Bank Guarantees
The bank guarantee is an instrument that can be used by business partners to secure an obligation in their contract.
Banks issue two different kinds of guarantees: the first demand guarantees and sureties.
The first demand guarantee is a written undertaking of the bank under the request of the customer – the principal - to pay a definite amount to the receiver of the guarantee - the beneficiary - against the first written demand stating that the principal has not met contractual obligations.
The first demand guarantee is independent on the underlying contract. This means that the principal has no right to object. As soon as the issuing bank receives a claim that fulfils the conditions of the guarantee, the issuing bank must pay.
From the beneficiary’s point of view, this type of guarantee is often a better form of security.
The first demand guarantees can be subject to Uniform Rules for Demand Guarantees, ICC Publication No 458 or International Standby Practices, ICC Publication 590.
The surety is a written undertaking of the bank to pay to the beneficiary should the principal have failed to fulfil his contractual obligations.
The surety is dependant on the underlying contract and the guarantor is entitled to invoke the defences against the beneficiary according to the law. Under the surety the bank is only obliged to pay upon submission of either a court decision or the principal’s written approval of the claim.
The beneficiary will rarely accept a guarantee payable on agreement, and the banks may be reluctant to provide such forms of guarantee.
Types of guarantees:
- Tender/bid bond supports the principal’s obligation to sign the contract in accordance with the tender conditions if the principal is awarded a bid
- Advance payment guarantee secures the repayment of the down payment if the principal fails to perform under the agreement
- Payment guarantee ensures the payment for goods or services to the seller if the buyer fails to fulfil his payment obligations
- Performance bond supports an obligation to pay for losses which may arise as a consequence of the principal failing to fulfil his obligations under the contract
- Warranty guaranty supports the beneficiary’s costs should the principal fail to meet his warranty obligations as per the contract terms
- Customs guarantee ensures the payment of customs debt and tax liabilities administrated by customs authorities (VAT, excise taxes) to the State Revenue Service.
- More information on +371 67 959 599.