Part 1 - Draft Uniform Independent Guarantees and Letters of Credit Act
(Draft 12: includes changes to June 6, 2008)
Scope of Application
1 (1) Part 1 applies to:
(a) all UNDERTAKINGs to which Part 2 does not apply, and;
(b) all UNDERTAKINGs to which Part 2 applies but only to the to the extent Part 1 applies to matters to which Part 2 does not apply.
(2) With the exception of this subsection, sections 3, 12(c) and 22(4), and subject to subsection (3) the effect of this Act may be varied by agreement or by a provision stated or incorporated by reference in an UNDERTAKING. A term in an agreement or UNDERTAKING generally excusing liability or generally limiting remedies for failure to perform obligations is not sufficient to vary obligations prescribed by this Act.
(3) The obligations of good faith, diligence, reasonableness, and care may not be disclaimed by agreement. The parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable. Whenever this Act requires an action to be taken within a reasonable time, a time that is not manifestly unreasonable may be fixed by agreement.
(4) An ISSUER, nominated person or adviser may not be exempted from liability for any grossly negligent.
(4.1) All provisions that apply to an ISSUER apply equally to a CONFIRMER other than:
(Comment: We need to set out the exceptions to the general rule)
(4.2) All provisions that apply to an UNDERTAKING apply equally to a confirmation other than:
(Comment: We need to set out the exceptions to the general rule)
(5) The statement of a rule in this Act does not by itself require, imply, or negate application of the same or a different rule to a situation not provided for, or to a person not specified, in this Act.
(COMMENT: We have to have a provision that will guide interpretation so that it is clear that deviation from the language of the Convention doesn’t necessarily mean that Part 1 is to be interpreted differently from Part 2. The two parts are to be construed consistently.)
1.1 (1) In this Part:
(a) "adviser" means a person who, at the request of the ISSUER, or another adviser, notifies or requests another adviser to notify the beneficiary that an UNDERTAKING has been issued, confirmed, or amended;
(a.1) "applicant" means a customer of the ISSUER or other person at whose request or for whose account an UNDERTAKING is issued. Where a person requests an ISSUER to issue an UNDERTAKING on behalf of another, if the person making the request undertakes an obligation to reimburse the ISSUER, each person is an applicant;
(b) "beneficiary" means a person who under the terms of an UNDERTAKING is entitled to have its complying presentation honoured and the term includes a person to whom drawing rights have been transferred under a transferable UNDERTAKING;
(c) “confirmation” of an UNDERTAKING means a commitment added to that of the ISSUER, and authorized by the ISSUER, providing the beneficiary with the option of demanding that the CONFIRMER honour the UNDERTAKING instead of the ISSUER, upon simple demand or upon demand accompanied by other documents, in conformity with the terms and any documentary conditions of the confirmed UNDERTAKING, without prejudice to the beneficiary's right to demand that the ISSUER honour the UNDERTAKING;
(d) "CONFIRMER" means a nominated person adding a confirmation to an UNDERTAKING;
(e) "counter-guarantee" means an UNDERTAKING given to the ISSUER of another UNDERTAKING by its instructing party and providing for honour upon simple demand or upon demand accompanied by other documents, in conformity with the terms and any documentary conditions of the UNDERTAKING, indicating, or from which it is to be inferred, that honour of that other UNDERTAKING has been demanded from, or made by, the person issuing that other UNDERTAKING;
(f) "counter-guarantor" means the person issuing a counter-guarantee;
(g) "dishonour" of an UNDERTAKING means failure timely to honour or to take an interim action, such as acceptance of a draft, that may be required by the UNDERTAKING;
(h) "document" means a draft or other demand, document of title, investment security, certificate, invoice, or other record, communication, statement, or representation of fact, law, right, or opinion that provides a complete record thereof;
(h.1) “draft” means a bill of exchange under the Bills of Exchange Act (Canada);
(i) "electronic" includes created, recorded, transmitted or stored in digital form or in other intangible form by electronic, magnetic or optical means or by any other means that has capabilities for creation, recording, transmission or storage similar to those means;
(j) "good faith" means honesty in fact in the conduct or transaction concerned;
(k) "honour" of an UNDERTAKING means performance of the ISSUER’s commitment in the UNDERTAKING which may be stipulated in the undertaking to be made in any form, including:
(a) payment in a specified currency or unit of account;
(b) acceptance of a draft and at maturity, its payment;
(c) incurrence of a deferred payment obligation and at maturity, its payment; or
(d) supply of a specified item of value;
(COMMENT: May need to be cleaned up)
(l) "ISSUER" means a bank or other person that issues an UNDERTAKING, and includes a counter-guarantor, but does not include an individual who makes an engagement for personal, family, or household purposes;
(m) "nominated person" means a person whom the ISSUER
- (i) designates or authorizes to pay, accept, negotiate, or otherwise give value under an UNDERTAKING; and
- (ii) undertakes by agreement or custom and practice to reimburse;
(n) "presentation" means delivery of a document to an ISSUER or nominated person for honour or giving of value under an UNDERTAKING;
(Comment: Definition needs reworking eg. “presentation of a document”. Convention talks about “demand” accompanied by the document being either the delivering of documents or the documents themselves. Will come back to this later)
(o) “presenter" means a person making a presentation as or on behalf of a beneficiary or nominated person;
(p) "record" means information that is inscribed on a tangible medium, or that is stored in an electronic or other medium and is retrievable in perceivable form;
(q) "successor of a beneficiary" means a person who succeeds to substantially all of the rights of a beneficiary by operation of law;
(r) "UNDERTAKING" means an independent commitment, known in [international practice] as an independent guarantee or as a letter of credit given by an ISSUER to pay to the beneficiary a certain or determinable amount upon simple demand or upon demand accompanied by other documents, in conformity with the terms and any documentary conditions of the UNDERTAKING, and includes a counterguarantee;
(COMMENT: Need to look into a definition of “independent guarantee” from various sources. If this is defined, we need a definition of “letter of credit”.)
Article 2. UNDERTAKING
(1) For the purposes of this Convention, an UNDERTAKING is an independent commitment, known in international practice as an independent guarantee or as a stand-by letter of credit, given by a bank or other institution or person ("guarantor/ISSUER") to pay to the beneficiary a certain or determinable amount upon simple demand or upon demand accompanied by other documents, in conformity with the terms and any documentary conditions of the UNDERTAKING, indicating, or from which it is to be inferred, that payment is due because of a default in the performance of an obligation, or because of another contingency, or for money borrowed or advanced, or on account of any mature indebtedness undertaken by the principal/applicant or another person.
(Definitions Source: 5-102 – UCC)
Giving of an UNDERTAKING
2(1) The UNDERTAKING may be given:
(a) at the request or on the instruction of the applicant;
(b) on the instruction of another person ("instructing party") that acts at the request of the applicant of that instructing party; or
(c) on behalf of the ISSUER itself.
(2) The UNDERTAKING may stipulate that the ISSUER itself is the beneficiary when acting in favor of another person.
(3) Consideration is not required to issue, amend, transfer, or cancel an UNDERTAKING, advice, or confirmation.
(COMMENT: To be added to the Commentary to this section: Subsection (4) is not required under the Quebec Civil Code}
Independence of UNDERTAKING
3. For the purposes of this Act, an UNDERTAKING is independent where the ISSUER’s obligation to the beneficiary is not:
(a) dependent upon the existence or validity of any underlying transaction, or upon any other UNDERTAKING (including letters of credit or independent guarantees to which confirmations or counter-guarantees relate); or
(b) subject to any term or condition not appearing in the UNDERTAKING, or to any future, uncertain act or event except presentation of documents or another such act or event within an ISSUER’s sphere of operations.
(Source: Article 3 - Convention)
Principles of interpretation
4. In the interpretation of this Part, regard is to be had to the need to promote uniformity in the international practice of independent guarantees and letters of credit.
(Source: Article 5 - Convention)
Binding on Crown
5. This Act is binding on the Crown in right of (name of the enacting jurisdiction).
Comment: The Convention is drafted on the assumption that it applies to all independent guarantees and stand-by letters of credit otherwise within its scope whether or not they involve governmental entities. Section 5 merely confirms this. Of course, if a jurisdiction’s interpretation legislation already provides that the Crown is bound unless otherwise stated in the particular act, there is no need to include it Issuance, form and irrevocability of UNDERTAKING
Issuance, form and irrevocability of UNDERTAKING
6. (1) Issuance of an UNDERTAKING occurs when and where the UNDERTAKING leaves the control of the ISSUER concerned.
(1.1) An UNDERTAKING is deemed to have left the control of the ISSUER when it has been sent or otherwise transmitted to the person requested to advise it, or to the beneficiary.
(2) An UNDERTAKING, advice, transfer, amendment or cancellation may be issued in any form which preserves a complete record of its text and provides authentication of its source by generally accepted means or by a procedure agreed upon by the parties.
(3) From the time of issuance of an UNDERTAKING, a demand to honour the UNDERTAKING may be made may be made in accordance with the terms and conditions of the UNDERTAKING, unless the UNDERTAKING stipulates a different time.
(4) An UNDERTAKING is irrevocable upon issuance, unless it stipulates that it is revocable.
(Source: Article 7 - Convention)
7. (1) An UNDERTAKING may not be amended except in the form stipulated in the UNDERTAKING or, failing such stipulation, in a form referred to in section 6(3).
(2) Unless otherwise stipulated in the UNDERTAKING or elsewhere agreed by the ISSUER and the beneficiary, an UNDERTAKING is amended upon issuance of the amendment if the amendment has previously been authorized by the beneficiary.
(3) Unless otherwise stipulated in the UNDERTAKING or elsewhere agreed by the ISSUER and the beneficiary, where any amendment has not previously been authorized by the beneficiary, the UNDERTAKING is amended only when the ISSUER receives a notice of acceptance of the amendment by the beneficiary in a form referred to in section 6(3)
(4) An amendment of an UNDERTAKING has no effect on the rights and obligations of:
- (a) the applicant;
- (b) an instructing party; or
- (c) a CONFIRMER of the UNDERTAKING
unless such person consents to the amendment.
(Source: Article 8 – Convention)
CONFIRMER, Nominated Person, and Adviser
8. (1) A CONFIRMER is directly obligated on an UNDERTAKING and has the rights and obligations of an ISSUER to the extent of its confirmation. The CONFIRMER also has rights against and obligations to the ISSUER as if the ISSUER was an applicant and the CONFIRMER had issued the UNDERTAKING at the request and for the account of the ISSUER.
(2) A nominated person who is not a CONFIRMER is not obligated to honour or otherwise give value for a presentation.
(3) A person requested to advise may decline to act as an adviser.
(4) An adviser is not obligated to honour or give value for a presentation.
(5) An adviser undertakes to the ISSUER and to the beneficiary accurately to advise the terms of an UNDERTAKING, confirmation, amendment, or advice received by that person and undertakes to the beneficiary to check the apparent authenticity of the request to advise.
(6) Even if the advice is inaccurate, an UNDERTAKING, confirmation, or amendment is enforceable as issued.
(7) A person who notifies a transferee beneficiary of the terms of an UNDERTAKING, confirmation, amendment, or advice has the rights and obligations of an adviser under subsection (3) to (6).
(8) The terms in the notice to the transferee beneficiary may differ from the terms in any notice to the transferor beneficiary to the extent permitted by an UNDERTAKING, confirmation, amendment, or advice received by the person who so notifies.
(Source: 5-107 – UCC)
8.1 In addition to warranties arising under any other law, if a presentation is honoured, the beneficiary warrants:
(a) to the ISSUER, any other person to whom presentation is made, and the applicant that there is no fraud by or to the knowledge of the beneficiary; and
(b) to the applicant that the drawing does not violate any agreement between the applicant and beneficiary.
(Source: 5-110 – UCC)
(COMMENT: Deal with the policy issue with fraud in UCC and Canadian law in the Commentaries)
Transfer of Beneficiary’s right to demand payment
9. (1) The beneficiary's right to demand that the UNDERTAKING be honoured may be transferred only if authorized in an UNDERTAKING, and only to the extent and in the manner authorized in the UNDERTAKING.
(2) If an UNDERTAKING is designated as transferable without specifying whether or not the consent of the ISSUER or another authorized person is required for the actual transfer, neither the ISSUER nor any other authorized person is obliged to effect the transfer except to the extent and in the manner expressly consented to by it.
(COMMENT: In the commentary draw attention to paragraph 31 of the Commentaries to the Convention)
Transfer by operation of law
9.1(1) A successor of a beneficiary may consent to amendments, sign and present documents, and receive payment or other items of value in the name of the beneficiary without disclosing its status as a successor.
(2) A successor of a beneficiary may consent to amendments, sign and present documents, and receive payment or other items of value in its own name as the disclosed successor of the beneficiary,
(3) An ISSUER shall recognize a disclosed successor under subsection (2) of a beneficiary as beneficiary in full substitution for its predecessor upon compliance with the requirements for recognition by the ISSUER of a transfer of drawing rights by operation of law under the standard practice of financial institutions that regularly issue UNDERTAKINGs.
(4) An ISSUER is not obliged to determine whether a purported successor is a successor of a beneficiary or whether the signature of a purported successor is genuine or authorized.
(5) An ISSUER who honours a purported successor’s apparently complying presentation has the rights specified in section 17(4), even if the purported successor is not the successor of a beneficiary.
(6) A beneficiary whose name is changed after the issuance of an UNDERTAKING has the same rights and obligations as a successor of a beneficiary under this section.
(Source: 5-113 UCC)
Assignment of proceeds
10. (1) Unless otherwise stipulated in the UNDERTAKING or elsewhere agreed by the ISSUER and the beneficiary, the beneficiary may assign to another person any proceeds to which it may be, or may become, entitled under the UNDERTAKING.
(2) If the ISSUER or another person obliged to honour an UNDERTAKING has received a notice originating from the beneficiary, in a form referred to in section 6(2), of the beneficiary's irrevocable assignment, honour of the UNDERTAKING to the assignee discharges the obligor, to the extent of such honouring, from its liability under the UNDERTAKING.
(Comment June 2: Clean up the wording)
(3) In this section, "proceeds" means the cash, cheque, accepted draft, or other item of value to be paid or delivered upon honour or giving of value by the ISSUER or any nominated person under the UNDERTAKING, but does not include a beneficiary's drawing rights or documents presented by the beneficiary.
(Source: Article 10 – Convention and UCC 5-113 (a))
Cessation of right to demand payment
11. (1) Subject to subsection (3), the right of the beneficiary to demand honour of the UNDERTAKING ceases when:
(a) the ISSUER has received a statement by the beneficiary of release from liability in a form referred to in section 6(2);
(b) the beneficiary and the ISSUER have agreed on the termination of the UNDERTAKING in the form stipulated in the UNDERTAKING or, failing such stipulation, in a form referred to in section 6(2);
(c) the amount available under the UNDERTAKING has been paid, unless the UNDERTAKING provides for the automatic renewal or for an automatic increase of the amount available or otherwise provides for continuation of the UNDERTAKING; or
(d) the validity period of the UNDERTAKING expires in accordance with the provisions of section 12.
(2) The UNDERTAKING may stipulate, or the ISSUER and the beneficiary may agree elsewhere, that return of the document embodying the UNDERTAKING to the ISSUER, or a procedure functionally equivalent to the return of the document in the case of the issuance of the UNDERTAKING in non-paper form, is required for the cessation of the right to demand payment, either alone or in conjunction with one of the events referred to in subsections (1)(a) and (b).
(3) In no case shall retention of any document by the beneficiary after the right to demand honour of an UNDERTAKING ceases in accordance with subsection 1(c) or (d) preserve any rights of the beneficiary under the UNDERTAKING.
(Source: Article 11 – Convention; Article 11(2) is split into subsections (2) and (3))
12. The validity period of the UNDERTAKING expires:
(a) at the expiry date, which may be a specified calendar date or the last day of a fixed period of time stipulated in the UNDERTAKING, provided that, if the expiry date is not a business day at the place of business of the ISSUER at which the UNDERTAKING is issued, or of another person or at another place stipulated in the UNDERTAKING for presentation of the demand for honour, expiry occurs on the first business day which follows;
(b) if expiry depends according to the UNDERTAKING on the occurrence of an act or event not within the ISSUER's sphere of operations, when the ISSUER is advised that the act or event has occurred by presentation of the document specified for that purpose in the UNDERTAKING or, if no such document is specified, of a certification by the beneficiary of the occurrence of the act or event; or
(c) if the UNDERTAKING does not state an expiry date, or if the act or event on which expiry is stated to depend has not yet been established by presentation of the required document and an expiry date has not been stated in addition, when six years have elapsed from the date of issuance of the UNDERTAKING.
(Source: Article 12 – Convention)
Determination of rights and obligations
13. (1) The rights and obligations of the ISSUER and the beneficiary arising from the UNDERTAKING are determined by the terms and conditions set forth in the UNDERTAKING, including any rules, general conditions or usages specifically referred to therein, and by the provisions of this Act.
(2) In interpreting terms and conditions of the UNDERTAKING and in settling questions that are not addressed by the terms and conditions of the UNDERTAKING or by the provisions of this Act, regard shall be had to generally accepted international rules and usages of independent guarantee or letter of credit practice.
(Source: Article 13 – Convention)
Standard of conduct and liability of ISSUER
14. In discharging its obligations under the UNDERTAKING and this Act, the ISSUER, nominated person or advisor shall act in good faith and exercise reasonable care having due regard to generally accepted standards of international practice of independent guarantees or letters of credit.
(Source: Article 14 – Convention)
15. (1) Any demand for honour of an UNDERTAKING shall be made in a form referred to in section 6(2) and in conformity with the terms and conditions of the UNDERTAKING.
(2) Unless otherwise stipulated in the UNDERTAKING, the demand and any certification or other document required by the UNDERTAKING shall be presented, within the time that a demand for honour may be made, to the ISSUER at the place where the UNDERTAKING was issued.
(Comment: need to consider the ISSUER, the CONFIRMER or the nominated person. How do we deal with Nominated person)
(3) The beneficiary, when demanding payment, is deemed to certify that the demand is not in bad faith and that none of the elements referred to in paragraphs 19(2) (a), (b) and (c) are present.
Examination of demand and accompanying documents
16. (1) The ISSUER shall examine the demand and any accompanying documents in accordance with the standard of conduct referred to in section 14 in order to determine whether the demand and any accompanying documents are, on their face, in strict compliance with the terms and conditions of the UNDERTAKING and consistent with one another.
(2) Unless otherwise stipulated in the UNDERTAKING or elsewhere agreed by the ISSUER and the beneficiary, the ISSUER shall have reasonable time, but not more than seven business days following the day of receipt of the demand and any accompanying documents, in which to:
- (a) examine the demand and any accompanying documents;
- (b) decide whether or not to honour;
- (c) if the decision is not to honour, issue notice thereof to the beneficiary.
(3) The notice referred to in subsection (2)(c) shall, unless otherwise stipulated in the UNDERTAKING or elsewhere agreed by the ISSUER and the beneficiary, be made by teletransmission or other electronic means or, if that is not possible, by other expeditious means and indicate the reason for the decision not to honour the UNDERTAKING.
(4) An ISSUER is precluded from asserting as a basis for dishonour any discrepancy with respect to which it has not given timely notice under subsection (2)(c).
(5) Failure to give the notice specified under subsection (2)(c) or to mention fraud, forgery, or expiration in the notice does not preclude the ISSUER from asserting as a basis for dishonour fraud or forgery or expiration of the UNDERTAKING before presentation.
(6) If an UNDERTAKING contains nondocumentary conditions, an ISSUER shall disregard the nondocumentary conditions and treat them as if they were not stated.
(Source: Article 16 – Convention – Jeffery Draft redrafted to 4 subsections)
17. (1) Subject to section 19, when a demand is made in accordance with the provisions of section 15, the ISSUER shall honour in the manner stipulated in the UNDERTAKING.
(Source: Article 17(1) split)
(Source: new in accordance with the instructions)
(2) Following a determination that a demand for honour is made in accordance with the provisions of section 15, honour shall be effected promptly, unless the UNDERTAKING stipulates honour on a deferred basis, in which case honour shall be effected at the stipulated time.
(Source: Article 17(1) split)
(3) Any honour against a demand that is not in accordance with the provisions of section 14 does not prejudice the rights of the applicant.
(4) An ISSUER who honours a presentation :
- (a) is entitled to be reimbursed by the applicant on demand; and
- (b) takes the documents free of claims of the beneficiary or presenter.
(Source: Article 17(2))
(COMMENT: We need to look at “payment” vs. “honour”)
18. Unless otherwise stipulated in the UNDERTAKING or elsewhere agreed by the ISSUER and the beneficiary, the ISSUER may discharge its obligation under the UNDERTAKING by availing itself of a right of set-off, except with any claim assigned to it by the applicant or the instructing party.
(Source: Article 18 Convention)
Exception to payment obligation
19. (1). If it is manifest and clear that there has been fraud by the beneficiary, then the ISSUER, acting in good faith, has a right, as against the beneficiary, to withhold honour of the UNDERTAKING.
(2) Fraud is deemed to have occurred if it is manifest and clear that:
- (a) any document is not genuine or has been falsified;
- (b) honour is not due on the basis asserted in the demand and the supporting documents; or
- (c) judging by the type and purpose of the UNDERTAKING, the demand has no conceivable basis.
(3) For the purposes of subsection (2)(c), the following are types of situations in which a demand has no conceivable basis:
- (a) the contingency or risk against which the UNDERTAKING was designed to secure the beneficiary has undoubtedly not materialized;
- (b) the underlying obligation of the applicant has been declared invalid by a court or arbitral tribunal, unless the UNDERTAKING indicates that such contingency falls within the risk to be covered by the UNDERTAKING;
- (c) the underlying obligation has undoubtedly been fulfilled to the satisfaction of the beneficiary;
- (d) fulfilment of the underlying obligation has clearly been prevented by wilful misconduct of the beneficiary;
- (e) in the case of a demand under a counter-guarantee, the beneficiary of the counter-guarantee has honoured in bad faith as an ISSUER of the UNDERTAKING to which the counter-guarantee relates.
(4) For the purposes of subsections (1) and (2),
- (a) the fraud of a third party of which the beneficiary is innocent shall not constitute fraud; and
- (b) the fraud of a beneficiary cannot be raised against the holder in due course of a draft on an UNDERTAKING.
(5) In the circumstances set out in subsection (1), the applicant is entitled to provisional court measures in accordance with section 20.
(Source: Article 19 Convention - Jeffrey Draft)
(Comment:Benjamin Geva to look at the term “invalid”)
Provisional court measures
20. (1) Where, on an application by the applicant or the instructing party, it is shown that there is a strong prima facie case of fraud with regard to a demand made, or expected to be made, by the beneficiary, the court, may:
- (a) issue a provisional order to the effect that the ISSUER not honour the UNDERTAKING, including an order that the ISSUER hold the amount of the UNDERTAKING; or
- (b) issue a provisional order to the effect that the proceeds of the UNDERTAKING paid to the beneficiary are blocked, taking into account whether in the absence of such an order the applicant would be likely to suffer serious harm.
(2) The court, when issuing a provisional order referred to in subsection (1), may require the person applying to furnish such form of security as the court deems appropriate.
(3) The court may not issue a provisional order of the kind referred to in subsection (1) based on any objection to honour of the UNDERTAKING other than fraud or use of the UNDERTAKING for a criminal purpose.
(Source: Article 20 Convention Jeffery Draft)
Choice of applicable law
21. (1) The UNDERTAKING is governed by the law the choice of which is:
- (a) stipulated in the UNDERTAKING or demonstrated by the terms and conditions of the UNDERTAKING; or
- (b) agreed elsewhere by the ISSUER and the beneficiary.
(2) The liability of a nominated person or adviser is governed by the law of the jurisdiction chosen by an agreement by the affected parties.
(3) Failing a choice of law in accordance with subsections (1) or (2), the UNDERTAKING or liability is governed by the law of the jurisdiction where the ISSUER or the party liable has that place of business at which the UNDERTAKING was issued or the liability is incurred.
(Source: Article 21 Convention - 5-116 – UCC)
Subrogation of ISSUER, Applicant, and Nominated Person
22. (1) An ISSUER that honours a beneficiary's presentation is subrogated to the rights of the beneficiary to the same extent as if the ISSUER were a secondary obligor of the underlying obligation owed to the beneficiary and of the applicant to the same extent as if the ISSUER were the secondary obligor of the underlying obligation owed to the applicant.
(2) An applicant that reimburses an ISSUER is subrogated to the rights of the ISSUER against any beneficiary, presenter, or nominated person to the same extent as if the applicant were the secondary obligor of the obligations owed to the ISSUER and has the rights of subrogation of the ISSUER to the rights of the beneficiary stated in subsection (1).
(3) A nominated person who honours a draft or demand presented under an UNDERTAKING is subrogated to the rights of:
(a) the ISSUER against the applicant to the same extent as if the nominated person were a secondary obligor of the obligation owed to the ISSUER by the applicant;
(b) the beneficiary to the same extent as if the nominated person were a secondary obligor of the underlying obligation owed to the beneficiary; and
(c) the applicant to same extent as if the nominated person were a secondary obligor of the underlying obligation owed to the applicant.
(4) Notwithstanding any agreement or term to the contrary, the rights of subrogation stated in subsections (1) and (2) do not arise until the ISSUER honours the UNDERTAKING and the rights in subsection (3) do not arise until the nominated person honours the UNDERTAKING.
(5) Until the rights of subrogation stated in subsections (1) (2) and (3) arise, the ISSUER, nominated person, and the applicant do not derive under this section present or prospective rights forming the basis of a claim, defense, or excuse.
(Source: 5-117 – UCC)