Convention Commentary Draft 5, 2008 February DRAFT by derrickcizzle

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									                                           DRAFT #5
 Commentary for the United Nations Convention on International Independent Guarantees and
                                Stand-by Letters of Credit

        This Commentary deals with certain differences in the language and approach between
Article 5 of the Uniform Commercial Code, as set forth in the 2003 Official Text promulgated by
the American Law Institute and the Uniform Law Commission, and the United States
Convention on Independent Guaranties and Stand-by Letters of Credit (“Convention”) approved
by the United Nations General Assembly in 195. . Notwithstanding the differing terminology, the
rules in the Convention are generally consistent with those in Article 5 of the UCC. Because of
this congruence between Article 5 and the Convention and because it is easy to exclude by its
terms all or any part of the Convention, the adoption of the Convention by the United States will
cause little change in American law.

       The text of the Convention may be found on the web site for the United Nations
Commission on International Trade Law (‘UNCITRAL”) at www.uncitral.org. The web site
also contains a commentary (the “Secretariat’s Commentary”) by the UNCITRAL Secretariat
may be found following the text of the Convention.

       This Commentary has been prepared by a Committee made up of representatives of the
Uniform Law Commission, the American Law Institute, the Uniform Law Commission of
Canada and the Mexican Uniform Law Center and Canadian and Mexican letter of credit experts
who are involved with the consideration of the Convention in their respective countries. At
various places that Commentary refers to “Understandings” These are proposed understandings
for adoption by the United States Senate in connection with any ratification of the Convention by
the Senate. The Understandings are attached at the end of this Commentary.

        Since the Convention is short and quite general, it does not deal with many topics
covered in Article 5 of the UCC or in the Uniform Customs and Practices (“UCP”) or the
International Standby Practices (“ISP”). When a standby letter of credit or an independent
guarantee (“undertaking”) incorporates one of the trade practice documents (such as ISP or UCP
600), the trade practice so incorporated will fill any omission that is left by the Convention if the
trade practice covers the omission, and, in other cases, the adoption of trade practice will vary
the Convention’s rules. Paragraph 5 of the Secretariat’s Commentary to the Convention
recognizes that the Convention “gives legislative support to the autonomy of the parties to apply
agreed rules of practice such as the [UCP].” In some cases no practice will be incorporated by
the undertaking and in others the incorporated practice will have no provision relevant to the
matter at issue; when that is so, the Commentary below generally directs one to “other law.” For
U.S. parties other law would usually be Article 5 of the Uniform Commercial Code.

        The Convention contemplates that it will be displaced or supplemented by other law as
well as by express terms of undertakings and by practice rules that are incorporated in or
otherwise applicable to undertakings See Paragraph 11 of the Secretariat’s Commentary.
Because Article 5 of the UCC covers more types of independent undertakings than the
Convention and covers a wider range of pre- and post-honor obligations, rights, and remedies of
more types of affected parties, Article 5 of the UCC will often supplement the Convention. For

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example, the Convention does not address the rights of an issuer to be reimbursed or indemnified
or the defenses or claims available to an applicant against an issuer. The issuer-applicant
relationship was left to their bilateral contract and the law applicable to it. The Convention does
not address the role of non-confirming nominated banks. They are much more prevalent in
commercial than standby letter of credit practice, which explains why they are ignored by the
Convention and not by the UCC. The UCC also addresses many questions regarding the rights of
assignees of letter of credit proceeds as against all interested parties, whereas the Convention
deliberately addresses only limited issues arising in that context. Except for Article 20 on
provisional relief for fraud, the Convention provides no remedies.

          Some of the omissions from the Convention arise from the drafters’ recognition that
certain issues are inherently domestic; other omissions recognize the existence and validity of
certain domestic rules. Because many of the omissions represent an intention to defer to
domestic rules that vary from country to country, courts should turn to domestic law and cases to
fill in the omissions, not to international law and cases. Where a court is called on to deal with an
issue that is covered by the Convention, a court may, of course, consider decisions of foreign and
international courts.


       The following commentary is divided according to the Articles of the Convention:

                                  Article 1. Scope of Application

(1) This Convention applies to an international undertaking referred to in article 2:
    (a) If the place of business of the guarantor/issuer at which the undertaking is issued is in a
        Contracting State, or
    (b) If the rules of private international law lead to the application of the law of a
        Contracting State,
unless the undertaking excludes the application of the Convention.

(2) This Convention applies also to an international letter of credit not falling within article 2 if
it expressly states that it is subject to this Convention.

(3) The provisions of articles 21 and 22 apply to international undertakings referred to in article
2 independently of paragraph (1) of this article.

        An undertaking’s incorporation of the UCP or ISP is not the adoption of “other law” as
that term is used above, but such incorporation might add terms and might otherwise change the
rule that would prevail under the Convention but for the incorporation.

      For consideration of the effect of various choice of law terms on the reach of the
Convention and its scope, consult the commentary attached to Articles 21 and 22 and the
Understandings concerning those Articles.

        To understand the relationship between Article 1 and Articles 21 and 22 consider the
following example. Assume that Canada has adopted the Convention and that litigation arises in
a Canadian court involving a standby letter of credit that chooses English law to govern the
rights of a Canadian issuer and an English beneficiary. In that case the Canadian court should
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apply English law as directed by Article 21 of the Convention. Even though the Convention
would not govern the substantive rights of the parties, it would provide the choice of law rule
that the Canadian court should follow.

                                      Article 2. Undertaking

(1) For the purposes of this Convention, an undertaking is an independent commitment, known in
international practice as an independent guarantee or as a stand-by letter of credit, given by a
bank or other institution or person ("guarantor/issuer") to pay to the beneficiary a certain or
determinable amount upon simple demand or upon demand accompanied by other documents, in
conformity with the terms and any documentary conditions of the undertaking, indicating, or
from which it is to be inferred, that payment is due because of a default in the performance of an
obligation, or because of another contingency, or for money borrowed or advanced, or on
account of any mature indebtedness undertaken by the principal/applicant or another person.

(2) The undertaking may be given:
    (a) At the request or on the instruction of the customer ("principal/applicant") of the
        guarantor/issuer;
    (b) On the instruction of another bank, institution or person ("instructing party") that acts at
        the request of the customer ("principal/applicant") of that instructing party; or
    (c) On behalf of the guarantor/issuer itself.

(3) Payment may be stipulated in the undertaking to be made in any form, including:
    (a) Payment in a specified currency or unit of account;
    (b) Acceptance of a bill of exchange (draft);
    (c) Payment on a deferred basis;
    (d) Supply of a specified item of value.

(4) The undertaking may stipulate that the guarantor/issuer itself is the beneficiary when acting
in favour of another person.

         Undertakings brought within the Convention include 1) standby letters that require the
presentation of only a demand (“clean” letters of credit) and 2) letters of credit known as “direct
pay” letters, see paragraph 8 of the Secretariat’s commentary, but do not include commercial
letters of credit, except for commercial letters that expressly state that they are covered.

         The limitation in Article 2 to undertakings that require payment upon presentation of a
“demand,” possibly accompanied with “documents,” is the same as the limitation imposed in
Article 5 of the UCC by Sections 5-102(a) (10) and 5-103(d). That an issuer not be burdened
with the duty of a conventional guarantor – to make an independent investigation of default – is a
critical distinction between letters of credit and independent guarantees on the one hand and
dependent or conventional guarantees on the other. Paragraph 9 of the Secretariat’s Commentary
similarly states that the “guarantor/issuer is not called on to investigate the underlying
transaction, but is merely to determine whether the documentary demand for payment conforms
on its face to the terms of the guarantee or stand-by letter of credit.”

                             Article 3. Independence of Undertaking

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(1) For the purposes of this Convention, an undertaking is independent where the
guarantor/issuer’s obligation to the beneficiary is not:
    (a) Dependent upon the existence or validity of any underlying transaction, or upon any
        other undertaking (including stand-by letters of credit or independent guarantees to
        which confirmations or counter-guarantees relate); or
    (b) Subject to any term or condition not appearing in the undertaking, or to any future,
        uncertain act or event except presentation of documents or another such act or event
        within a guarantor/issuer’s sphere of operations.

        Certain fundamental nondocumentary conditions in a writing purporting to be a letter of
credit or an independent guarantee would deprive the document of that status and so remove it
from the coverage of the Convention. If, for example, a document required the issuer to pay upon
issuer’s determination that a person had defaulted (not on a documentary certification of default),
the document would be a contract but not a letter of credit or independent guarantee subject to
the Convention. On the other hand, the presence of a less fundamental nondocumentary
condition (e.g. issuer shall pay on a decision from a “duly appointed arbitrator”) would not
deprive the document of its status as a letter of credit. In the latter case the issuer should
disregard the nondocumentary condition, see, Section 5-108(g) of the UCC, ISP Rule 4.11, and
UCP 600 Art. 14 h.

                                      Article 6. Definitions

For the purposes of this Convention and unless otherwise indicated in a provision of this
Convention or required by the context:

   (a) "Undertaking" includes "counter-guarantee" and "confirmation of an undertaking";
   (b) "Guarantor/issuer" includes "counter-guarantor" and "confirmer";
   (c) "Counter-guarantee" means an undertaking given to the guarantor/issuer of another
       undertaking by its instructing party and providing for payment upon simple demand or
       upon demand accompanied by other documents, in conformity with the terms and any
       documentary conditions of the undertaking, indicating, or from which it is to be inferred,
       that payment under that other undertaking has been demanded from, or made by, the
       person issuing that other undertaking;
   (d) "Counter-guarantor" means the person issuing a counter-guarantee;
   (e) "Confirmation" of an undertaking means an undertaking added to that of the
       guarantor/issuer, and authorized by the guarantor/issuer, providing the beneficiary with
       the option of demanding payment from the confirmer instead of from the
       guarantor/issuer, upon simple demand or upon demand accompanied by other
       documents, in conformity with the terms and any documentary conditions of the
       confirmed undertaking, without prejudice to the beneficiary's right to demand payment
       from the guarantor/issuer;
   (f) "Confirmer" means the person adding a confirmation to an undertaking;
   (g) "Document" means a communication made in a form that provides a complete record
       thereof.

         That “document” is defined broadly enough to include digital documents does not by
itself authorize one who is making presentation under the Convention to present documents in
digital or other non-paper form. Thus where there is no authority in the undertaking or in the
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practice applicable to the undertaking to authorize the use of a digital document, the presentation
of a digital document would render the presentation non complying both under the Convention
and under Article 5 of the UCC
        .
        According to the United States Understanding concerning Article 6, terms used but not
defined in the Convention have that same meaning as that stated for the same or substantially
similar terms in the UCC. See United States Understanding on Article 6.

                                      Article 8. Amendment

(1) An undertaking may not be amended except in the form stipulated in the undertaking or,
failing such stipulation, in a form referred to in paragraph (2) of article 7.

(2) Unless otherwise stipulated in the undertaking or elsewhere agreed by the guarantor/issuer
and the beneficiary, an undertaking is amended upon issuance of the amendment if the
amendment has previously been authorized by the beneficiary.

(3) Unless otherwise stipulated in the undertaking or elsewhere agreed by the guarantor/issuer
and the beneficiary, where any amendment has not previously been authorized by the
beneficiary, the undertaking is amended only when the guarantor/issuer receives a notice of
acceptance of the amendment by the beneficiary in a form referred to in paragraph (2) of article
7.

(4) An amendment of an undertaking has no effect on the rights and obligations of the principal/
applicant (or an instructing party) or of a confirmer of the undertaking unless such person
consents to the amendment.

       Both the UCC and rules of practice would find that a beneficiary’s presentation under an
amended undertaking that invokes the amended terms of the undertaking constitutes the
beneficiary’s agreement to the amendment. See Section 5-106, comment 2, UCP Article 10c and
ISP section 2.06c.ii. Article 8, operating in conjunction with Article 13, is not different.

                               Article 10. Assignment of Proceeds

(1) Unless otherwise stipulated in the undertaking or elsewhere agreed by the guarantor/issuer
and the beneficiary, the beneficiary may assign to another person any proceeds to which it may
be, or may become, entitled under the undertaking.

(2) If the guarantor/issuer or another person obliged to effect payment has received a notice
originating from the beneficiary, in a form referred to in paragraph (2) of article 7, of the
beneficiary's irrevocable assignment, payment to the assignee discharges the obligor, to the
extent of its payment, from its liability under the undertaking.

       The statement in paragraph (2) that an issuer’s payment to an assignee would, in the
circumstances there stated, lead to the discharge of its obligation to pay, does not determine
whether the issuer would have an obligation to pay nor does it determine whether payment to the
assignor in similar circumstances would discharge any obligation that the issuer might have

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under the undertaking. Those matters are left to domestic letter of credit law and to rules such as
ISP Rule 6.06 ff.

                       Article 11. Cessation of Right to Demand Payment

(1) The right of the beneficiary to demand payment under the undertaking ceases when:
    (a) The guarantor/issuer has received a statement by the beneficiary of release from liability
        in a form referred to in paragraph (2) of article 7;
    (b) The beneficiary and the guarantor/issuer have agreed on the termination of the
        undertaking in the form stipulated in the undertaking or, failing such stipulation, in a
        form referred to in paragraph (2) of article 7;
    (c) The amount available under the undertaking has been paid, unless the undertaking
        provides for the automatic renewal or for an automatic increase of the amount available
        or otherwise provides for continuation of the undertaking;
    (d) The validity period of the undertaking expires in accordance with the provisions of
        article 12.

(2) The undertaking may stipulate, or the guarantor/issuer and the beneficiary may agree
elsewhere, that return of the document embodying the undertaking to the guarantor/issuer, or a
procedure functionally equivalent to the return of the document in the case of the issuance of the
undertaking in non-paper form, is required for the cessation of the right to demand payment,
either alone or in conjunction with one of the events referred to in subparagraphs (a) and (b) of
paragraph (1) of this article. However, in no case shall retention of any such document by the
beneficiary after the right to demand payment ceases in accordance with subparagraph (c) or (d)
of paragraph (1) of this article preserve any rights of the beneficiary under the undertaking.

       The last sentence is consistent with Article 5 of the UCC, as stated in Paragraph 34 of the
Secretariat’s Commentary.

                                        Article 12. Expiry

The validity period of the undertaking expires:
   (a) At the expiry date, which may be a specified calendar date or the last day of a fixed
        period of time stipulated in the undertaking, provided that, if the expiry date is not a
        business day at the place of business of the guarantor/issuer at which the undertaking is
        issued, or of another person or at another place stipulated in the undertaking for
        presentation of the demand for payment, expiry occurs on the first business day which
        follows;
   (b) If expiry depends according to the undertaking on the occurrence of an act or event not
        within the guarantor/issuer's sphere of operations, when the guarantor/issuer is advised
        that the act or event has occurred by presentation of the document specified for that
        purpose in the undertaking or, if no such document is specified, of a certification by the
        beneficiary of the occurrence of the act or event;
   (c) If the undertaking does not state an expiry date, or if the act or event on which expiry is
        stated to depend has not yet been established by presentation of the required document
        and an expiry date has not been stated in addition, when six years have elapsed from the
        date of issuance of the undertaking.

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       Neither the Convention nor UCC Section 5-106 permits an undertaking to operate in
perpetuity, but the time periods differ. Under Section 5-106 undertakings that claim to be
perpetual expire after 5 years and those without an expiration date expire after 1 year; under the
Convention all undertakings without fixed expiration dates expire in 6 years.

        The rule on undertakings without expiration dates does not affect undertakings that
contain automatic extension clauses even though such undertakings may state no final expiration
date. In those cases the undertaking is to be terminated by payment or by the issuer’s giving
notice that it will not extend the undertaking.

               Article 14. Standard of Conduct and Liability of Guarantor/issuer

(1) In discharging its obligations under the undertaking and this Convention, the
guarantor/issuer shall act in good faith and exercise reasonable care having due regard to
generally accepted standards of international practice of independent guarantees or stand-by
letters of credit.

(2) A guarantor/issuer may not be exempted from liability for its failure to act in good faith or
for any grossly negligent conduct.

        Despite the explicit reference to good faith and to reasonable care, the standard of
conduct stated in this Article is consistent with the standard stated in Section 5-108. Note that
Article 1 of the UCC imposes a duty of good faith on the issuer’s responsibilities in Section 5-
108 but that any duty under Article 5 of the UCC or under the Convention would be measured by
the restricted definition of good faith in UCC 5-108. See the United States Understanding
concerning Article 6.

        Exercise of “reasonable care” would not be a defense under Article 14, 15 and 17 for an
issuer who dishonored a presentation that strictly complied (absent the circumstances stated in
Article 19).

        Observance of the relevant standard practice constitutes the exercise of reasonable care.
Paragraph 38 of the Secretariat’s Commentary similarly states that the standard of conduct “is to
be defined by reference to generally accepted standards of international practice.” However, it
also explains that Article 14(2) “prohibits any exemption of the guarantor from liability for a
lack of good faith or gross negligence.”

                                       Article 15. Demand

(1) Any demand for payment under the undertaking shall be made in a form referred to in
paragraph (2) of article 7 and in conformity with the terms and conditions of the undertaking.

(2) Unless otherwise stipulated in the undertaking, the demand and any certification or other
document required by the undertaking shall be presented, within the time that a demand for
payment may be made, to the guarantor/issuer at the place where the undertaking was issued.




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(3) The beneficiary, when demanding payment, is deemed to certify that the demand is not in bad
faith and that none of the elements referred to in subparagraphs (a), (b) and (c) of paragraph (1)
of article 19 are present.

        Consistent with Section 5-110, a false or inaccurate certification under paragraph 3 does
not justify dishonor. (Of course, the beneficiary’s fraudulent behavior might give the issuer a
right to dishonor under Article 19.) Whether the beneficiary’s giving of a false or inaccurate
certification gives a claim for damages or other remedy, and to whom, is left to other law such as
Section 5-110, cf. Paragraph 40 of the Secretariat’s Commentary

         Paragraph 2’s requirement that one present to the “guarantor/issuer” does not apply to
undertakings that allow presentation to a nominee or confirmer and does not override normal
letter of credit practice that might allow for presentation to a nominated bank or to a confirmer
See e.g., UCP600 and ISP.

               Article 16. Examination of Demand and Accompanying Documents

(1) The guarantor/issuer shall examine the demand and any accompanying documents in
accordance with the standard of conduct referred to in paragraph (1) of article 14. In
determining whether documents are in facial conformity with the terms and conditions of the
undertaking, and are consistent with one another, the guarantor/issuer shall have due regard to
the applicable international standard of independent guarantee or stand-by letter of credit
practice.

(2) Unless otherwise stipulated in the undertaking or elsewhere agreed by the guarantor/issuer
and the beneficiary, the guarantor/issuer shall have reasonable time, but not more than seven
business days following the day of receipt of the demand and any accompanying documents, in
which to:
    (a) Examine the demand and any accompanying documents;
    (b) Decide whether or not to pay;
    (c) If the decision is not to pay, issue notice thereof to the beneficiary.

The notice referred to in subparagraph (c) above shall, unless otherwise stipulated in the
undertaking or elsewhere agreed by the guarantor/issuer and the beneficiary, be made by
teletransmission or, if that is not possible, by other expeditious means and indicate the reason
for the decision not to pay.

        Whether documents are consistent with one another has to be judged by the applicable
international practice. For example UCP500 Article 13a required that documents not be
“inconsistent” with one another; UCP600 Article 14d requires that they not “conflict,” ISP Rule
4.03 provides that one must “examine” for “inconsistency” only to the extent that the
undertaking requires, and Article 5 of the UCC has no analogous requirement.

        Article 16 does not specify the consequences of an issuer’s failure to give notice or to
give its reasons for dishonor in the notice. Where an undertaking under the Convention is not
subject to law or rules of practice that provide for timely and adequate notice of refusal and
where such law or practice does not spell out the consequence of failure to give such notice, a

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court may apply UCC Section 5-108(c) or rules of practice such as UCP600 Article 16 or ISP
Rule 5.03 and so preclude the issuer from using any unstated reasons to justify its dishonor.

                                       Article 17. Payment

(1) Subject to article 19, the guarantor/issuer shall pay against a demand made in accordance
with the provisions of article 15. Following a determination that a demand for payment so
conforms, payment shall be made promptly, unless the undertaking stipulates payment on a
deferred basis, in which case payment shall be made at the stipulated time.

(2) Any payment against a demand that is not in accordance with the provisions of article 15
does not prejudice the rights of the principal/applicant.

        Article 17(2) does not establish or address any rights that the principal or applicant may
have after a payment that may violate Article 15. Those rights must be found in the agreements
of the parties or in the rules of practice.

                           Article 19. Exception to Payment Obligation

(1) If it is manifest and clear that:
    (a) Any document is not genuine or has been falsified;
    (b) No payment is due on the basis asserted in the demand and the supporting documents; or
    (c) Judging by the type and purpose of the undertaking, the demand has no conceivable
          basis, the guarantor/issuer, acting in good faith, has a right, as against the beneficiary,
          to withhold payment.

(2) For the purposes of subparagraph (c) of paragraph (1) of this article, the following are types
of situations in which a demand has no conceivable basis:
    (a) The contingency or risk against which the undertaking was designed to secure the
         beneficiary has undoubtedly not materialized;
    (b) The underlying obligation of the principal/applicant has been declared invalid by a court
         or arbitral tribunal, unless the undertaking indicates that such contingency falls within
         the risk to be covered by the undertaking;
    (c) The underlying obligation has undoubtedly been fulfilled to the satisfaction of the
         beneficiary;
    (d) Fulfillment of the underlying obligation has clearly been prevented by willful misconduct
         of the beneficiary;
    (e) In the case of a demand under a counter-guarantee, the beneficiary of the counter-
         guarantee has made payment in bad faith as guarantor/issuer of the undertaking to
         which the counter-guarantee relates.

(3) In the circumstances set out in subparagraphs (a), (b) and (c) of paragraph (1) of this article,
the principal/applicant is entitled to provisional court measures in accordance with article 20.

        The effect of Article 19 against the beneficiary is substantially the same as the fraud rule
stated in Section 5-109(a). Paragraph 46 of the Secretariat’s Commentary states that the purpose
of Article 19 is to provide an “internationally agreed general definition of the types of situations
in which an exception to the obligation to pay against a facially compliant demand would be
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justified,” and that the “definition encompasses fact patterns covered in different legal systems
by notions such as ‘fraud’ or ‘abuse of right.’”

        Since Article 19 is silent as to the rights of the issuer against other parties, such as holders
in due course, a court may choose to apply Section 5-109 where there are claims by or against
such persons.

                              Article 20. Provisional Court Measures

(1) Where, on an application by the principal/applicant or the instructing party, it is shown that
there is a high probability that, with regard to a demand made, or expected to be made, by the
beneficiary, one of the circumstances referred to in subparagraphs (a), (b), (c) or paragraph (1)
of article 19 is present, the court, on the basis of immediately available strong evidence, may:
    (a) Issue a provisional order to the effect that the beneficiary does not receive payment,
        including an order that the guarantor/issuer hold the amount of the undertaking, or
    (b) Issue a provisional order to the effect that the proceeds of the undertaking paid to the
        beneficiary are blocked, taking into account whether in the absence of such an order the
        principal/applicant would be likely to suffer serious harm.

(2) The court, when issuing a provisional order referred to in paragraph (1) of this article, may
require the person applying therefor to furnish such form of security as the court deems
appropriate.

(3) The court may not issue a provisional order of the kind referred to in paragraph (1)of this
article based on any objection to payment other than those referred to in subparagraphs (a), (b),
(c) of paragraph (1) of article 19, or use of the undertaking for a criminal purpose.

       Because the Convention does not include a full range of procedural rules, courts that deal
with extraordinary remedies should use local procedural rules and may invoke local rights and
remedies to supplement those in Article 20.
       The United States Understanding concerning Article 20 concludes that the phrase
“use…for a criminal purpose” applies only to acts that are violations of criminal law, not to acts
that might be loosely characterized as “illegal.” See United States Understanding on Article 20.


                                    Article 21 Choice of Applicable Law


       The undertaking is governed by the law the choice of which is:
       (a)Stipulated in the undertaking or demonstrated by the terms and conditions of the
undertaking; or
       (b) Agreed elsewhere by the guarantor/issuer and the beneficiary.

       Both UCC 5-116 and Article 21 give full effect to any choice of law clause in the
undertaking and are consistent with one another. Normally undertakings are issued without
bargaining between the issuer and any other party over terms such as the choice of law clause;
accordingly in interpreting such clauses, it is inappropriate to consider any party’s intention
except for that of the issuer.
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         A choice of law clause such as “This undertaking is subject to ISP98 and is governed by
the New York UCC and, as to matters outside the scope of ISP98 and the UCC by New York
State and United States federal laws,” or a simpler clause that merely stated that “this
undertaking is governed by New York law,” would limit application of the Convention's
substantive provisions to those not displaced by the chosen UCC. Because the UCC is more
comprehensive than the Convention in its codification of the law of independent undertakings,
the practical effect of choosing the UCC is to exclude all of the Convention except Articles 21
and 22 and, perhaps, Article 11 on cessation of the beneficiary's rights and Article 18 limiting
setoff. Incorporation of ISP98 alone has the practical effect, under Article 13 of the Convention,
of displacing much if not most of the Convention. Since the Convention, the UCC, and ISP98
were all drafted in the 1990s with a view to harmonizing the law and practice applicable to
independent undertakings, each yields nearly the same result in most disputes. See the United
States Understanding on Article 21.

        [At least Jim Barnes and I are uncertain of the committee’s collective opinion on the
substance of the commentary on Article 21. Presumably there is agreement that a term adopting
the “UCC” would cause Article 5 of the UCC to trump the Convention where there is a UCC
rule, but what about a term adopting “the law of New York?” Some of us (at least White and
Byrne) think that the reference to the law of New York in a letter from an American bank means
the UCC, not the Convention, but we are unsure of the committee’s view.]



                                Article 22. Determination of Applicable Law



        Failing a choice of law in accordance with article 21, the undertaking is governed by the
law of the State where the guarantor/issuer has that place of business at which the undertaking
was issued.

       Article 22 of the Convention and UCC 5-116(b) state equivalent conflict-of-law rules.
Both focus on the obligor’s location. Because UCC 5-116(b) deals with advising and nominated
banks as well as issuing and confirming banks, it is more elaborate. See the United States
Understanding on Article 22.




                                    United States Understandings




Article 6. Definitions

The United States understands as follows: Terms used but not defined in the Convention a) have the
same meanings as the same or substantially similar terms defined in Article 5 of the UCC (e.g., "good


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faith" as defined in UCC 5-102) or b) if there is no definition in Article 5, have the meaning in definitions
found elsewhere in the UCC or c) if there is no definition in the UCC, have meanings equivalent to the
same or substantially similar terms used in Article 5 of the UCC (e.g., "documentary" and "non-
documentary" as used in the Convention or the UCC to describe a type of undertaking, condition, or
presentation).

Article 20. Provisional court measures

(3) The court may not issue a provisional order…based on any objection other than those referred to
in…article 19, or use of the undertaking for a criminal purpose.

The United States understands as follows: The phrase "or use of the undertaking for a criminal purpose"
applies only to laws that make it a crime to pay an independent undertaking (see, e.g., the United States
federal foreign asset control laws).]

Article 21. Choice of applicable law

The undertaking is governed by the law the choice of which is: (a) Stipulated in the undertaking
or demonstrated by the terms and conditions of the undertaking; or (b) Agreed elsewhere by the
guarantor/issuer and the beneficiary.

The United States understands as follows: An international undertaking issued from the United States
which provides for application of a state’s law would be governed by the substantive law in the UCC (by
virtue of the uniform state choice-of-laws rules provided in UCC 5-116(a) and in Article 21 of the
Convention). Depending on the choice-of-UCC language in the undertaking, application of the Convention
would be entirely excluded or would be included as a supplement to the UCC. For example, a clause,
"This undertaking is issued subject to ISP98 and is governed by the New York UCC and, as to matters
outside the scope of ISP98 and the UCC, by New York State and United States federal laws", would
permit application of the Convention's substantive provisions only to matters not dealt with by the UCC. A
clause stating merely that an undertaking is “subject to New York law” would have the same effect.

Article 22. Determination of applicable law

Failing a choice of law in accordance with Article 21, the undertaking is governed by the law of the State
where the guarantor/issuer has that place of business at which the undertaking was issued.

The United States understands as follows:

An international undertaking issued from the United States that fails to choose the applicable law would
be governed by the substantive law provided in the Convention, supplemented by the substantive law in
the UCC. UCC 5-116(b) would determine which state’s version of the UCC would provide that
supplementary law.

The term "where the guarantor/issuer has that place of business at which the undertaking was issued"
has a meaning equivalent to the term” jurisdiction in which the [issuer] is located” as that term is used in
UCC 5-116(b).




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