ONE GUARANTEE ISSUED AGAINST MORE THAN ONE COUNTER-GUARANTEE

(When one guarantee has two “parents”)

INTRO

Every now and then, a guarantee comes into this world with not one, but two proud parents — two counter-guarantors, each claiming their share of responsibility. Sounds like a happy family? Well, it can be… provided everyone knows exactly who pays what when the baby cries.

That’s exactly the situation raised in this interesting case below.

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QUESTION

Dear Mr. Old Man,

I am facing a difficult case relating to bank guarantees subject to URDG 758. Please kindly give me your opinion.

We have received two counter-guarantees (Counter-guarantee No. 1 and Counter-guarantee No. 2) from two different counter-guarantors instructing us to issue one bid guarantee for USD 1,000,000.00 in favour of Beneficiary B in Vietnam.

• Counter-guarantee No. 1 is issued on behalf of Applicant 1 covering 80% of the bid guarantee.
• Counter-guarantee No. 2 is issued on behalf of Applicant 2 covering 20% of the bid guarantee.

(Applicant 1 and Applicant 2 are joint-venture bidders.)

Counter-guarantee No. 1 contains the following clause:

We hereby instruct and request you to issue under our responsibility in favour of Beneficiary B the bid guarantee for the total amount of USD 1,000,000.00… Our responsibility is restricted to the amount of USD 800,000.00 corresponding to 80% of our customer’s liability in the guarantee. Must be received by your bank from other counter-guarantor on behalf of Applicant 2 a counter-guarantee for its share (20%).

Counter-guarantee No. 2 contains the following clause:

We hereby instruct and request you to issue under our responsibility in favour of Beneficiary B the bid guarantee for the total amount of USD 1,000,000.00… Our responsibility is restricted to the amount of USD 200,000.00 corresponding to 20% of our customer’s liability in the guarantee. Must be received by your bank from other counter-guarantor on behalf of Applicant 1 a counter-guarantee for its share (80%).

We need your expert advice for this situation:

Under URDG 758, whether or not our bank can issue one guarantee for USD 1,000,000.00 against the two above-mentioned counter-guarantees?

If yes, is the wording in the above clause enough, or what specific wording should be inserted in Counter-guarantee No. 1 and Counter-guarantee No. 2?

I hope to receive your reply soon!

Thanks and best regards,

K.

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ANSWER

Dear K.,

It’s an interesting case — and not an uncommon one when joint-venture bidders come knocking.

Yes, it is possible for a bank to issue one guarantee against more than one counter-guarantee, provided that the total amount is fully covered and the responsibilities of each counter-guarantor are clearly defined.

In your situation, the clauses in Counter-guarantee No. 1 and Counter-guarantee No. 2 appear sufficient, since each counter-guarantor:

• specifies its respective share of liability (80% and 20%), and
• conditions its undertaking on receipt of the other counter-guarantee.

You may therefore issue a single bid guarantee for USD 1,000,000 in favour of Beneficiary B.

However, once issued, your bank remains liable for the full amount of the guarantee towards the beneficiary. If a complying demand is made and payment effected, your recourse will be to claim reimbursement from each counter-guarantor in proportion to its respective share (80% / 20%) as set out in its counter-guarantee.

That’s the beauty — and the risk — of being the issuing bank: the guarantee may have two “parents,” but only one name appears on the birth certificate.

Kind regards,

Mr. Old Man