1. BANK GUARANTEES
&
STAND BY LETTERS OF CREDIT
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2. WHEN A GUARANTEE OR A STAND BY LETTER OF
CREDIT IS AN ALTERNATIVE
Instead of cash collateral
When there is a need for an
additional security
When the financial strength
of the counter party is
uncertain
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3. HOW GUARANTEES &
STANDBYS CORRELATE TO THE
COMMERCIAL EVENTS
Commercial event
Invitation for tender
Tender Contract Partial delivery Installation Take over Warranty period
Advance
Payment
Time
Type of
Guarantee
Performance guarantee
Bid guarantee Advance payment guarantee Retention guarantee Warranty guarantee
Validity period
& amount
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4. ADDITIONAL TYPES OF
GUARANTEES AND STANDBYS
Payment guarantee
Transfer guarantee
Loan/Credit guarantee
Customs guarantee
Duty exempt guarantee
Judicial guarantee
Guarantees in favor of governmental
entities
Rental guarantees
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5. THE PARTIES INVOLVED IN A
GUARANTEE OR STANDBY
The underlying contract
Principal Beneficiary
Letter of indemnity
Direct Guarantee Local Guarantee
or
Counter Guarantee
BANK– Guarantor/ Guarantor
Instructing Party
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6. THE TWO MAIN PRINCIPLES
Suretyship guarantee - ”as for a
debt of our own”
or
Demand guarantee - ”we hereby
irrevocably undertake to pay
you any sums or sums not
exceeding ......upon receipt by
the BANK of your first demand
in writing and your written
statement stating .....”
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7. SURETYSHIP GUARANTEES
The underlying transaction or contract must be presented
to your bank before issuance of the guarantee
Suretyship guarantees are dependent on the underlying
legal obligation or the contract
The Guarantor is entitled to make the same objections
against a claim as the Principal
Consequently the Guarantor can wait for a legally binding
arbitration award or judgement or written agreement between the
Principal and the Beneficiary
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8. DEMAND GUARANTEES
By their nature a separate transactions from the underlying
contract
The Guarantor’s duty is to pay on Beneficiary’s first written
demand and statement
The Guarantor must pay without any objections if the
Beneficiary claims in accordance with the terms & conditions of
the guarantee.
A Demand Guarantee could be enhanced with documentary
support, e.g. a court decision, an arbitration award etc. (see
article 2a URDG 458).
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9. STANDBYS
The Standby is essentially the same as a Demand
Guarantee
Its appearance is different from a typical Demand
Guarantee issued by banks outside of the US
The essence of a Standby is that the issuer (the Bank)
promises to pay the Beneficiary upon presentation of
documents as stipulated in the Standby
ICC, however, applies a set of different rules for Standbys
(ISP98).
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10. CLEAN STANDBYS IN FAVOR OF
THE INSURANCE COMMUNITIES
Silent to the underlying
reference/contract
Evergreen clause
Only one single draft
More than one beneficiary
Often governed by UCP
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11. MULTI PARTY GUARANTEES
AND STANDBYS
Issued for the account of two or more Principals/
Applicants
Issued by two or more Issuers
Issued in favor of two or more Beneficiaries
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12. TO TAKE INTO CONSIDERATION
BEFORE ISSUING A STANDBY
Commercial Letter of Credit vs. Standby Letter of
Credit
Expiry date
Confirmation vs. Counter-Guarantee
Law & Jurisdiction
Rules UCP600 vs. ISP98
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13. RULES OF PRACTICE FOR
GUARANTEES AND STANDBYS
International Standby Practices - ISP98
Uniform Rules for Demand Guarantees - URDG 458
Uniform Customs and Practice for Documentary
Credits - UCP500 (600)
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14. PAYMENT UPON PRESENTATION OF
THIRD PARTY DOCUMENTS
Demand +
Demand + Demand +
Judgement or
Independent Beneficiary’s
Arbitration Award
Assessment Statement
• • • • •
Max Mini
Security Security
Demand +
Suretyship Guarantee Architect/Engineer
Certificate
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15. TO TAKE IN TO CONSIDERATION
BEFORE SIGNING THE CONTRACT
Type of guarantee Max amount
Reference to the Reduction clause
underlying contract
Foreign bank’s charges
Rules - URDG458, ISP98
or UCP600 Templates and language
Documents to be Law and Jurisdiction
presented
Time of validity/expiry
date
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