Costly commercial litigation can be avoided by utilising guarantees governed by uniform rules, says UJ Law Professor

The times immediately after World War 1 were troubled times. In 1919, a group of industrialists, financiers and traders, who became known as “the merchants of peace” founded the International Chamber of Commerce (ICC). Their thinking was that the facilitation of world-wide trade and commerce and the harmonisation of the rules governing them would contribute to peace. There was a conscious decision not to wait upon governments to do what was necessary in these respects, said Charl Hugo, a Professor of Banking Law and Director of the Centre for Banking Law at the University of Johannesburg (UJ) on Monday 24 October 2016.

Prof Hugo discussed reasons why the ICC’s work has been so spectacularly effective in the case of letters of credit but less so in the case of guarantees, and argued for greater use of the ICC rules in the case of guarantees, when he delivered his Inaugural Professorial address in the UJ Council Chambers on Monday, 24 October 2016.

Prof Hugo’s address focused on the history of the ICC, especially its work relating to harmonisation of the law and practice of letters of credit and demand guarantees by means of rule-making – the Uniform Customs and Practice for Documentary Credits (UCP) and the Uniform Rules for Demand Guarantees (URDG) which aims to regulate the practice relating to demand, or independent guarantees.

“The UCP and the URDG, in their current form, when read side by side, are strikingly similar. Their impact in the relevant industries are, however, still very different, he said. Letters of credit are invariably issued subject to the UCP. Guarantees, at least in South Africa (but it is more widespread than that) are very often not issued subject to any of the potentially applicable rules. The reasons are not entirely clear.”

He added that the scarcity of South African cases relating to letters of credit is remarkable. “This stands in stark contrast to cases relating to guarantees. Kelly-Louw has written prolifically on the South African case law relating to guarantees over the past decade. In her comprehensive overview shared in her paper at the recent Annual Banking Law Update, she referred, on a rough count, to no less than 18 South African cases (the overwhelming majority of which were decided in the past decade). To Kelly-Louw’s list at least another three can be added. The question that must be posed in the context of this statistic is how many of these cases would have proceeded to litigation had the guarantees in question been issued subject to ICC rules. It is suggested that many of the disputes would not have arisen.

He stressed that these rules are rules drafted by practical and experienced experts and deserve at least to be considered by the drafters of guarantees. This requires better knowledge of the rules than is presently apparent in South Africa.

Prof Hugo says that the historic lesson is essentially that: “We, as commercial lawyers, must do our bit to avoid disputes without waiting for governmental initiatives. Perhaps it is a bit far-fetched to think that, by so doing we will contribute to world peace. We will, however, make our immediate environment a better place.”

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