Technical - TYPES OF CONSTRUCTION AND ENGINEERING GUARANTEES

1. CONSTRUCTION AND ENGINEERING

2. TYPES OF DEMAND GUARANTEES > Tender guarantees/ bid bonds > to cover the risk of a tenderer withdrawing its bid > Performance guarantees > to cover the risk of delivery by a contractor/supplier of non-conforming works/goods/services > Advance payment guarantees > to cover the risk of a contractor/supplier being unable to repay an advance payment for works/goods/services.

3. TYPES OF GUARANTEES > Retention money guarantees > replace retention amounts but fulfil the same function > Warranty guarantees > cover the obligation of a supplier/contractor to maintain equipment/goods/works which it delivered, for a certain period > Customs guarantees > issued in favour of customs authority to cover liability for duties in certain circumstances.

4. TYPES OF GUARANTEES > Payment guarantees > to cover payment obligations eg the price of goods/services furnished > Credit enhancement guarantees > issued by a better-rated financial institution to cover a guarantee by a lesser-rated institution > Parent company guarantees > cover the performance or payment obligations of the guarantor's subsidiaries or affiliates.

5. TYPES OF GUARANTEES > Reinsurance guarantees > issued by several re-insurers in favour of an insurer - used to spread the risk > Sub-contract guarantees > secure the payment by a main contractor of sums due by it to subcontractors.

6. > No uniform rules for cross-border guarantees before and during the 1970s: No internationally accepted standard terms of demand guarantees > URCG (Uniform Rules for Contract Guarantees) were drafted between 1968 and 1978, but regrettably failed and were not accepted by the market > URDG 458 drafted between 1981 and 1991, where after they were adopted by the International Chamber of Commerce (ICC) and entered into force in 1992. (These are still referenced in all model guarantees which accompany the 1999 FIDIC suite of contracts.)

7. > URDG 758 (drafted between 2007 and 2009) were adopted by the ICC and came into force in 2010 > The URDG have proved to be very popular and widely accepted. Comments from 52 countries were taken into account.

8. WHAT ARE THE URDG? > Neither a law nor an international treaty > They generally apply: > where expressly incorporated into the guarantee/counter guarantee > as trade usage (in certain circumstances) > It is a set of contractual rules > They only apply to independent demand guarantees or counter guarantees > May be excluded.

9. HIGH LEVEL OVERVIEW OF THE URDG 758.

10. ROLE PLAYERS > Applicant: the party indicated in the guarantee as having the obligation (under the underlying relationship) secured by the guarantee > Instructing Party: the party which gives instructions for the issue of the guarantee and is responsible for indemnifying the guarantor if the guarantor must pay out on the guarantee (usually the applicant) > Beneficiary: the party in whose favour the guarantee is issued > Guarantor: the party issuing the guarantee > Counter guarantor: the issuer of a counter guarantee, usually in favour of a guarantor.

11. A TRULY INDEPENDENT UNDERTAKING > distinguishes it from a suretyship, which is accessory (not independent) > the beneficiary only needs to present a complying demand: > regardless of whether breach has occurred or not > regardless of the amount of the resulting loss > parties must use the URDG model guarantee/counter guarantee wording > parties must incorporate the URDG by reference.

12. “EFFECTIVE WHEN ISSUED” > Sometimes there are disputes about when (for example) an advance payment guarantee becomes effective: must the advance payment be made first or not? > If the URDG apply, this doubt is removed: the guarantee is available for the presentation of a demand from the time the guarantee is issued.

13. IRREVOCABLE UNDERTAKING > Protects the beneficiary against the guarantee being revoked by the guarantor whilst the applicant’s obligation is still to be completed > Nevertheless subject to an expiry date/event > If the URDG apply, the guarantee is irrevocable even if that is not stated.

14. NO VARIATION OF AMOUNT ABSENT AGREEMENT > The amount of the guarantee can only be reduced: > in accordance with the wording of the guarantee itself; or > because of prior partial payments on a complying partial demand > Progress of performance under the underlying contract is irrelevant.

15. TIME AND CONTENT OF NOTICE OF REJECTION – PRECLUSION > Guarantors must decide by no later than close of business on the 5th business day after presentation whether they regard the demand as being non-complying and must give reasons if they reject the demand > If the guarantor does not do so, the guarantor is precluded from subsequently claiming that the demand is non-complying.

16. STATEMENT, NOT PROOF, OF BREACH > The beneficiary is only expected to indicate, in a statement supporting its demand, in what respect the applicant is in breach of the underlying contract > The beneficiary is not required to prove the breach or to justify its right to claim payment.

17. "EXTEND OR PAY" MEANS PAY UNLESS EXTENSION GRANTED > The beneficiary can make an "extend or pay" demand that complies with the wording of the guarantee > If this is done, such a demand is automatically regarded as a payment demand if no extension is granted > This prevents the guarantor from declining the extension after the guarantee has expired.

18. AMENDMENTS TO BE AGREED > An amendment to the guarantee made without the beneficiary’s consent is not binding on the beneficiary > Unilateral variations are not competent.

19. INCOMPLETE PRESENTATIONS POSSIBLE > A beneficiary can choose to make a presentation (including a demand) in a piecemeal manner, provided that it indicates that it will be completed later (it must be completed before the guarantee expires) > The guarantor need not commence examination before the presentation is complete > The beneficiary is protected against rejection risk in the interim.

20. ELECTRONIC PRESENTATION > It could happen that a guarantee requires electronic presentation but omits to specify the format, the system for data delivery or the electronic address for presentation > In such a case the beneficiary has a choice between making an electronic presentation that can be authenticated, or making presentation in paper form.

21. MODE OF DELIVERY OF PAPER PRESENTATION > Some guarantees require paper presentation through a mode of delivery but do not exclude other modes > In such a case the beneficiary can use another mode of delivery if presentation is received at the place for presentation before expiry of the guarantee.

22. MULTIPLE DEMANDS ALLOWED > The beneficiary can make multiple demands (unless this is prohibited by the guarantee wording itself) provided the aggregate of all the demands does not exceed the amount available under the guarantee > This puts an end to debates about whether a demand made for a lesser amount, precludes the beneficiary from making other demands later.

23. SEPARATE DEMANDS > If the guarantee states that only one demand may be made and the beneficiary then makes a demand that is rejected for non-compliance, another demand can be made before expiry of the guarantee.

24. > To curb the rate of rejection of demands on grounds of non-conformity, the URDG adopt a functional standard for the examination of documents > Presented documents have to be consistent with one-another and must be compliant with the guarantee > Data need not be identical in all documents or identical to the data in the guarantee. FUNCTIONAL STANDARD FOR EXAMINATION OF DOCUMENTS

25. CHANGE OF CURRENCY > Historically, some guarantors sought to hide behind the defence of impossibility to perform in circumstances where payment could not be made in the currency of the guarantee because of an impediment beyond the control of the guarantor > The URDG direct the guarantor to make payment in the currency of the place of payment, even if the guarantee states the contrary.

26. TERMINATION UPON RELEASE > To deal with clerical errors and the like, the URDG provide that (besides an expiry event occurring or an expiry date arriving) a guarantee also terminates upon presentation to the guarantor of the beneficiary’s signed release.

27. FORCE MAJEURE > It can happen that presentation, examination or payment is prevented by force majeure, and in the meantime the guarantee expires > The URDG 758 now provide that in such a case both the guarantee (and the counter guarantee if applicable) are extended for a limited duration and all rights already crystalized are suspended until cessation of the force majeure.

28. CHARGES > The URDG direct guarantors not to stipulate that the guarantee is conditional upon the receipt by the guarantor of its charges > This rule is designed to prevent guarantors trapping unwary beneficiaries and to assure beneficiaries of the reliability of the guarantors’ commitment.

29. TRANSFER > In principle, beneficiaries can transfer guarantees, in other words the beneficiary’s right under the guarantee is valuable and mobile personal property which can be transferred, appropriated and collateralised under certain conditions: the requirements of article 33 of the rules must however be complied with (there are 7 rules and 4 sub-rules in this regard)

30. NON-DOCUMENTARY CONDITIONS > URDG 758 provides that a guarantee should not contain a condition (other than a date or a lapse of a period) the fulfilment of which cannot be determined from the guarantor’s own records or from an index specified in the guarantee, without specifying a document to indicate compliance with that condition (article 7)

31. [Guarantor Letterhead or SWIFT identifier Code] To: [Insert name and contact information of Beneficiary] Date: [Insert date of issue] Type of Guarantee: [Specify tender guarantee, advance payment guarantee, performance guarantee, payment guarantee, retention money guarantee, warranty guarantee, etc.] Guarantee no.: [Insert guarantee reference number] FORM OF DEMAND GUARANTEE UNDER URDG 758

32. FORM OF DEMAND GUARANTEE UNDER URDG 758 The Guarantor: [Insert name and address of place of issue, unless indicated in the letterhead] The Applicant: [Insert name and address] The Beneficiary: [Insert name and address] The Underlying Relationship: The Applicant's obligation in respect of [Insert reference number or other information identifying the contract, tender conditions or other relationship between the applicant and the beneficiary on which the guarantee is based]

33. FORM OF DEMAND GUARANTEE UNDER URDG 758 Guarantee Amount and currency: [Insert in figures and words the maximum amount payable under the guarantee and the currency in which it is payable] Any document required in support of the demand for payment, apart from the supporting statement that is explicitly required in the text below: [Insert any additional documents required in support of the demand for payment. If the guarantee requires no documents other than the demand and the supporting statement, keep this space empty or indicate "none"] Language of any required documents: [Insert the language of any required document. Documents to be issued by the applicant or the beneficiary shall be in the language of the guarantee unless otherwise indicated herein]

34. FORM OF DEMAND GUARANTEE UNDER URDG 758 Form of presentation: [Insert paper or electronic form. If paper, indicate mode of delivery. If electronic, indicate the format, the system for data delivery and the electronic address for presentation] Place for presentation: [Guarantor to insert address of branch where a paper presentation is to be made or, in the case of an electronic presentation, an electronic address such as the Guarantor's SWIFT address. If no Place for presentation is indicated in this field, the Guarantor's place of issue indicated above shall be the Place for presentation] Expiry: [Insert expiry date or describe expiry event]

35. FORM OF DEMAND GUARANTEE UNDER URDG 758 The party liable for the payment of any charges: [Insert the name of the party] As Guarantor, we hereby irrevocably undertake to pay the Beneficiary any amount up to the Guarantee Amount upon presentation of the Beneficiary's complying demand, in the form of presentation indicated above, supported by such other documents as may be listed above and in any event by the Beneficiary's statement, whether in the demand itself or in a separate signed document accompanying or identifying the demand, indicating in what respect the Applicant is in breach of its obligations under the Underlying Relationship.

36. FORM OF DEMAND GUARANTEE UNDER URDG 758 Any demand under this Guarantee must be received by us on or before Expiry at the Place for presentation indicated above. This Guarantee is subject to the Uniform Rules for Demand Guarantees (URDG) 2010 revision, ICC Publication No. 758. Signature(s).

37. THANK YOU 30 September 2014 Legal notice: Nothing in this presentation should be construed as formal legal advice from any lawyer or this firm. Readers are advised to consult professional legal advisers for guidance on legislation which may affect their businesses.