A bank guarantee may be defined as a written undertaking by which a bank, at the request of its customer (the applicant), irrevocably commits itself to pay a sum of money to a third party (the beneficiary) upon receipt of a complying demand by the beneficiary informing the bank that the applicant failed to fulfil his obligations under the underlying commercial contract.
As it appears from the definition, the bank does not guarantee the actual fulfilment of the applicant’s obligation under the contract. It only commits itself to pay, in whole or in part, the amount stated in the guarantee.
This means that the bank will not, and is not liable to, deliver the goods or assume any responsibility for carrying out a project.
In the most common scenario, a guarantee involves the following parties:
- An applicant : the party having an obligation under the underlying relationship supported by the guarantee.
- A beneficiary : the party in favor of which a guarantee is issued.
- A guarantor : the bank issuing the guarantee and committing itself to pay upon receipt of a complying demand for payment.
- In some cases there may be a counter guarantor who guarantees the guarantor banks obligation. If so, counter-guarantor ( bank ) issues a counter guarantee in favour of the bank who will commit payment to the beneficiary.
Main type of guarantees;
- Bid Bond, Tender Bond/Guarantee
- Performance Bond / Guarantee
- Advance Payment Guarantee
- Customs Guarantees,
- Security For a Credit Line,
- Retention Guarantees,
- Warranty Guarantees,