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Scope

AUGSBURG SUMMER SCHOOL 2019 Independent guarantees (and letters of credit) Prof Charl Hugo Professor of Banking Law and Director of the Centre for Banking Law University of Johannesburg chugo@uj.ac.za. Scope. Seminar deals with

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Scope

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  1. AUGSBURG SUMMER SCHOOL 2019Independent guarantees (and letters of credit) Prof Charl Hugo Professor of Banking Law and Director of the Centre for Banking Law University of Johannesburgchugo@uj.ac.za

  2. Scope • Seminar deals with • Introductory issues: letters of credit and the contracts underlying them • Introductory issues: independent guarantees and the contracts underlying them • Foundations of the law of letters of credit and independent guarantees

  3. Introductory issues: letters of credit • Context: international sale • Risks and problems faced by the parties • Seller • Economic risk • Political risk • Cash flow • Buyer • Economic risk: quality control • Political risk • Cash flow • Financier • Security

  4. Introductory issues: letters of credit • Context: international sale • Risks and problems faced by the parties • Documentary nature • Commercial invoice • Transport document • Insurance document • Different certificates

  5. Introductory issues: letters of credit • Context: international sale • Risks and problems faced by the parties • Documentary nature • Payment clause • Payment in advance • Open account • Documentary collection (ICC’s URC) • Letter of credit (ICC’s UCP)

  6. Documentary collections: D/P Buyer Seller (D) docs (A) docs (F) money (C) money (B) docs Collecting bank Remitting bank (E) money

  7. Letter of credit: payment mandate Issuing bank Buyer sale reimbursement letter of credit Advising bank Nominated bank payment Seller

  8. Letter of credit: deferred payment mandate Issuing bank Buyer sale reimbursement letter of credit Advising bank Nominated bank Seller discounting transaction

  9. Introductory issues: independent guarantees Context: wide – prevalent - construction industry Major contracts – major risks Crucial aspects of construction contracts Parties Employer Contractor Subcontractor Principal agent/engineer

  10. Introduction: Guarantees and the contracts underlying them Context: wide – prevalent - construction industry Major contracts – major risks Crucial aspects of construction contracts Parties Standard form contract Reasons JBCC/GCC/FIDIC/NEC

  11. Introduction: Guarantees and the contracts underlying them Prevalent context: construction industry Large contracts – large risks Crucial aspects of construction contracts Parties Standard form contract Staged contract Payment Stages of completion

  12. Introduction: Guarantees and the contracts underlying them Prevalent context: construction industry Large contracts – large risks Crucial aspects of construction contracts Parties Standard form contract Staged contract Risks From employer’s perspective Failure to perform/perform properly Bankruptcy Damage to works or site

  13. Introduction: Guarantees and the contracts underlying them Prevalent context: construction industry Large contracts – large risks Crucial aspects of construction contracts Parties Standard form contract Staged contract Risks From employer’s perspective From contractor’s perspective Payment Damage to works or site

  14. Introduction: Guarantees and the contracts underlying them Prevalent context: construction industry Large contracts – large risks Crucial aspects of construction contracts Parties Standard form contract Staged contract Risks From employer’s perspective From contractor’s perspective Guarantees and Insurance

  15. Construction guarantee mandate Issuing bank Contractor $10 m guarantee Guarantees performance to max of 10% of contract price construction contract $100 m doc demand Employer

  16. Advance payment guarantee mandate Issuing bank Contractor $10 m upfront $10 m guarantee construction contract $100 m doc demand Employer

  17. Payment guarantee mandate Issuing bank Employer $10 m guarantee construction contract $100 m doc demand Contractor

  18. Retention guarantee mandate Issuing bank Contractor $10 m guarantee Guarantees payment of retention monies construction contract $100m providing for 10% retention doc demand Employer

  19. Four-party guarantee SA Issuing bank SA Contractor in India Counter guarantee mandate Indian Issuing bank construction contract $100 m doc demand $10 m guarantee Guarantees performance to max of 10% of contract price Employer (Indian)

  20. Foundational principles Letter of credit and demand guarantee is independent of the underlying contract and the mandate To be paid the beneficiary must comply (strictly?) with the terms of the guarantee or the letter of credit To be reimbursed the paying bank must comply (strictly?) with the terms of the guarantee or the letter of credit

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