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 means that the legal position of the Guarantee must be studied in each case.
Every declaration that is designated a “bank guarantee” must be examined carefully to ascertain its legal significance and implications. A particularly clear distinction must be made between a surety bond and an abstract payment undertaking. The custom and protocol in international trade is to have undertakings that are payable on first demand and that are legally separate from the underlying transaction, (Uniform Rules for Demand Guarantees).
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 underlaying contract), the Bank Guarantee will take various formats (or wordings).
In Collateral Transfer, the Guarantees issued are to secure loans or credit lines. These are referred to as Credit Facilities Guarantees and are worded accordingly. For more details on Collateral Transfer, please visit IntaCapital Swiss.