Counter-guarantee (indirect guarantee)

In 1977, the English company R.D. Harbottle (Mercantile) had sold to Egyptian buyers and provided them with performance guarantees, issued by Egyptian banks against counter-guarantees from National Westminster Bank. Once the guarantees were called, Harbottle asked Kerr J to restrain NatWest from paying. He refused: the bank honors its undertakings unless fraud is established, and the seller settles its accounts with the buyer under the contract. The structure has four parties: the applicant, the counter-guarantor, the local guarantor and the beneficiary. It exists because the buyer, often a public entity, wants a guarantee governed by its own law and payable at home by a bank it knows, and because local procurement rules often require exactly that. The ICC's URDG 758, in force since July 1, 2010, give the counter-guarantee a regime of its own. The guarantor's demand must be supported by a statement that it has received a complying demand under its own guarantee (article 15(b)), and each undertaking is governed by the law of the place of the issuer's branch or office (article 34): the guarantee by the law of the buyer's country, the counter-guarantee by that of the exporter's bank. That mismatch is where the danger lies. If local law keeps the guarantee alive past its expiry date, or if the beneficiary sends an extend-or-pay demand, the counter-guarantee has to expire late enough to give the guarantor time to call, and banks usually build in a gap of fifteen days to a month. The exporter pays two sets of fees and, at the end of the chain, bears every call, justified or not. When the beneficiary is a state or a state-owned company, the unfair call is what gets insured as political risk.