Uniform Rules for Demand Guarantees
The Uniform Rules for Demand Guarantees (URDG) refers to a set of international guidelines produced by the International Chamber of Commerce (ICC) and adopted in 1991. These guidelines set forth generally agreed-upon rules governing securing payments and meeting performance guarantees in contracts among global trading partners.
In general, the URDG guidelines outline the rights and obligations of parties under demand guarantees. A demand guarantee is a type of protection that one party in a transaction can impose on another party in the event that the second party does not perform according to predefined specifications.
According to the ICC, many bankers, traders, and industry associations recognize and accept the URDG because it attempts to balance the interests of all parties involved in various types of international contracts.
Both the World Bank and the United Nations Commission on International Trade Law (UNCITRAL) each have adopted the URDG standard.
Definition: The Uniform Rules for Demand Guarantees (URDG) are a set of international guidelines established by the International Chamber of Commerce (ICC) in 1991. These guidelines outline the common consensus rules for ensuring payment and performance guarantees in contracts between global trade partners. The URDG guidelines detail the rights and obligations of parties under demand guarantees. A demand guarantee is a protective measure that one party can impose on another to ensure performance according to agreed specifications.
Origin: The origin of URDG dates back to 1991 when the International Chamber of Commerce (ICC) created these rules to standardize the practice of demand guarantees in international trade. The aim was to provide a unified standard to reduce disputes and uncertainties in international trade.
Categories and Characteristics: URDG primarily includes two types: demand guarantees and standby letters of credit. A demand guarantee is an independent guarantee instrument where the beneficiary can obtain payment by submitting compliant claim documents. A standby letter of credit is a bank's commitment to pay the beneficiary if the applicant fails to fulfill contractual obligations. Characteristics of URDG include: 1. Independence: Guarantees exist independently of the underlying contract; 2. Simplicity: Only compliant claim documents are required; 3. International Acceptance: Widely accepted and used globally.
Specific Cases: Case 1: A construction company uses a demand guarantee as a performance bond in an international project. When the construction company fails to complete the project on time, the project owner submits claim documents under URDG rules, and the bank promptly pays the guarantee amount. Case 2: An exporter signs a contract with a foreign buyer using a standby letter of credit as a payment guarantee. When the buyer fails to make timely payments, the exporter submits claim documents under URDG rules, and the bank pays the corresponding amount.
Common Questions: 1. What is a demand guarantee? A demand guarantee is an independent guarantee instrument where the beneficiary can obtain payment by submitting compliant claim documents. 2. What is the difference between URDG and a standby letter of credit? URDG is a set of rules, while a standby letter of credit is a specific guarantee instrument, and they can be used together.
