What is a Bank Guarantee?

Bank Guarantees are a Letter of Guarantee issued by one bank to another bank to guarantee the performance of an obligation on the part of the applicant, guaranteeing the beneficiary.

It is important to note that Bank Guarantees are not like a Letter of Credit (L/C) or Documentary Credit. The main difference between a Bank Guarantee and a Documentary Credit is that a L/C also functions as a means of payment. A bank guarantee acts as security for a payment, and not as a means of payment.

Bank guarantees are governed almost exclusively by the law of the country of domicile of the bank that issues the guarantee to the beneficiary. This may be of great importance in the event of dispute, particularly if the beneficiary of a bank guarantee is domiciled in another country.

Every declaration that is designated a “bank guarantee” must be examined carefully to ascertain its legal significance and implications. A particularly important point to establish is whether the issuing bank is really undertaking an independent obligation to pay on first demand, or only a secondary (accessory) liability under a surety guarantee.

Bank Guarantee’s take several forms. They can be used to guarantee the payment of a liability. Depending on the type of liability (as evidenced by an underlying contract), bank guarantees can be issued in the form of a Tender Guarantee (or Bid Bond), a Performance Guarantee, Advance Payment Guarantee or Retention Guarantee to name but a few.

Bank guarantees are essentially an independent obligation to pay in the event that the applicant defaults on its underlying contractual terms with the beneficiary. Bank guarantees are not transferable and may only be claimed upon by the beneficiary stated therein.