CHAPTER 32 - TYPES OF BANK GUARANTEES
Performance Guarantee:
Commercial
contracts often provide for the provision of a performance guarantee and this
arguably the most common form of guarantee used, in a variety of situations.
The guarantee is likely to be called by the Beneficiary if the Applicant fails to fulfill
their contractual obligations.
Performance
guarantees are normally required at the time of commencement of the contract
and will extend over the duration of the contract.
Financial Guarantee:
This
type of guarantee is often used to cover the non-payment of a debt(s) arising
under a transaction or over a period of time The guarantee
provides financial security to the Beneficiary (the Seller) should
the Applicant (the buyer) fail to make payment for goods supplied.
Such
guarantee will invariably run up to the final scheduled date of payment, plus a
grace period to allow the Beneficiary to make demand in the event of
non-payment.
Financial guarantee is
also known as or very similar to Payment
Guarantee.
Payment Guarantee
Unlike other bank
guarantees a payment guarantee secures the payment of the exporter in case the
importer does not fulfill its payment obligations .A payment guarantee can be
issued in the form of an endorsement on a draft, also known as an “aval”.
Advance Payment
Guarantee:
Some
contracts provide for the payment by the Beneficiary of a sum of money to the
Applicant at an early stage of the contract. In such
circumstances, the Beneficiary will invariably call for an advance payment
guarantee.
The guarantee will
allow the Beneficiary to recover the amount paid in advance, or a part thereof,
if the applicant fails to fulfill their underlying contractual obligations.
Occasionally, the
guarantee will provide for pro rata reductions to the guarantee amount.
Bid Bond / Tender Bond Guarantee:
Tender
Guarantees are often called for in support of contract tenders, particularly in
International Trade situations.
It
is intended that the Guarantee will provide the beneficiary with a financial
remedy if the Applicant:
1.
Endeavours to modify or withdraw their
bid within its validity; or
2.
Fails to enter into a contract where
their bid is successful; or
3.
Fails to provide subsequent bonding
(e.g. a performance guarantee) within the agreed timescales
specified in the contract terms.
Retention Money Guarantee:
Contracts may allow
the Beneficiary to retain a proportion of the contract value once substantial completion of the contract has taken place. The
Beneficiary may be prepared to release this retention against the presentation of a retention money
guarantee.
This
guarantee takes a standard unconditional form and is payable against
presentation of the Beneficiary's demand and declaration of
failure as specified in the guarantee.
Maintenance Money Guarantee:
Normally
the buyer will wish to retain a part of the contract value, for the period for
which the contractor has agreed to maintain the
property and rectify any defects.
In
case the contractor wants the buyer to release the money retained by him before
the expiry of the maintenance period, Maintenance Money
guarantee issued to cover the release of maintenance money to the seller
(contractor).
The importer has to
provide proof of re-export with value addition to the customs authorities for
reclaiming the original bank guarantee. Maintenance Guarantee is also known as
Warranty Guarantee
In most places Maintenance and Retention Guarantee are
used as a same one.
The other forms of Guarantee
are Tax Payment Guarantee, Price offer
Guarantee, Warranty Guarantee, Deferred Payment Guarantee, Insurance Guarantee,
Direct Pay, Loan Guarantee etc.
All the above Guarantees are very similar in work flow while
executing through an Application, so all the above are called as Generic
Guarantee.
Shipping Guarantee:
Issued by a bank in
favour of the shipping company for delivery of goods to the consignee without production
of original Bill of Lading (missing B/L) covering the value of the goods.
Normally the original shipping guarantee is
taken back from the shipping company on production of original / Duplicate Bill
of Lading at a later date.
Shipping Guarantee is used in Letters of
Credit and Documentary Collection.
Shipping Guarantee is a Letter of Indemnity.
Counter Guarantee:
- Step 1: The principal
and the beneficiary sign a sales contract. In order to be able to talk
about the counter-guarantee, the principal and the beneficiary should be
located in different countries. Otherwise the principal could have issued
a bank guarantee in favor of the beneficiary without using any form of
counter-guarantee.
- Step 2: The principal
gives instructions to his bank to issue a counter-guarantee.
- Step 3: The instructing
party, who is the principal’s bank, issues a counter-guarantee in favor of
the guarantor bank to issue the bank guarantee against its counter
indemnity.
- Step 4: The guarantor
bank issues the guarantee in favour of the beneficiary.
What
are the parties to a counter-guarantee?
- The Principal: The party requesting the issuance of a counter-guarantee.
- The Instructing Bank: The bank that requests to the
beneficiary's bank to issue the guarantee against its counter indemnity.
- The Guarantor Bank: The bank that guarantees that the
agreed compensation amount will be paid if the guarantee principal fails
to meet its contractual obligations and the beneficiary makes a complying
demand in writing according to terms and conditions of the guarantee.
- The Beneficiary: The party in favour of whom the
guarantee is issued.
