INDEPENDENCE PRINCIPLE UNDER URDG 758
Introduction
Demand guarantees play a crucial role in reinforcing the relationship of trust between parties, especially in international commercial transactions, and in minimizing payment risks. In cases where one party to a contract fails to perform its obligations, these guarantees which are typically issued by a third party (usually a bank), serve to ensure financial security between the parties. The primary objective of a demand guarantee is to provide the beneficiary with assurance up to a specified amount in the event of the obligor’s non-performance. The operational framework for such guarantees is set forth under the Uniform Rules for Demand Guarantees 758 (URDG 758), issued by the International Chamber of Commerce (ICC) and effective since 2010. URDG 758 aims to establish a globally accepted set of rules to minimize legal uncertainties arising from different national legal systems.
URDG 758 governs demand guarantees, whereby the guarantor bank undertakes to pay a specified amount upon presentation of a demand complying with the terms and conditions stated in the guarantee. The most distinctive feature of such a guarantee is that the guarantor’s undertaking is independent from both the underlying contractual relationship between the applicant and the beneficiary, and the agreement between the bank and the beneficiary relating to the issuance of the guarantee. This characteristic renders the guarantee a standalone legal instrument separate from the underlying contract.
Definition and Significance of the Independence Principle
The independence principle is expressly regulated under Article 5 of URDG 758, titled as “Independence of the guarantee and counter-guarantee”. This principle means that the guarantor's commitment exists independently from the underlying relationship. In other words, a demand guarantee does not constitute an “accessory” obligation but rather creates a primary obligation. Consequently, the guarantor cannot raise any objections or defenses arising from the underlying relationship between the applicant and the beneficiary (e.g., invalidity or termination of the main contract, or non-performance by the applicant). Similarly, the guarantor may not invoke any defenses arising from the internal relationship between the guarantor and the beneficiary, such as the beneficiary’s failure to pay issuance fees. In short, the guarantor’s payment obligation is strictly limited to the terms set out in the guarantee itself and is not subject to defenses or objections based on any external contractual relationship. This structure provides a significant legal safeguard for the beneficiary by allowing prompt enforcement of payment claims without delving into the complexities of the underlying transaction.
Effects of the Independence Principle in Practice
While the independence principle offers numerous advantages in practice, it may also expose parties -particularly contractors or sellers- to the risk of unjustified payment demands. Since the guarantee is detached from the underlying contract, the guarantor is obligated to pay upon presentation of compliant documents, regardless of whether the beneficiary is legally entitled to the payment under the main contract. A notable consequence of the independence principle under URDG 758 is the opportunity of partial demands, as provided under Article 9(b). According to this provision, the beneficiary may submit a demand for the full guaranteed amount in a single request or may submit partial claims if only part of the loss or damage has occurred. For example, in a construction contract, the employer may obtain a demand guarantee worth USD 100,000 to secure against delays by the contractor. If the employer suffers an initial delay-related loss of USD 25,000, they may submit a partial demand for that amount under the guarantee.
This mechanism is particularly useful in long-term or phased performance contracts, where the total loss cannot be immediately quantified. It allows the beneficiary to obtain payment for realized losses without waiting for the entire scope of damages to accrue. For the guarantor, it provides a clear and document-driven framework for assessing claims. Nevertheless, for this method to remain effective, any partial claim must be made within the validity period of the guarantee and must strictly comply with URDG requirements. Moreover, each demand must be properly documented and separately submitted. It is also important to note that each partial payment will reduce the remaining amount available under the guarantee. Therefore, beneficiaries should carefully plan their claims, especially when anticipating further damages in the future.
Conclusion
In conclusion, the independence of demand guarantees under URDG 758 signifies that the guarantor’s obligation is confined solely to its own undertaking, without regard to the contractual relationships between the other parties. This principle provides the beneficiary with a reliable and flexible payment mechanism. Additionally, the ability to submit partial demands under Article 9(b) enables a phased and proportional recovery of losses. The practical utility of demand guarantees largely depends on the effective implementation of these two structural elements -independence and partial demands- which together enhance commercial certainty and efficiency in cross-border transactions.