Published on January 4, 2010
BANK GUARANTEES & STAND BY LETTERS OF CREDIT www.thebenche.com
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 www.thebenche.com
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 www.thebenche.com
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 www.thebenche.com
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 www.thebenche.com
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 .....” www.thebenche.com
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 www.thebenche.com
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). www.thebenche.com
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). www.thebenche.com
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 www.thebenche.com
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 www.thebenche.com
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 www.thebenche.com
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) www.thebenche.com
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 www.thebenche.com
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 www.thebenche.com
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