CAP Funding Guarantees use well-proven URDG ICC 758

Uniform Rules for Demand Guarantees (URDG), International Chamber of Commerce (ICC) publication number 758, is now widely accepted as the definitive standard for bank-involved, financial guarantees.

URDG-based financial guarantees stand as an excellent mechanism to obtain advantageous terms and access to funding that might otherwise be out of reach to developers seeking project finance, the main area of focus for In3’s capital partners.  Such guarantees streamline due diligence, ensures continuity and certainty of project acceptance (once pre-approved using our 3-stage process), improve investment terms and expedite closings, simply by acting as a source of assurance or “surety” that the project will be successfully completed and commissioned to begin commercial operations.

Generally, any of the three main sets of rules — ICC 758, 600 or 590 — can be used for CAP funding guarantees (Standby Letters of Credit are most common), but URDG 758 must be used instead of “Standby” rules if the instrument is called a “Bank Guarantee” (BG), while in the US and other markets the more common name is a Standby Letter of Credit (SbLC).  Several other names that can be acceptable for CAP project funding with the right instrument wording, namely one that closely follows our template.

There are several advantages of URDG guarantees for CAP funding, such as use of non-cash assets as collateral to the issuing bank (whether or not collateral is needed will be determined by the involved banker), where the misleading phrase “cash backed” means the instrument itself is considered cash, even if non-cash assets, or no assets, were used by the issuing bank.

This article explores these and other less widely understood aspects of demand guarantees (DGs) for project finance, such as for In3’s Completion Assurance Program™ (CAP funding).

The basic idea of a DG is as security, so in case the principal/second party (developer, owner, or hired contractor) does not perform as promised to predefined contract specifications, the beneficiary/first party (funder) would have the ability to “demand” that the parties solve the problem to (when using CAP funding) complete the project.  Although the funder would be entitled to draw or call the guarantee in the event of fraud, in practice that is not going to happen.  The parties would work together to make sure that the instrument did not need to be called.  More on this at FAQs.

URDG can be used for many other types of transactions, as can ICC 590 or 600 (alternative legal venues we can also accept with the right wording, as Standby Letters of Credit, not a DG), but URDG’s popularity is due to the fact that it is well proven in the courts, offering mutual protection (the authors say it “balances the legitimate interests of both parties”) for ensuring that project funding is used per the developer’s disclosures to complete and commission the project to begin commercial operations.  URDG’s emphasis on Demand Guarantee undertakings sets it apart from the other ICC standards and thus clarifies intent.

For more on URDG from the ICC’s academy:

• Visit icc.academy/urdg-758
• For a comparison of these various ICC legal venues, and how DGs compare to the most widely used instrument, a “standby” Letter of Credit (SbLC), a type of bank-issued guarantee used in the US and overseas, visit the ICC’s A Comprehensive Guide to Standby Letters of Credit (2021) – ICC Academy
• The URDG 758 companion document titled the International Standard Demand Guarantee Practice (ISDGP) for URDG 758 (ICC publication 814E), which highlights best practices.

The overarching purpose of such instruments is to “balance the legitimate interests of all parties,” which implies that they also filter out fraud and malfeasance, also known as “illegitimate” interests.

Instrument issuers or endorsers are guided by these well-established rules, making it easier for the parties engaged in developing and building the project to work together and resolve any issues that crop up.  The only circumstances that could be seen as fraud as if one party stops, gives up, or drags its feet beyond a reasonable date.  Demand guarantee rules make it quite clear if one party turns out to be fraudulent, and how the other party would be made whole, effectively eliminating the option of simply walking away (stealing or embezzling) the underlying funds.

With regard to In3 CAP funding, URDG puts case law to work to offset the risk of project non-completion due to fraud.

But that said, the issuer and related parties (a third party guarantor, endorser, confirming bank, etc.) are well protected against any arbitrary or unjust claims or abuse of the instrument because the burden of proof of a contractual breach is always on us — the Beneficiary (our Family Office capital partners) — in order to make any claim.  This structure encourages and allows for negotiation and cooperation, with contracts that provide an extended “cure” period if there are problems.  This always works to get back on track so as long as the development team is still at the table, operating in good faith, in which case there is no concern about the guarantee instrument being abused, arbitrarily or unjustly called.

Translation:  through In3 CAP funding, project developers/owners enjoy better terms than would be otherwise available, decreasing the overall cost of capital, leaving room for others to get paid well, and funding qualifying mid-market projects at any stage of readiness using a process our clients say is much faster, easier and better than the traditional route.

More details, including independent legal review and case law examples via this fulsome Practitioner Series article: