Guarantees & Standby Letter of Credits

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Information about Guarantees & Standby Letter of Credits
Economy & Finance

Published on January 4, 2010

Author: theBenche



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

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

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

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

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 .....”

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

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).

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).

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

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

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

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)

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

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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