As the “Belt and Road” initiative steadily advances, China’s economic and trade cooperation with countries along the route continues to strengthen. With the further expansion of Chinese enterprises in foreign engineering contracting, international trade, energy development, and overseas investment, the demand for various cross-border bank guarantees is also increasing. This article introduces the relevant basic situation of Kuwait, outlines the characteristics of Kuwait guarantees, and proposes relevant risk prevention suggestions to better serve Chinese enterprises and support their healthy business development.
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Overview of Kuwait
Kuwait is an important resource-rich country in the Middle East and the first Gulf Arab country to establish diplomatic relations with New China. The relationship between China and Kuwait has traditionally been friendly. Kuwait highly appreciates and actively responds to China’s “Belt and Road” initiative, being the first country to sign a cooperation document for the joint construction of the “Belt and Road” with China. Additionally, Kuwait is one of the founding member countries of the Asian Infrastructure Investment Bank initiated by China. In recent years, the two countries have shown good development momentum in trade, investment, engineering contracting, energy, communications, infrastructure, and finance, with China becoming Kuwait’s largest trading partner.
1. Anti-Money Laundering and Combating Terrorist Financing
Kuwait is a member of the Middle East and North Africa Financial Action Task Force (MENAFATF), and the Gulf Cooperation Council (GCC) it belongs to is a member of the Financial Action Task Force (FATF). Since the FATF mutual evaluation in 2011, Kuwait has made significant progress in anti-money laundering. In the face of the ongoing turmoil in the West Asia and North Africa region and the increasingly severe threat of terrorism, Kuwait has increased its investment in security and defense, strictly controlling domestic institutions from engaging with the “Islamic State” under the guise of “charity” or indirectly providing financial support to it.
2. Major Financial Institutions
Kuwait’s major commercial banks include Kuwait National Bank, Gulf Bank, Ahli Bank, Kuwait Middle East Bank, Burgan Bank, and Kuwait Commercial Bank. In 2005, Kuwait National Bank established a representative office in Shanghai, China, and the Shanghai branch officially opened in 2017.
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Characteristics of Kuwait Guarantees
1. Overall Characteristics
By reviewing the guarantees (including counter-guarantees) issued by Chinese banks to Kuwait in recent years, the following basic characteristics have been summarized:(1) Client Industries: Mainly oil, electricity, and construction enterprises.(2) Types of Guarantees: Mainly bid guarantees, performance guarantees, advance payment guarantees, quality guarantees, etc.(3) Currency of Guarantees: Mainly in US dollars and Kuwaiti Dinars, with US dollars being predominant. If issued in Kuwaiti Dinars, it can be agreed to be paid in US dollars at an agreed exchange rate.(4) Validity of Guarantees: Guarantees and counter-guarantees can specify an expiration date, and it is common for the beneficiary to request “extend or pay” before the expiration date.(5) Applicable Law: Counter-guarantees and guarantees are mostly governed by Kuwaiti law, with a few applicable under UK law, and very few guarantees or counter-guarantees specifying the application of the International Chamber of Commerce’s Uniform Rules for Demand Guarantees (URDG758).(6) Issuance Method: Generally, applicants outside Kuwait need to apply for bank counter-guarantees and entrust Kuwaiti banks to issue guarantees to the beneficiaries. A few Kuwaiti beneficiaries may accept guarantees issued by foreign banks.
2. Main Characteristics of Counter-Guarantee Terms of Kuwaiti Banks
(1) The counter-guarantee must state that it is demand guaranteed, and the written claim does not include a statement that the guarantor has received a compliant claim submitted by the beneficiary.(2) Counter-guarantees rarely apply the International Chamber of Commerce’s Uniform Rules for Demand Guarantees (URDG758) and usually must specify the application of Kuwaiti law.(3) The counter-guarantee includes a “no extend or pay” clause.Should you be served with a request from the beneficiary of your guarantee to extend the validity thereof (whether such request contains an “extend or pay” demand or an “extend or hold for value” request), and you concede to such request (at your sole discretion), we undertake that upon receipt of your request, either: (a) to provide you immediately with our agreement to extend the validity of our counter guarantee from its present (or extended) expiry date for a period of not less than fifteen (15) days beyond the extended expiry date requested by the beneficiary, or(b) to immediately honour your demand for payment under our counter guarantee.This clause indicates that if the counter-guarantee bank receives a request for extension from the beneficiary under its guarantee, the counter-guarantee bank must correspondingly extend or pay upon receipt of the notice from the counter-issuing bank. When the counter-issuing bank requests an extension, it is not required to state that it has received a compliant claim from the beneficiary.It should be noted that the “no extend or pay” requirement in this clause differs from the meaning of “extend or pay” in URDG758. According to URDG758 Article 23(a), “Where a complying demand includes, as an alternative, a request to extend the expiry, the guarantor may suspend payment for a period not exceeding 30 calendar days following its receipt of the demand.” The beneficiary can propose a request for extension instead of payment in the compliant claim, and the guarantor can choose to extend or pay upon receiving such a request after reviewing the claim in accordance with the guarantee terms. As long as the guarantor extends the guarantee as required, the beneficiary’s compliant claim will be deemed automatically withdrawn. Similarly, the counter-issuing bank, as the beneficiary under the counter-guarantee, must also submit a compliant claim under the counter-guarantee. In cases where such a “no extend or pay” commitment clause is included in the guarantee/counter-guarantee, the beneficiary does not need to submit a claim statement regarding the default of the guaranteed party under the contract; it only needs to request an extension or, if not extended, payment or freezing of funds, and the counter-issuing bank only needs to notify the counter-guarantee bank of this situation without stating that it has received a compliant claim under the guarantee.Moreover, the term “extend or hold for value request” is a relatively vague requirement, which is quite rare in practice, and there are some disputes regarding its understanding.Considering that different parties may have different interpretations of the “extend or hold for value request,” when a beneficiary proposes an “extend or hold for value” request, the counter-guarantee bank should carefully review the relevant requests from the counter-issuing bank to determine the true intentions of the counter-issuing bank and the beneficiary.(4) Require the counter-guarantee bank to make relevant commitments and guarantees in compliance with the foreign exchange control policies of the country.(5) Require the exclusion of the application of the United Nations Convention on Independent Guarantees and Standby Letters of Credit.
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Overview of Relevant Laws and Provisions on Guarantees
1. Overview of Kuwaiti Law
Kuwait is a hereditary monarchy and has historically been a protectorate of Britain, gaining full independence in 1961. Its judicial system is influenced by English law. At the same time, Kuwaiti law belongs to the civil law system, heavily influenced by French and Egyptian law, with Islam being the state religion, and its teachings form the basis of Kuwaiti legislation.Kuwaiti law allows for the recognition and enforcement of foreign judgments. Article 199 of Kuwait’s Law No. 38 of 1990 on Civil and Commercial Litigation stipulates that the recognition and enforcement of foreign judgments in Kuwait must be based on reciprocity, meaning that only if the country that issued the judgment also allows the enforcement of judgments made in Kuwait can a foreign judgment be applied for enforcement in Kuwait. In practice, Kuwait rarely enforces court judgments from non-GCC member countries, while it is more likely to enforce foreign arbitration under the New York Convention.China and Kuwait signed the “Treaty on Judicial Assistance in Civil and Commercial Matters” in 2007, greatly facilitating the delivery of summons and other judicial documents, judicial evidence collection, etc., between the two countries. Article 17 of the treaty stipulates that both parties shall recognize and enforce civil, commercial, and identity judgments made by each other’s courts after the treaty comes into effect according to their national laws, as well as the judgments made by each other’s courts regarding damages in criminal cases; Article 28 stipulates that both parties shall recognize and enforce arbitration awards according to the “Convention on the Recognition and Enforcement of Foreign Arbitral Awards” signed in New York on June 10, 1958.
2. Provisions on Guarantees in Kuwaiti Law
Kuwait’s New Commercial Law of 1980 provides detailed provisions on guarantees. The main contents are as follows:Article 382 and 385 stipulate that a guarantee is a responsibility of the bank to pay the agreed amount unconditionally and without restriction to the beneficiary during the agreed period at the request of the applicant, and the purpose of the guarantee must be stated in the guarantee. The bank may not refuse payment based on its relationship with the applicant or the relationship between the guaranteed party and the beneficiary of the guarantee.Article 386 stipulates that if no claim is received during the validity period stipulated in the guarantee, the guarantee will become invalid unless an extension is made before expiration.Article 384 stipulates that the beneficiary cannot transfer the rights under the guarantee without the consent of the guarantor.Kuwait is one of the first countries to join the United Nations Convention on Independent Guarantees and Standby Letters of Credit, indicating that the Kuwaiti government supports the independence of guarantees from legal provisions and treaty attitudes.
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Characteristics and Risks of the Kuwaiti Market
The contracting market in Kuwait has four bidding methods: international bidding, BOT/PPP, private investment, and local bidding, among which Chinese enterprises participate more in international bidding and local bidding. The new bidding law No. 49 of Kuwait in 2016 removed the restriction that foreign companies must have local agents to bid, but during project execution, local agents or partners are still required to participate (unless a wholly foreign-owned Kuwaiti company has been established), and at least 30% of the goods must be purchased in the local market. In practice, foreign companies generally participate in bidding as general contractors, commonly by forming joint ventures with local companies and registering locally to obtain bidding qualifications, or by purchasing the bid, paying a certain percentage of transfer fees to the winning local contractor, and contracting the project in the name of the local contractor.It is noteworthy that foreign companies using the bid purchasing method, or nominally subcontracting but actually transferring the project, are not uncommon, but these practices are not legally supported. Once disputes arise, foreign companies find it challenging to protect their rights through legal means. Moreover, in the aforementioned cases, the main contractor/general contractor may sometimes require the actual executing party of the contract to issue a demand guarantee in the name of the main contractor/general contractor to the owner, and some cases that have emerged indicate that this practice often brings significant risks to foreign companies undertaking project construction.
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Risk Control Suggestions
1. Strengthen Background Checks
When accepting guarantees for overseas engineering contracting, it is essential to consider not only the factors of the business itself but also the contractor’s ability to withstand risk events and the performance ability, reputation, and financial strength of the project owner, including changes in the international economic and financial situation during the guarantee period. Before issuing guarantees, the review of the underlying transaction should be strengthened to clarify the rights and obligations of all parties involved in the transaction. Ensure that the guaranteed party and the beneficiary are consistent with the parties involved in the underlying transaction to avoid providing guarantees for business with unclear transaction backgrounds and unequal rights and obligations among the parties to the transaction, to prevent being drawn into disputes. After issuing guarantees, post-issuance management should be strengthened, and timely follow-up on the project execution situation should be conducted to grasp the opportunity to control risks.
2. Pay Attention to the “No Extend or Pay” Clause and Subsequent Claims
Since foreign enterprises often issue guarantees to Kuwaiti beneficiaries in a transferred form, with foreign counter-guarantee banks issuing demand counter-guarantees to Kuwaiti counter-issuing banks. The counter-guarantees required by Kuwaiti banks usually do not contain specific claim statement clauses, do not stipulate payment deadlines, and include commitments such as “no extend or pay.” The counter-guarantee should be reviewed immediately upon receiving a claim or “no extend or pay” request, and the applicant should be notified. For “no extend or pay” requests, timely extensions should be made after fully communicating with the applicant about the project’s progress and, if necessary, the applicant should be required to prepare sufficient payment funds. For compliant claims, payment should be made as soon as possible to avoid disputes with the counter-issuing bank and to protect the bank’s reputation.
3. Pay Attention to Exchange Rate Risks
For guarantees issued in the local currency, Kuwaiti Dinars, efforts should be made to pre-specify the currency and exchange rate used for payment in the guarantee text, for example, “Payments under the guarantee shall be made in freely convertible US dollars and calculated at the exchange rate of Kuwaiti Dinars to US dollars on the day of the claim.” For guarantees issued in the local currency of the beneficiary’s country, close attention should be paid to exchange rate fluctuations after issuance, and if necessary, timely additional collateral and counter-guarantee measures should be taken.
This article is authored by: Zhang Xiao, Assistant Manager at the International Settlement Document Processing Center of Bank of ChinaGuided by: Peng Jianjun, Business Manager at the International Settlement Document Processing Center of Bank of ChinaHou Yun, Supervisor at the International Settlement Document Processing Center of Bank of ChinaThis article only represents the author’s views, and the author is responsible for the content.
(Source: Secretariat of the China National Committee of the International Chamber of Commerce)
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