Memorandum by the British Exporters Association
1. BExA would like to draw the attention
of the House of Lords Select Committee on Economic Affairs in
their enquiry on the Impact of Economic Sanctions to the significant
negative impact on British exporters if the country subject to
the sanctions is allowed to "call" bank guarantees provided
by British exporters in support of their sales contracts with
that country.
2. Bank guarantees are normally required
prior to, during and after a sales contract to give the buyer
assurances that the British party will perform his obligations:
— A bid bond is provided with
a tender to ensure that the winning bidder concludes a contract.
— An advanced payment guarantee
ensures that if the exporter does not perform, the buyer can get
back any down payments or progress payments he has made.
— A performance bond guarantees
that the exporter will complete the contract.
— Warranty bonds and retention money
bonds secure the exporter's obligations post-shipment or post-commissioning.
— Offset bonds guarantee that
the exporter will perform his obligations to perform any offset
required under the contract.
3. Such guarantees are usually payable on
first demand, ie they are unconditional and no evidence of non-performance
is required. The issuing bank is therefore forced to pay any calls
unless subject to an injunction or similar court restraint. If
the guarantee is indirect (ie issued by a bank in the buyer's
country and secured by a counter-guarantee from a bank in the
UK), the local bank is even more likely to pay a call.
4. Bid bonds are likely to be for 2 per
cent-4 per cent of contract value, but advanced payment guarantees
are typically 10 per cent-30 per cent and performance bonds 10
per cent-15 per cent. The advance payment guarantee and performance
bonds should not be cumulative but often are, so an amount equivalent
to at least 25 per cent of the contract value may be at risk of
unfair calling. If UK exports to the country subject to sanctions
were running at £2 billion pa with an average performance
time of 18 months, then bond liabilities could easily be as high
as £750 million.
5. If sanctions mean that UK exporters are
unable to deliver equipment, or they (and/or their local contractors)
are unable to perform work on site, there is a real danger of
some or all of these bonds being called. Moreover, there is also
an increased risk that the government of a sanctioned country
will issue a decree that all bonds are to be called (possibly
as retaliation against those nations that have imposed sanctions).
6. In some cases, bonds will have been issued
by a UK-registered bank; in other cases they will have been issued
by a local bank in the sanctioned country under the indemnity
of a UK-registered bank. In either case, the calling of a bond
would automatically result in the UK bank taking recourse to the
UK exporter under the terms of the counter-indemnity that it will
have been required to provide to the bank. Thus, UK exporters
could immediately suffer a very significant financial loss in
addition to any other loss that the company might suffer as a
result of the imposition of economic sanctions. Some exporters
elect to insure against the risk of bonds being called unfairly,
but that insurance is not always effective in protecting against
all circumstances, and—more importantly—is sometimes
not available (at an affordable price) for bonds issued in difficult
countries.
7. When the UN imposed economic sanctions
against Iraq, following its invasion of Kuwait in 1990, those
sanctions contained provisions that effectively prevented banks
from paying any bond calls. This is an important measure that
should be considered whenever economic sanctions are applied,
so that banks registered in the UK cannot pay against calls made
under:
— any indemnities they have issued
to banks in the sanctioned country, or
— any bonds or guarantees that they
have issued directly to beneficiaries in the sanctioned country.
This will also protect any underwriters who
may have insured the exporter against unfair calling of the bonds.
September 2006
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