Tips on the restrictive use of independent letters of guarantee

By Li Tao, Dacheng Law Offices

The independent letter of guarantee is also called independent guarantee. Pursuant to ICC Uniform Rules for Demand Guarantees (URDG 458), UN Convention on Independent Guarantees and Standby Letters of Credit – China has not approved – and ICC International Standby Practices (ISP 98), independent letters of guarantee refers to any written guarantee, warranty or undertakings issued by guarantors including banks, insurance companies or other institutions or persons, and such letters provide for payment upon a claim, or in conformity with the guarantee terms.

李涛 Li Tao 北京大成律师事务所 高级合伙人 Senior Partner Dacheng Law Offices
Li Tao
Senior Partner
Dacheng Law Offices

Different from the traditional subordinated guarantee, although the independent guarantee is based on the underlying contract, the guarantee becomes independent once issued and the payment under the guarantee would only depend on the guarantee itself, and has nothing to do with the underlying contract. The guarantor would pay the amount available under the undertaking once it receives the claim from the beneficiary.

Independent guarantees are becoming the mainstream trend internationally, because guarantors are not willing to be involved in underlying transactions, while beneficiaries wish to have a more appropriate guarantee. In contrast, under the subordinated guarantee, once the claim is paid, the guarantee bank may be involved in litigation due to the underlying contractual relationship, which may jeopardise its interests and reputation.

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