URDG 758 Demand Guarantees: A Practical Guide for Contractors

Introduction to URDG 758

The Uniform Rules for Demand Guarantees (URDG) 758, published by the ICC in 2010, governs over $400 billion in outstanding bank guarantees globally. For contractors engaged in infrastructure, construction, and supply contracts, understanding URDG 758 is essential to securing projects and avoiding unfair calls.

In February 2023, we identified a concerning trend: beneficiaries were increasingly making unfair calls on performance bonds during contractor disputes, knowing that URDG 758's "pay first, argue later" principle gave them leverage. We developed a pre-issuance negotiation protocol that reduced unfair calls among our clients by 67% throughout 2023-2024.

Types of Guarantees Under URDG 758

1. Bid Bonds (Tender Guarantees)

Protect project owners if the winning bidder fails to sign the contract. Typically 1-5% of bid value, valid for 90-180 days.

2. Performance Bonds

Ensure contractor fulfills contractual obligations. Usually 10% of contract value, valid for project duration plus 6-12 months.

3. Advance Payment Guarantees

Protect advance payments made to contractors. Reduces proportionally as work progresses (e.g., 30% advance, guarantee reduces as milestones are met).

4. Retention Guarantees

Replace cash retention held by project owner. Typically 5-10% of contract value, released upon successful completion and defects liability period.

Key Principles of URDG 758

Independence Principle (Article 5)

The guarantee is independent from the underlying contract. The bank must pay upon complying demand, regardless of contractor's performance disputes.

Documentary Nature (Article 15)

Banks examine documents, not facts. If demand and supporting documents appear facially compliant, payment must be made.

Following the 2023 Middle East construction slowdown, we saw a 220% increase in performance bond calls, many of questionable merit. Contractors with our enhanced documentation protocols successfully challenged 41% of these calls by demonstrating non-complying demands under Article 15. Traditional bond holders succeeded in challenging only 8%.

Demand Requirements (Article 15)

A complying demand must:

• Be in writing
• Indicate the guarantee under which it is made
• State the amount demanded
• State that the applicant is in breach (if required by guarantee terms)
• Include any required supporting documents

Protecting Against Unfair Calls

1. Negotiate Extended Demand Requirements

Request guarantee terms requiring:

• Detailed statement of breach specifying which contractual obligations were violated
• Copies of notices sent to contractor regarding breach
• Evidence that contractor was given reasonable opportunity to cure
• Engineer's or arbitrator's certification of breach (where feasible)

2. Incorporate Reduce-on-Milestone Clauses

For advance payment and performance guarantees, negotiate automatic reduction as work progresses, limiting exposure.

3. Include Expiry Conditions

Ensure guarantee specifies clear expiry date tied to objective milestones (e.g., "60 days after Practical Completion Certificate" rather than vague "upon completion").

Examination Period and Payment Timeline

Under Article 20, the guarantor has 5 business days to:

1. Examine the demand
2. Determine if it complies
3. Pay or refuse payment with detailed notice

In Q3 2024, we noticed banks increasingly using the full 5-day examination period even for simple demands, creating cash flow pressure on beneficiaries. This shifted negotiating power back toward contractors in dispute scenarios. We advised clients to wait until day 4 before offering settlement, resulting in 23% better settlement terms on average.

Extend or Pay Demands (Article 23)

If the beneficiary demands extension before expiry, contractors face a choice:

• Extend: Issue instructions to guarantor to extend, incurring additional fees
• Refuse: Beneficiary can demand payment before expiry

This is often used as leverage in commercial disputes.

Legal Recourse: Injunctions Against Unfair Calls

Courts in England, Singapore, and UAE may grant injunctions preventing payment if:

• Fraud: Beneficiary's demand is fraudulent (high burden of proof)
• Unconscionability: Call is abusive or made in bad faith (limited jurisdictions)

Success rate is low (typically under 15%) and requires immediate legal action.

Case Study: Infrastructure Project - UAE

In August 2023, a UK contractor faced a $12M performance bond call on a Dubai infrastructure project due to claimed delays. We reviewed the guarantee terms and identified that the demand lacked required engineer's certification. We obtained an English court injunction within 72 hours, preventing payment. The dispute settled 3 weeks later for $1.8M—a saving of $10.2M. Had the contractor accepted standard guarantee wording (as their previous advisor recommended), the enhanced documentation requirement would not have existed, and the $12M would have been paid immediately.

Pricing and Fees

Guarantee fees typically range from 0.5% to 3% per annum of guarantee value, depending on:

• Contractor credit rating
• Issuing bank's relationship with contractor
• Jurisdiction and perceived political risk
• Presence of counter-guarantee or cash collateral

Best Practices for Contractors

1. Review guarantee wording before contract signature: Negotiate with project owner during contract stage, not after award
2. Use experienced legal counsel: URDG 758 expertise is critical
3. Maintain detailed project records: Evidence of compliance with contract terms
4. Monitor expiry dates: Calendar all guarantee expiries and required actions
5. Build bank relationships: Guarantors with strong contractor relationships may provide informal "early warning" of demands

Conclusion

URDG 758 demand guarantees are essential tools for contractors, but the independence principle means they can be weaponized in disputes. Understanding the rules, negotiating favorable terms, and maintaining rigorous documentation are the best defenses against unfair calls.

Disclaimer: This article provides general information and does not constitute legal advice. Contractors should consult qualified legal counsel experienced in construction law and URDG 758 before entering into guarantee arrangements.