG 758

Commercial letters of credit are mostly issued subject to UCP 600, whereas bank guarantees are usually issued subject to URDG 758.

UCP 600 are the set of rules, which are prepared by ICC Banking Commission, that apply to commercial letters of credit and standby letters of credit to the extent to which they may be applicable.

URDG 758 are the latest version rules that apply to demand guarantees and counter-guarantees.

URDG (Uniform Rules on Demand Guarantees) are the set of rules that apply to bank guarantees in international scale. URDG have been published by ICC.

Beneficiary Oriented Approach and Applicant Oriented Approach

The commercial letter of credit is a “beneficiary oriented” trade finance tool, whereas the bank guarantee is an “applicant oriented” trade finance facility.

Beneficiary oriented trade finance tool means that the letter of credit mostly protects the interests of the beneficiary of the letter of credit, whom in most cases is the exporter.

Applicant oriented trade finance tool means that, comparing to the commercial letter of credit, the bank guarantee tends to favor the interests of the applicant, whom in most cases is the importer.

This distinction between the letter of credit and bank guarantee becomes more important when the case goes to the court.

Availability of the Bank Guarantee and Letter of Credit

In letter of credit terminology, availability refers to the availability of the documents in exchange for the payment of the amount stated in the letter of credit.

Commercial letters of credit could be issued available by payment, deferred payment, acceptance or negotiation.

On the other hand bank guarantees could be issued only by payment.

It is also not possible to negotiate a bank guarantee, however letter of credit rules allow for a negotiation.

Confirmed Letter of Credit and Counter-Guarantee

Letter of credit rules allow for a confirmation as a result we can talk about a confirmed letter of credit.

On the contrary, bank guarantee rules do not allow for a confirmation. Because of this reason counter-guarantee mechanism has been created under bank guarantee transactions.

Counter-guarantee means any guarantee, bond or other payment undertaking of the instructing party, however named or described, given in writing for the payment of money

What is a Counter-Guarantee?

Ozgur Eker (CDCS) Bank Guarantees, Counter Guarantee 15 October 20186 April 2019Bank Guarantee, Counter Guarantee

Bank guarantee means any signed undertaking, however named or described, providing for payment on presentation of a complying demand.

Letter of credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.

Under certain situations, exporters do not trust the issuing bank’s payment undertaking and seeks additional assurances in letter of credit transactions.

Confirmation is a security tool that is created for the exporters, who is looking for additional assurances.

Confirmation means a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation.

Unlike letters of credit, banks could not add their confirmations to the bank guarantees that have been issued by another bank, because latest version of bank guarantee rules do not define the confirmation process.

Instead of a confirmation, URDG 758 defines another mechanism, which is called counter guarantee.

On today’s post, I will not only define the counter-guarantee process, but also explain its structure, as well.

Counter Guarantee Definition:

Counter-guarantee means any guarantee, bond or other payment undertaking of the instructing party, however named or described, given in writing for the payment of money.

How Does a Counter Guarantee Work?

The figure below explains how does a counter-guarantee work in international trade transactions.

Step 1: The principal and the beneficiary sign a sales contract. In order to be able to talk about the counter-guarantee, the principal and the beneficiary should be located in different countries. Otherwise the principal could have issued a bank guarantee in favor of the beneficiary without using any form of counter-guarantee.
Step 2: The principal gives instructions to his bank to issue a counter-guarantee.
Step 3: The instructing party, who is the principal’s bank, issues a counter-guarantee in favor of the guarantor bank to issue the bank guarantee against its counter indemnity.
Step 4: The guarantor bank issues the guarantee in favour of the beneficiary.

What are the Parties to a Counter-Guarantee?

The Principal: The party requesting the issuance of a counter-guarantee.
The Instructing Bank: The bank that requests to the beneficiary’s bank to issue the guarantee against its counter indemnity.
The Guarantor Bank: The bank that guarantees that the agreed compensation amount will be paid if the guarantee principal fails to meet its contractual obligations and the beneficiary makes a complying demand in writing according to terms and conditions of the guarantee.
The Beneficiary: The party in favour of whom the guarantee is issued.

What are the Advantages of a Counter-Guarantee?

Counter-Guarantee Eliminates Country Related Economic and Political Risks: Bank guarantee, that is issued by a guarantor bank, which is located in a country other than the beneficiary, may not be satisfactory, especially when the guarantor bank is located in a high risk country.

For example, bank guarantee issued by an Afghan bank would not mean anything for a medium size manufacturing company located in USA.

As a result in order to protect its interests, the US manufacturing company may demand a bank guarantee issued by a US bank.

By having a bank guarantee issued by a US bank, US manufacturing company eliminates country related economic and political risks.

Counter-Guarantee Eliminates Foreign Jurisdiction Risks: I have already mentioned on my previous articles that bank guarantees are applicant oriented trade finance tools.

Which means that demand guarantees may protect applicants’ interests more than beneficiaries rights.

It is not an uncommon practice to stop the payments under bank guarantees by local court order. By having a local bank guarantee, beneficiary may eliminate foreign jurisdiction risks.

What are the Main Specifications of a Counter-Guarantee?

Independence of Counter-Guarantee: A counter guarantee is an independent form of facility than the bank guarantee.

Additionally, counter-guarantee is also independent from the underlying transaction and any instructions received by the instructing bank.

As a result counter-guarantee is bound by its own terms and conditions. Independence of a counter-guarantee has a gigantic effect in legal situations.

Counter-Guarantee and Bank Guarantee Need Not to be a Mirror Image Each Other: For example expiry of the counter-guarantee may be different than the bank guarantee.

Counter-Guarantee and Bank Guarantee may be Issued in a Different Form of Facilities: For example, while the counter guarantee is issued as a demand guarantee, the guarantee can be structured as a surety.

What are the differences between counter-guarantee and bank guarantee?

Bank guarantee issued by the guarantor bank in favor of a beneficiary.
Counter-guarantee is issued by the instructing bank in favor of the guarantor bank in order to facilitate the issuance of the bank guarantee.
Bank guarantee and counter-guarantee are separate instruments as a result they may be issued in different structure.

What are the differences between counter-guarantee and confirmation?

Unlike letter of credit rules, bank guarantee rules do not allow for a confirmation.
Under letter of credit transactions confirming banks add their confirmation on the same L/C.
Under bank guarantee transactions, guarantor banks issue a seperate bank guarantee after they receive an independent counter-guarantee from the principal’s bank located in abroad.

Counter-Guarantee Sample Format

Instructions to a correspondent bank for the issue of a performance guarantee against a counter-guarantee.

Our reference number: 2015/001-PGCG
At the request of Daihon-dai Corporation. Tokyo, Japan please issue on our responsibility in favor of Bihar Urban Infrastructure Development Corporation Ltd., Bihar, India your guarantee in the following wording:
Quote
We have been informed that Daihon-dai Corporation. Tokyo, Japan, (hereinafter called “the principal”), has entered into contract No. 2014/0001/Cnt dated 15.July.2014 with you, for the supply of 1000 Metric Ton/Metric Tons of Stainless Steel.
Furthermore we understand that, according to the conditions of contract, a performance guarantee is required.
At the request of the principal, we Bank of Barindo hereby irrevocably undertake to pay you any sum or sums not exceeding in total an amount of 300.000,00 USD (say Three Hundred Thousand USD) upon receipt by us of your first demand in writing and your written statement stating:
that the principal is in breach of his obligations under the underlying contract, and
the respect in which the principal is in breach.
Your demand for payment must also be accompanies by the following documents:
Proof of identity certificate issued and signed by our branch in beneficiary’s country or else one of our corresponding bank’s located in beneficiary’s country stating that the bank has verified beneficiary’s signature(s) appearing on the first demand of payment.
This guarantee shall expire on 15.December.2015 at the latest.
Consequently any demand for payment under it must be received by us at this office on or before that date.
This guarantee is subject to the Uniform Rules for Demand Guarantees, ICC publication No. 758.
Unquote
In consideration of your issuing your guarantee as above, we hereby give you our irrevocable counter-guarantee and undertake to pay you any sum or sums not exceeding in total amount of 300.000,00 USD (say Three Hundred Thousand USD) upon receipt by us this Office no later than 30.December.2015 of your first demand. Such demand shall be supported by your written statement that you have received a demand for payment under your guarantee in accordance with its terms and Article 20 of the Uniform Rules for Demand Guarantees.
This guarantee is subject to the Uniform Rules for Demand Guarantees, ICC publication No. 758.
Please confirm us the issuance of your guarantee.