Demand Guarantees vs Conditional Guarantees
Demand Guarantees
A
demand guarantee is payable upon the beneficiary's simple written demand, without any requirement to prove actual loss or default.
Standard Demand Language:
"We undertake to pay you any amount up to [amount] upon receipt of your first written demand stating that [the principal] has failed to perform their obligations under [the contract]."
The guarantor bank examines only whether the demand is compliant on its face — it cannot investigate whether the underlying default actually occurred.
Protection Against Abusive Calls (URDG 758 Article 19):
If a principal can show a demand is "manifestly abusive or fraudulent" and obtains a court injunction, the bank may be restrained from paying. However, courts set a very high bar for this.
Conditional Guarantees
A
conditional guarantee requires the beneficiary to provide evidence of the principal's default before the bank pays.
Common conditions:
- An arbitral award or court judgment confirming the default
- A surveyor's certificate confirming non-performance
- A joint written statement from both principal and beneficiary confirming the default
Trade-off: Conditional guarantees are more protective of the principal but less valuable to the beneficiary (who may wait years for a judgment). International buyers typically insist on demand guarantees.
URDG 758 vs UCP 600 for Standby LCs
Both URDG 758 and ISP98 (International Standby Practices) govern standby instruments, but with different emphases:
| Feature | URDG 758 | ISP98 |
|---|
| Designed for | Demand guarantees | Standby LCs |
| Documents required | Demand + statement of breach | Varies by terms |
| Expiry rules | Explicit non-payment of charges does not extend | Complex expiry rules |
| Jurisdiction | Civil law friendly | Common law friendly |