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What is a Bank Guarantee
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Unlike sureties, the contract of guarantee is not explicitly governed by law. As such, the following two positions are taken:
· Application of a contract to the charge of a third party (Art. 111 of the Swiss Code of Obligations)
· Presence of an accepted payment order (Art. 466 ff. of the Swiss Code of Obligations)
· In addition, in the case of a contract of guarantee a number of important clauses also apply.
· The guidelines issued by the International Chamber of Commerce aim to ensure uniform application.
The following applies:
The contract of guarantee contains an abstract promise to perform and is a separate obligation independent of the underlying transaction. The guarantee is used to secure the performance of a specific obligation, irrespective of whether the performance is owed or not.
In principle, there are two types of guarantee:
Direct guarantees are used primarily in domestic business. However, an accessory security in the form of a surety is often enough. This is issued directly to the beneficiary in the same way as a direct guarantee.
Guarantees apply whenever the bank's undertaking to provide security is not contingent on the existence, validity and enforceability of the principal obligation. For this reason guarantees are frequently opted for in cross-border transactions, because the beneficiary is able to assert his or her claims rapidly due to the abstract legal nature of the guarantee. Guarantees have the added advantage of being easier to adapt to foreign legal systems and practices, because there are no form requirements. Due to cost and risk considerations, direct guarantees are increasingly being used in foreign business as well.
· View the process as flash animation
Indirect guarantees are mainly issued in connection with export business – in particular when government agencies or public entities are the beneficiaries.
In addition, many countries do not accept foreign banks as guarantors due to legal provisions or other form requirements (e.g. Middle-Eastern countries).
With an indirect guarantee, a second bank (usually a foreign bank with head office in the beneficiary's country of domicile) is involved.
In making a claim under a bank guarantee, the beneficiary is exercising his or her right to demand payment of the guarantee amount (or part thereof). The bank checks whether the claim has been made in accordance with the conditions of the guarantee.
Signature check:
In general, guarantees contain a clause (identification clause) whereby the beneficiary's bank has to confirm his or her signature in the event of a claim. This procedure ensures that the claim is only signed by a person or persons authorized to do so.
Form of claim:
The claim generally has to be submitted in written form. The conditions of the guarantee often permit claims to be made via encrypted telex or SWIFT communications.
Time-limit of claim:
The claim must be received in the specified form, at the latest on the expiry date, by the branch of the bank stipulated in the guarantee.
The beneficiary is responsible for the mailing risk and any other delays (force majeure).
The beneficiary of the guarantee can normally assign his or her conditional claim for payment to a third party, or assignee (assignment of the proceeds but not the drawing right).
Things to note:
· The assignee does not automatically receive the right to invoke the guarantee. Only the beneficiary specified by name in the guarantee document can claim under the guarantee.
· Any change in the beneficiary of the guarantee requires the agreement of all parties involved, i.e. the existing beneficiary, the UBS client and the guaranteeing bank.
· In contrast to the law concerning sureties, the assignment of the guaranteed claim arising from the underlying transaction does not result in the simultaneous transfer of the conditional guarantee claim.
1. Ordinary expiry :
If the beneficiary has not made a claim by the date specified in the expiry clause of the guarantee document, the guarantee will expire. This applies irrespective of whether the guarantee document was returned to the bank or not.
2. Payment of guarantee amount :
In the event of the definitive and final settlement of the guarantee amount due to a claim by the beneficiary, the guarantee will expire.
3. Premature cancellation :
Formal discharge by the beneficiary.
1. Expiry date:
Expiry of the bank guarantee issued by the guaranteeing (foreign) bank to the beneficiary.
Expiry of the counter-liability and counter-guarantee of the initiating (Swiss) bank in favour of the guaranteeing foreign bank (15 to 30 days following the expiry date).
2. Expiry of counter-liability and -guarantee:
Some countries do not allow time-limits for counter-guarantees from the initiating bank. In this case, the obligations of the initiating (Swiss) bank do not expire until the bank is discharged definitively and in full by the guaranteeing (foreign) bank.
3. Payment of guarantee amount:
If a claim is made under the guarantee by the guaranteeing bank or the end-beneficiary, it will expire when the guarantee amount has been definitively paid by the principal's bank.
Guarantees can, for identification and transmission purposes, be notified to the beneficiary via a third-party bank, normally in the beneficiary's country of domicile. This is primarily done electronically via SWIFT or encrypted telex. The notifying bank does not enter into any direct guarantee obligations.
Guarantee from a third-party bank in your favour:
Naturally, the guarantee notification also functions in the opposite direction to the procedure referred to above. We forward the third-party guarantee with no commitment on our part – merely for identification and transmission purposes – to you as the beneficiary. We will be happy to provide you with advice in the event of uncertainties regarding the content of the guarantee (technical guarantee-related language), the creditworthiness of the bank or the current country risk. You can often avoid problems of this kind by requesting that the foreign company with which you are doing business arrange for this guarantee to be issued by a first-rate bank in
BANK GUARANTEE PROFORMA FOR FURNISHING
PERFORMANCE SECURITY
In consideration for the President of India
(hereinafter called "the Government") having agreed to
exempt........................(hereinafter called "the said
Contractor(s)" from the demand, under the terms and conditions of
an Agreement dated.................made between..........and....
of Performance Security for the due fulfilment of the said
Contractor(s) of the terms and conditions contained in the said
Agreement, on production of Bank Guarantee for
Rs....................(Rupees................................
(indicated the name of the Bank)
Bank") at the request of........................contractor(s) do
hereby undertake topay to the Government an amount not exceeding
Rs....................... against any loss or damage caused to or
suffered would be caused to or suffered by the Government by
reason of any breach of the said Contractor(s) of any of the
terms or conditions contained in the said Agreement.
2. We....................do hereby undertake to pay the amount
due and payable under this Guarantee without any demur, merely on
a demand from the Government stating that the amount claimed is
due by way of loss or damage caused to or would be caused to or
suffered by the Government by reason of breach by the said
contractor(s) of any of the terms or conditions contained in the
said Agreement or by reason of the contractor(s)'s failure to
perform the said Agreement. Any such demand made on the Bank
shall be conclusive as regards the amount due and payable by the
Bank under this guarantee. However, our liability under this
guarantee shall be restricted to an amount not exceeding Rs....
3. We undertake to pay the Government any money so demanded
notwithstanding any dispute or disputes raised by the
contractor(s)/supplier(s) in any suit or proceeding pending
before any Court or Tribunal relating thereto liability under
this present being absolute and unequivocal.
The payment so made by us under this Bond shall be a valid
discharge of our liability for payment thereunder and the
contractor(s)/supplier(s) shall have no claim against us for
making such payment.
4. We,..................further agree that theguarantee herein
contained shall remain in full force and effect during the period
that would be taken for the performance of the said Agreement and
that it shall continue to be enforceable till all the dues of the
Government under or by virtue of the said Agreement have been
fully paid and its claim satisfied or discharged or till.........
that the terms and conditionsof the said Agreement have been
fully and properly carried out by the said Contractor(s) and
accordingly discharges this Guarantee. Unless a demand or claim
under this Guarantee is made on us in writing on or before the...
guarantee thereafter.
5. We,................further agree with the Government that
the Government shall have the fullest liberty without our consent
and without affecting in any manner our obligations hereunder to
vary any of the terms and conditions of the said Agreement or to
extend time of performance by the said Contractor(s) from time to
time or to postpone for any time or from time to time any of the
powers exercisable by the Government against the said
Contractor(s)and to forbear or enforce any of the terms and
conditions relating to the said Agreement and we shall not be
relieved from our liability by reason of any such variation, or
extension being granted to the said Contracotr(s) or for any
forbearance, act or omission on the part of the Government or any
indulgence by the Government to the said Contractor(s) or by any
such matter or thing whatsoever which under the law relating to
sureties would, but for this provision, have effect of so
relieving us.
6. Notwithstanding anything contained herein above our
liability under the guarantee is restricted to Rs._____ and shall
remain in force until________. Unless a claim or suit under this
guarantee is filed with us on or before_______. ALL OUR RIGHTS
UNDER THE GUARANTEE SHALL BE FORFEITED and the Bank shall be
relieved and discharged from all liabailities therein.
7. This Guarantee will not be discharged due to the change in
the constitution of the Bank or the Contractor(s)/supplier(s).
8. We,....................lastly undertake not to revoke this
Guarantee during its currency except with the previous consent of
the Government in writing.
Dated the..........date of......1999/2000
for............................
(indicate the name of Bank)
Signature......................
Name of the Officer.................
(in Block Capitals)
Designation of
Code No. ....................
Name of the Bank and Branch.........
Format for Bank Guarantee.nd Floor, Jeevan Seva Annexe Building, S.V. Road, Santacruz(W), Mumbai
NOTWITHSTANDING ANYTHING CONTAINED HEREIN : The Bank hereby covenants and declares that the guarantee hereby given is an irrevocable one and shall not be revoked by a Notice or otherwise. Our liability under this guarantee is restricted to a sum of _______________________ Rs. ________________/- (Rupees __________________________________ only). The Bank Guarantee will be valid for a period upto _______________(upto and including ___________) This bank guarantee will subsist till express instructions from the Corporation to release the same are not received even after a lapse of period of validity which will in any case not exceed a period of 6 months from the end of validity date. The Corporation need not prove or show grounds or reasons for the demand of a part or the full amount of guarantee. A written claim or demand for payment under this Bank Guarantee is the only condition precedent for payment of part/full sum under the guarantee to the Corporation. Dated At This Day Of SEALED & SIGNED BY THE BANK
This Deed of Guarantee executed by the __________________ (bank name) a
Scheduled Bank within the meaning of the Reserve Bank of India Act and carrying out
banking business including guarantee business at Mumbai and other places having its
head office at _____________________________(hereinafter referred to as “the Bank”)
in favour of Life Insurance Corporation of India, having its IT department of Central Office
at the 2
400054 and formed under the act of the Parliament LIC act, 1956 (hereinafter referred to
as “the Corporation”) for an amount not exceeding Rs._____________/- (Rupees
_______________________only) at the request of “Vendor Name” (hereinafter referred
to as the “Vendor”).
This Guarantee is issued subject to the condition that the liability of the Bank under this
Guarantee is limited to a maximum of Rs. _______________/- (Rupees
______________________________only) and the Guarantee shall remain in force upto
_________ and cannot be invoked, otherwise than by a written demand or claim under
this guarantee served on the Bank on or before ___________ by the Corporation.
Whereas (Vendors name) having its head office at (address), has undertaken to supply
Computer goods as per the terms and conditions of purchase mentioned in the Tender
document dated ______________
And whereas the Bank ____ (name and address) has agreed to give on behalf of the
vendor a Guarantee :
Therefore, we hereby affirm that we Guarantee and are responsible to you on behalf of
the Vendor, upto a total amount of Rs._______________/- (Rupees
__________________________only) and we undertake to pay you, upon your first written
demand declaring the Vendor to be in default under the terms the Contract, and without
cavil or argument, any sum or sums as specified by you within the limit of
Rs.__________/-. (Rupees ______________________only) as aforesaid, without your
need to prove or to show grounds or reasons for your demand of the sum specified
therein. This Gurantee shall not be affected by any change in the Constitution of the Bank.
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