What is bank guarantee?

A guarantee is a promise made by the person/organization (or guarantor) to the Banker that he will pay the present or future debt in case of default by the principal debtor. So the guarantor is undertaking to repay the debt in case it is not the principal debtor. We should know who is the principal debtor? The person in respect of whose default the guarantee is given is called the “Principal Debtor” and the person to whom the guarantee is given is called the “ Creditor (beneficiary)”.

It may be either (1) a specific guarantee or (2) a continuing guarantee. A specific guarantee relates to one transaction only & whereas a continuing guarantee covers a series of transactions and the guarantee subsists unless revoked by the guarantor.

In 1992, the ICC published its Uniform Rules for Demand Guarantees (URDG), ICC Publication No.458. The Rules reflect current demand guarantee practice and aim to achieve a fair balance between the competing interests of the parties involved. The ICC believes that the establishment of standards for best practice is beneficial to all concerned with demand guarantee business, and there are already signs that URDG is now being increasingly used as its existence becomes more widely known.

Under Article 2(b) ICC Uniform Rules for Demand Guarantees ICC publication No.458 states that “Guarantees by their nature are separate transactions form the contract(s) or tender conditions on which they may be based, and Guarantors are in no way concerned with or bound by such contract(s), or tender conditions, despite the inclusion of a reference to them in the Guarantee. The duty of a Guarantor under it is to pay the sum or sums therein stated on the presentation of a written demand for payment and other documents specified in the Guarantor on presentation in conformity with the terms of the Guarantee.

“Counter Guarantee” means any guarantee, bond or another payment undertaking of the Instructing Party, however, named or described, given in writing for the payment of money to the Guarantor on presentation in conformity with the terms of the undertaking of a written demand for payment and other documents specified in the Counter-Guarantee which appear on their face to be in accordance with the terms it.

TYPES:

There are two types :

a) Simple Guarantee: It is given with respect to a specific transaction or promise undertaken by the Principal debtor. It comes to an end when the specific Promise or transaction is fulfilled.

b) Continuing Guarantee: When a guarantee is given in respect of a series of promises or transactions, it is called a “Continuing Guarantee”. The surety specified the amount up to which, and the period within which, he shall remain liable as a surety. It is taken by banks is usually a continuing guarantee, which holds good as security although the balance is the debtor’s account may fluctuate from time to time.

Type of Guarantee that is generally issued by the bank:

(1) Bid-Bond / Security deposit: This is also called tender or bid guarantee and is generally sought for 2 percent to 5 percent of the contract amount. In case of default of the tender at whose request it is extended, the beneficiary may en-cash the same.

(2) Performance Guarantee: Which are extended in consideration of the specific performance of the contract is called performance guarantee. Performance guarantees are given to the Government or Corporation on behalf of contractors undertaking to make payment of a penalty in the event of non-fulfillment of their performance of a contract or supplying goods as per contract.

(3) Shipping Guarantee: Banks give indemnity to shipping companies for release of goods in the absence of shipping documents, in case of goods arrive before receipt of such documents by the consignee and are incurring demurrage or original shipping documents have been lost after retirement from bank.
(4) Customs Guarantee: This is issued in favor of customs authority on account of customs duties/excise duties on imported goods and machinery or export commodities on behalf of clients.

ISSUANCE OF FOREIGN BANK GUARANTEE AND ITS DIFFERENT TYPES

Sometimes Foreign Correspondent on behalf of its customer requests the Bank in Bangladesh to issue a guarantee in favor of beneficiary in Bangladesh. When the Authorized Dealer issues it against Counter Guarantee of Foreign Correspondent is called Foreign Bank guarantee. Normally there are two major types of Foreign Guarantees that Bank issues one Bid Bond and another Performance Bond/Guarantee. Generally, Foreign Guarantee is issued in Convertible currency such as Dollar, Pound Sterling, Yen, Deutsche Mark on in the Domestic Currency of the issuing country. Foreign letter of guarantee may be issued other than the above currency provided Foreign Correspondent undertakes that reimbursement claim would be settled in the convertible currencies.
i.   An authorized dealer may without prior approval of Bangladesh Bank, issue guarantee Bid Bond, or Performance Bond in foreign currency on behalf of non-resident firm/company-favoring residents in Bangladesh provided a Back-to-Back guarantee covering the guaranteed amount from an overseas correspondent or other Band abroad is held by the Authorized Dealer. The Authorized Dealer should satisfy itself about the bonafide of the overseas guarantee before issuing its own Guarantee/Bid Bond/Performance Bond there against.
ii.   Non-resident international agencies may demand Bank guarantees from non-resident contractors against the supply of materials/down payment for the ongoing projects in Bangladesh financed by them. Such guarantee on behalf of a non-resident contractor in favor of the non-resident beneficiary may be issued by an Authorized Dealer against 100% Counter Guarantee from a reputed international Bank abroad, or against 100% cash collateral in Foreign Exchange received from aboard through Banking channel.
iii.   Authorized Dealers may not, without prior approval of Bangladesh bank furnish guarantees to or hold collaterals on behalf of overseas Bank branches or correspondents in respect of credit facilities or guarantees to be extended by them on for any other purpose.
iv.   Authorized Dealers may furnish Performance Bonds/Guarantees in favor of overseas buyers on account of Bangladeshi Exporters subject to the following donations.
b)   The tender floated by the Freeing buyer call for Bank Guarantees/Performance Bond.
c)   The tender is a bonafide merchandise exporter.
d)   There is no export bank on the commodity to be supplied.
e)   The past performance of the tendered (exporter) is considered satisfactory by the Authorised Dealer.