Bank Guarantees

Secure your trade

Bank guarantees provide trading partners with security for most parts of a contract and ensure that compensation is paid if the obligated party does not fulfil its contractual obligations. The type and the terms of the guarantee are agreed between the parties of the contract and approved by the issuing bank.

The most common types of bank guarantees

Contractual guarantees:

• Payment guarantee: secures the payer’s ability to fulfil its payment obligations to the seller.
• Bid bond/tender guarantee: secures that the company submitting a bid/tender will abide by its offer.
• Advance payment guarantee:  secures the buyer a refund of the advance payment if the merchandise is not delivered as per the contract.
• Performance guarantee:  secures the seller’s contractual obligations towards the buyer.
• Warranty guarantee:  secures the warranty of the goods after delivery, or work completed, during any agreed warranty period.
• Retention money guarantee:  secures the buyer’s right to repayment of any final payment made, which would otherwise have remained pending until the completion of the contract.

Other types of guarantees:

• Guarantee for a missing bill of lading (letter of indemnity):  authorises a transport carrier or its agents to release specified cargo to a consignee named in the bill of lading without the surrender of the original bill of lading.
• Customs guarantee: issued in favour of customs offices as security for payment of customs duties by an importer.
• Rental guarantee: serves as collateral for rental agreement payments.
• Credit guarantee: serves as collateral for repaying a loan.

Standby Letters of Credit

A Standby Letter of Credit is defined as a bank guarantee and it has the same purpose. However, it is issued in the form of a letter of credit, but does not serve as a payment instrument. It is issued usually as SWIFT MT760 (guarantee format) and advised by the beneficiary’s bank, or directly to the beneficiary as a letter.

Standby Letters of Credit are commonly used instead of traditional bank guarantees in the US, Canada, Australia and South America, for instance Colombia, Brazil, Argentina, Bolivia, Mexico and Peru.

However, it is possible to use in other parts of the world as well.

Useful tips

A bank guarantee/standby letter of credit should fulfil the following criteria:

• Clear and understandable wording.
• No clauses should be ambiguous or contradictory.
• It should be subject to ICC rules (URDG758 (URDG458), ISP98, UCP600).
• The ICC rules enable the guarantee text to be briefer, as articles that are in the rules are not required as clauses in the guarantee wording. Since the ICC rules are widely accepted, they are also a good starting point for discussions where drafting of the text is required.