An independent undertaking by a bank (hereafter named ‘Guarantor’). The Guarantor becomes obligated to pay an amount, specified in the Guarantee, provided the terms of its Guarantee are complied with.
A Guarantee is irrevocable, meaning that once issued it cannot be amended nor cancelled during its validity period without the consent of the parties, i.e. the Guarantor and/or the Beneficiary.
When used, the Guarantee becomes a ‘payment instrument’, with the trigger for payment being the presentation of a demand and/or any other pieces of information outlined in the wording of the Guarantee.
The Guarantor deals with documents, not with goods, services or performance that the documents may relate to. In addition, the Guarantor is not liable for the effectiveness of these factors, so will not check whether the information contained within the Guarantee is correct.
When a demand is made to the Guarantor (and it is compliant with the terms of the Guarantee), the Guarantor is obligated to pay, regardless of the underlying relationship. The obligation is based solely on the Guarantee itself and the demand.
What are the different types of Guarantees?
The most common way to issue a Guarantee, as these are issued by the Guarantor directly the Beneficiary, who must present demand for payment direct to the Guarantor. This demand can be issued by letter, telecommunications, or via SWIFT. In this instance, the Guarantee is issued by the Applicant’s bank and forwarded to the Beneficiary through its bankers.
The advising party is not obligated to the Beneficiary under the Guarantee.
The Applicant’s bank issues the Counter Guarantee to the Beneficiary’s bank and instructs it to issue its own Guarantee to the Beneficiary.
An undertaking given by the counter-Guarantor to another party which names that party as the Beneficiary to procure the issue by that other party of a local guarantee to be issued to the Beneficiary in the underlying contract/relationship.
The Counter Guarantor is obligated to the Guarantor and the Guarantor is obligated to the Beneficiary. The Counter Guarantor undertakes to reimburse the Guarantor should a complying demand be made under the Guarantee.
Standby letters of credit:
A Standby Letter of Credit (SBLC / SLOC) is a guarantee that is made by a bank on behalf of a client,
which ensures payment will be made even if their client cannot fulfill the payment.
An instrument typically issued by a bank which undertakes to pay one party to a contract (the beneficiary) when the other party has failed, or is alleged to have failed, to perform the contract. The beneficiary is usually the purchaser of goods or services under the contract. A standby letter of credit is often payable simply on the beneficiary's presentation of a written demand.
The issuer's undertaking to pay creates a primary obligation on it, which is independent of the underlying contract. A standby letter of credit is therefore similar to an on demand bond but differs from a true guarantee (that is, a contract of suretyship).The obligation of a guarantor to make payment under a true guarantee is a secondary obligation dependent on the beneficiary establishing that the primary obligor is in breach of the underlying contract.