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What is a Counter-Guarantee?

By
Ozgur Eker (CDCS)
-
0

Bank guarantee means any signed undertaking, however named or described, providing for payment on presentation of a complying demand.

Letter of credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.

Under certain situations, exporters do not trust the issuing bank’s payment undertaking and seeks additional assurances in letter of credit transactions.

Confirmation is a security tool that is created for the exporters, who is looking for additional assurances.

Confirmation means a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation.

Unlike letters of credit, banks could not add their confirmations to the bank guarantees that have been issued by another bank, because latest version of bank guarantee rules do not define the confirmation process.

Instead of a confirmation, URDG 758 defines another mechanism, which is called counter guarantee.

On today’s post, I will not only define the counter-guarantee process, but also explain its structure, as well.

Counter Guarantee Definition:

Counter-guarantee means any guarantee, bond or other payment undertaking of the instructing party, however named or described, given in writing for the payment of money.

How Does a Counter Guarantee Work?

The figure below explains how does a counter-guarantee work in international trade transactions.

How does a counter guarantee work?

  • Step 1: The principal and the beneficiary sign a sales contract. In order to be able to talk about the counter-guarantee, the principal and the beneficiary should be located in different countries. Otherwise the principal could have issued a bank guarantee in favor of the beneficiary without using any form of counter-guarantee.
  • Step 2: The principal gives instructions to his bank to issue a counter-guarantee.
  • Step 3: The instructing party, who is the principal’s bank, issues a counter-guarantee in favor of the guarantor bank to issue the bank guarantee against its counter indemnity.
  • Step 4: The guarantor bank issues the guarantee in favour of the beneficiary.

What are the Parties to a Counter-Guarantee?

  • The Principal: The party requesting the issuance of a counter-guarantee.
  • The Instructing Bank: The bank that requests to the beneficiary’s bank to issue the guarantee against its counter indemnity.
  • The Guarantor Bank: The bank that guarantees that the agreed compensation amount will be paid if the guarantee principal fails to meet its contractual obligations and the beneficiary makes a complying demand in writing according to terms and conditions of the guarantee.
  • The Beneficiary: The party in favour of whom the guarantee is issued.

What are the Advantages of a Counter-Guarantee?

Counter-Guarantee Eliminates Country Related Economic and Political Risks: Bank guarantee, that is issued by a guarantor bank, which is located in a country other than the beneficiary, may not be satisfactory, especially when the guarantor bank is located in a high risk country.

For example, bank guarantee issued by an Afghan bank would not mean anything for a medium size manufacturing company located in USA.

As a result in order to protect its interests, the US manufacturing company may demand a bank guarantee issued by a US bank.

By having a bank guarantee issued by a US bank, US manufacturing company eliminates country related economic and political risks.

Counter-Guarantee Eliminates Foreign Jurisdiction Risks: I have already mentioned on my previous articles that bank guarantees are applicant oriented trade finance tools.

Which means that demand guarantees may protect applicants’ interests more than beneficiaries rights.

It is not an uncommon practice to stop the payments under bank guarantees by local court order. By having a local bank guarantee, beneficiary may eliminate foreign jurisdiction risks.

What are the advantages of a counter-guarantee?

What are the Main Specifications of a Counter-Guarantee?

Independence of Counter-Guarantee: A counter guarantee is an independent form of facility than the bank guarantee.

Additionally, counter-guarantee is also independent from the underlying transaction and any instructions received by the instructing bank.

As a result counter-guarantee is bound by its own terms and conditions. Independence of a counter-guarantee has a gigantic effect in legal situations.

Counter-Guarantee and Bank Guarantee Need Not to be a Mirror Image Each Other: For example expiry of the counter-guarantee may be different than the bank guarantee.

Counter-Guarantee and Bank Guarantee may be Issued in a Different Form of Facilities: For example, while the counter guarantee is issued as a demand guarantee, the guarantee can be structured as a surety.

What are the differences between counter-guarantee and bank guarantee?

  • Bank guarantee issued by the guarantor bank in favor of a beneficiary.
  • Counter-guarantee is issued by the instructing bank in favor of the guarantor bank in order to facilitate the issuance of the bank guarantee.
  • Bank guarantee and counter-guarantee are separate instruments as a result they may be issued in different structure.

What are the differences between counter-guarantee and confirmation?

  • Unlike letter of credit rules, bank guarantee rules do not allow for a confirmation.
  • Under letter of credit transactions confirming banks add their confirmation on the same L/C.
  • Under bank guarantee transactions, guarantor banks issue a seperate bank guarantee after they receive an independent counter-guarantee from the principal’s bank located in abroad.

Counter-Guarantee Sample Format

Instructions to a correspondent bank for the issue of a performance guarantee against a counter-guarantee.

Our reference number: 2015/001-PGCG

At the request of Daihon-dai Corporation. Tokyo, Japan please issue on our responsibility in favor of Bihar Urban Infrastructure Development Corporation Ltd., Bihar, India your guarantee in the following wording:

Quote

We have been informed that Daihon-dai Corporation. Tokyo, Japan, (hereinafter called “the principal”), has entered into contract No. 2014/0001/Cnt dated 15.July.2014 with you, for the supply of 1000 Metric Ton/Metric Tons of Stainless Steel.

Furthermore we understand that, according to the conditions of contract, a performance guarantee is required.

At the request of the principal, we Bank of Barindo hereby irrevocably undertake to pay you any sum or sums not exceeding in total an amount of 300.000,00 USD (say Three Hundred Thousand USD) upon receipt by us of your first demand in writing and your written statement stating:

that the principal is in breach of his obligations under the underlying contract, and
the respect in which the principal is in breach.

Your demand for payment must also be accompanies by the following documents:

Proof of identity certificate issued and signed by our branch in beneficiary’s country or else one of our corresponding bank’s located in beneficiary’s country stating that the bank has verified beneficiary’s signature(s) appearing on the first demand of payment.

This guarantee shall expire on 15.December.2015 at the latest.

Consequently any demand for payment under it must be received by us at this office on or before that date.

This guarantee is subject to the Uniform Rules for Demand Guarantees, ICC publication No. 758.

Unquote

In consideration of your issuing your guarantee as above, we hereby give you our irrevocable counter-guarantee and undertake to pay you any sum or sums not exceeding in total amount of 300.000,00 USD (say Three Hundred Thousand USD) upon receipt by us this Office no later than 30.December.2015 of your first demand. Such demand shall be supported by your written statement that you have received a demand for payment under your guarantee in accordance with its terms and Article 20 of the Uniform Rules for Demand Guarantees.

This guarantee is subject to the Uniform Rules for Demand Guarantees, ICC publication No. 758.

Please confirm us the issuance of your guarantee.

Bank Guarantee Sample in MT 760 Swift Format

By
Ozgur Eker (CDCS)
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0

Bank guarantee means any signed undertaking, however named or described, providing for payment on presentation of a complying demand.

MT 760 is a swift message type that is used by issuing banks when issuing a guarantee or a standby letter of credit.

Issuing banks send terms and conditions of a guarantee or a standby letter of credit with a MT 760 Guarantee / Standby Letter of Credit swift message type.

On this page you can find a bank guarantee sample in MT 760 swift format.

This is a real life example.

I have just changed the commercial information on the bank guarantee such as the name of the guarantor bank, the name of the advising bank, the name of the beneficiary and the applicant.

Date of issue and expiry date as well as the guarantee amount also changed for commercial reasons.

Bank Guarantee Sample in MT 760 Swift Format

++++++++++++++++ INCOMING MESSAGE++++++++++++++++

Message Receive Time : 03.08.2014 – 11:00
Message Type : 760 – GUARANTEE / STANDBY LETTER OF CREDIT
Delivery : N
Record Number: 0006000261000
Sender: DEBRDEGGXXX DEUTSCHE EXPORT BANK AG-FRANKFURT AM MAIN – GERMANY
Receiver: TLHLTRISXXX TURKISH IMPORT BANK A.S.- ISTANBUL – TURKEY
Value Date: 0
Currency:
Amount: ,00
Branch: TUM
Department: MUTUAL
Session Number: 4400
Sequence Number (ISN): 960000

===========================================

27: Sequence of Total
1/1

20: Transaction Reference Number
100BGS1100000

23: Further Identification
ISSUE

30:Date
Date : 02.08.2014

40C: Applicable Rules
URDG

77C: Details of Guarantee

WE HEREBY KINDLY REQUEST YOU TO ADVISE OUR FOLLOWING GUARANTEE TO BENEFICIARY WITHOUT ANY OBLIGATION ON YOUR PART:

QUOTE

PAYMENT GUARANTEE NO. 100BGS1100000
DATED 02 AUGUST 2014
.
THE GUARANTOR: DEUTSCHE EXPORT BANK AG-FRANKFURT AM MAIN – GERMANY

THE APPLICANT: SOOO `BELKELETE`, BELARUS, 220000 MINSK, ZAKOVASKAYA STR.10, ROOM 20

THE BENEFICIARY: HANDELSON MAKINA SANAYI VE TICARET A.S., GUZELYALI MAH. PAZARSUYU MEVKII BODRUM-MUGLA, TURKEY.

AS GUARANTOR, WE HAVE BEEN INFORMED THAT THE BENEFICIARY AND THE APPLICANT, HAVE CONCLUDED CONTRACT NO.1 DD JULY 17,
2014, CALLED `THE CONTRACT`, FOR SUPPLY OF CS-12000 KF (SUNFLOWER SEED, HAZELNUT AND ETC.) ROASTING LINE, CALLED `THE GOODS` FOR THE TOTAL AMOUNT OF EUR 240.000,00.

ACCORDING TO THE CONTRACT TERMS THE APPLICANT`S OBLIGATIONS TO PAY FOR THE SUPPLIED GOODS MUST BE SECURED BY A BANK GUARANTEE ISSUED IN THE BENEFICIARY`S FAVOR IN THE AMOUNT OF EUR 180.000,00.

IN CONSIDERATION OF THE AFORESAID, WE, AS GUARANTOR, HEREBY IRREVOCABLY UNDERTAKE TO PAY TO THE BENEFICIARY ANY AMOUNT(S) IN EURO CLAIMED BY THE BENEFICIARY UP TO THE MAXIMUM OF EUR 180.000,00. (IN WORDS: ONE HUNDRED EIGHTY THOUSAND EURO) UPON PRESENTATION OF THE ORIGINAL OF THE BENEFICIARY`S COMPLYING DEMAND IN PAPER FORM WITH REFERENCE TO THIS GUARANTEE NUMBER STATING THAT THE BENEFICIARY SUPPLIED THE GOODS TO THE APPLICANT IN CONFORMITY WITH THE CONTRACT TERMS AND THE APPLICANT HAS FAILED TO MEET A PART OF OR ALL HIS PAYMENT OBLIGATIONS THERE UNDER IN DUE TIME IN THE AMOUNT CLAIMED BY THE BENEFICIARY UNDER THIS GUARANTEE, BUT NOT EXCEEDING EUR 180.000,00 IN THE AGGREGATE.

ANY DEMAND UNDER THIS GUARANTEE WILL BE HONORED BY THE GUARANTOR ONLY WHEN:

  1. PRESENTED TO THE GUARANTOR AFTER 15 CALENDAR DAYS FROM THE DATE OF SHIPMENT INDICATED IN ANY RELEVANT INTERNATIONAL ROAD WAYBILL (CMR) (INCLUDING THE DATE OF SHIPMENT IN CALCULATION),
  2. SUPPORTED BY COPIES OF THE FOLLOWING DOCUMENTS PRESENTED IN PAPER FORM:
    A) BENEFICIARY`S INVOICE INDICATING THE CONTRACT NUMBER AND DATE, AND
    B) INTERNATIONAL ROAD WAYBILL (CMR) CONTAINING DATE OF SHIPMENT,
  3. PRESENTED THROUGH THE INTERMEDIARY OF TURKISH IMPORT BANK A.S.- ISTANBUL – TURKEY WHICH WILL
    A) FORWARD IT TO THE GUARANTOR UNDER THEIR COVER LETTER TOGETHER WITH THE DOCUMENTS AS PER POINT 2. OF PRESENT PARAGRAPH, AND
    B) CONFIRM TO THE GUARANTOR BY AUTHENTICATED SWIFT MESSAGE FORMAT MT799 TO THE GUARANTOR`S SWIFT ADDRESS DEBRDEGGXXX THE AUTHENTICITY OF SIGNATURE(S) APPEARING ON THE BENEFICIARY`S DEMAND.

LANGUAGE OF ALL REQUIRED DOCUMENTS UNDER THIS GUARANTEE IS ENGLISH.

THIS GUARANTEE IS VALID UNTIL 26.09.2014, CALLED `THE EXPIRY DATE`. AFTER THE EXPIRY DATE THE GUARANTOR`S LIABILITIES HEREUNDE WILL EXPIRE IN FULL AND AUTOMATICALLY. THE ORIGINAL OF THE BENEFICIARY`S DEMAND TOGETHER WITH REQUIRED DOCUMENTS MUST BE RECEIVED BY THE GUARANTOR

A) ON OR BEFORE THE EXPIRY DATE,
B) AT THE PLACE OF PRESENTATION – DEUTSCHE EXPORT BANK AG-FRANKFURT AM MAIN – GERMANY, EXCEPT FOR DOCUMENT 3B) OF PRESENT GUARANTEE WHICH MUST BE PRESENTED IN ELECTRONIC FORM TO GUARANTOR`S SWIFT ADDRESS: DEBRDEGGXXX.

ALL CHARGES UNDER THE GUARANTEE ARE FOR THE PRINCIPAL`S ACCOUNT.

THIS GUARANTEE IS SUBJECT TO THE UNIFORM RULES FOR DEMAND GUARANTEES (URDG) 2010 REVISION, ICC PUBLICATION NO.758.

UNQUOTE

THIS IS THE OPERATIVE INSTRUMENT AND NO MAIL CONFIRMATION WILL FOLLOW.
PLEASE CONFIRM EXECUTION.
KIND REGARDS

Retention Money Guarantee Sample

By
Ozgur Eker (CDCS)
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0

Bank guarantee means any signed undertaking, however named or described, providing for payment on presentation of a complying demand.

In big projects such as building a factory plant, supply of complicated machineries and other capital goods, it is often determined that the buyer may keep around 10% of the contract amount for a further period of time even after the supplier delivered the goods or completed the assembly, for example 18 months after the production plant up and running.

The supplier may want to have the full contract amount before the end of this extended period (in the example given above, 18 months) by issuing a retention guarantee that covers the amount that would otherwise be withheld by the buyer.

The supplier will request its bank to issue a retention guarantee in favor of the buyer.

Once the buyer receives the retention guarantee he will transfer the amount of the guarantee amount direct to the supplier by T/T payment.

A retention money guarantee sample will be provided on this page.

The example you can find on this page is prepared as per ICC sample demand guarantee forms.

Retention Money Guarantee Sample

Beneficiary : State Property Committee                                                                         Date : 31.August.2014
55, Uzbekistanskaya str.,
700003 Tashkent,
Uzbekistan

Retention Money Guarantee No. : 2014/0015

We have been informed that Advanced Manufacturing Systems Corporation, Hwaseong, South Korea (hereinafter called “the principal”), has entered into contract No. 20140831 dated 08.August.2014 with you, for the supply of Semiconductor Machinery Manufacturing.

Furthermore we understand that, according to the conditions of the contract, retention money in the sum of 50.000,00 covering the Principal’s warranty obligations will be released against a retention money guarantee.

At the request of the principal, we KLB Bank hereby irrevocably undertake to pay you any sum or sums not exceeding in total an amount of 50.000,00 USD (say Fifty Thousand USD) upon receipt by us of your first demand in writing and your written statement stating:

that the principal is in breach of his obligations under the underlying contract, and
the respect in which the principal is in breach.

Your demand for payment must also be accompanies by the following documents:

Copy of commercial invoice
Proof of identity certificate issued and signed by our branch in beneficiary’s country or else one of our corresponding bank’s located in beneficiary’s country stating that the bank has verified beneficiary’s signature(s) appearing on the first demand of payment.

It is a condition for any claim and payment under this guarantee to be made that the advance payment referred to above must have been received the principal on his account number 444333222 at KLB Bank (Head Office) South Korea.

This guarantee shall expire on 30.December.2014 at the latest.

Consequently any demand for payment under it must be received by us at this office on or before that date.

This guarantee is subject to the Uniform Rules for Demand Guarantees, ICC publication No. 758.

Performance Guarantee Sample

By
Ozgur Eker (CDCS)
-
0

Bank guarantee means any signed undertaking, however named or described, providing for payment on presentation of a complying demand.

Performance guarantee issued by a bank and protects the beneficiary against the failure of the principal to meet its contractual obligations in the underlying contract.

Please keep in mind that a Tender Guarantee is issued before the tender contract is concluded.

On the other hand a Performance guarantee is issued by the winner of the tender after the tender contract is signed.

On this page you can find an example of a performance guarantee, which is prepared as per ICC sample demand guarantee forms.

Performance Guarantee Sample

Beneficiary: Bihar Urban Infrastructure Development Corporation Ltd.                       Date:30.August.2014
#303, 3rd Floor, Maurya Tower,
Maurya Lok Complex,
Budh Marg, Patna -800 001, Bihar
India

Performance Guarantee No. : 2014/002-PFRM

We have been informed that Daihon-dai Corporation. Tokyo, Japan, (hereinafter called “the principal”), has entered into contract No. 2014/0001/Cnt dated 15.July.2014 with you, for the supply of 1000 Metric Ton/Metric Tons of Stainless Steel.

Furthermore we understand that, according to the conditions of contract, a performance guarantee is required.

At the request of the principal, we The International Commerce Bank of Tokyo. hereby irrevocably undertake to pay you any sum or sums not exceeding in total an amount of 300.000,00 USD (say Three Hundred Thousand USD) upon receipt by us of your first demand in writing and your written statement stating:

that the principal is in breach of his obligations under the tender conditions, and
the respect in which the principal is in breach.

Your demand for payment must also be accompanies by the following documents:

Proof of identity certificate issued and signed by our branch in beneficiary’s country or else one of our corresponding bank’s located in beneficiary’s country stating that the bank has verified beneficiary’s signature(s) appearing on the first demand of payment.

This guarantee shall expire on 15.December.2014 at the latest.

Consequently any demand for payment under it must be received by us at this office on or before that date.

This guarantee is subject to the Uniform Rules for Demand Guarantees, ICC publication No. 758.

Advance Payment Bank Guarantee Sample

By
Ozgur Eker (CDCS)
-
0

Bank guarantee means any signed undertaking, however named or described, providing for payment on presentation of a complying demand.

An advance payment bank guarantee is a type of bank guarantee.

Under an advance payment bank guarantee, the guarantor undertakes to repay an advanced payment that the principal has received in the event that the principal does not fulfill the terms of its contract.

An advance payment bank guarantee sample will be provided on this page.

The example you can find on this page is prepared as per ICC sample demand guarantee forms.

Advance Payment Bank Guarantee Sample

Beneficiary : Trusted Importhause of Heidelberg                                                          Date : 30.August.2014
Kurfuersten-Anlage 50-60
69000 Heidelberg
Germany

Advance Payment Bank Guarantee No. : 2014/001

We have been informed that Al-Aman Soap Factory Co. P.O.Box 2022 Jeddah 24500 K.S.A, (hereinafter called “the principal”), has entered into contract No. 1910201107 dated 19.August.2014 with you, for the supply of 230 Metric Ton/Metric Tons Laundry Soap.

Furthermore we understand that, according to the conditions of the contract, an advance payment in the sum of is to be made against an advance payment guarantee.

At the request of the principal, we First National Commercial Bank K.S.A. hereby irrevocably undertake to pay you any sum or sums not exceeding in total an amount of 100.000,00USD (say One Hundred Thousand USD) upon receipt by us of your first demand in writing and your written statement stating:

that the principal is in breach of his obligations under the underlying contract, and
the respect in which the principal is in breach.

Your demand for payment must also be accompanies by the following documents:

Copy of commercial invoice

It is a condition for any claim and payment under this guarantee to be made that the advance payment referred to above must have been received the principal on his account number 111222333 at The National Commercial Bank (Head Office) Jeddah KSA.

This guarantee shall expire on 30.September.2014 at the latest.

Consequently any demand for payment under it must be received by us at this office on or before that date.

This guarantee is subject to the Uniform Rules for Demand Guarantees, ICC publication No. 758.

Tender Bank Guarantee Sample

By
Ozgur Eker (CDCS)
-
0

A tender guarantee (also called a tender bond or bid bond) is requested from the tender participants during the tender processes.

The aim of the tender guarantee is to make sure that the tender participants submit workable bids under the tender. A tender guarantee protects the tender organizers against the tender participants’ acts of injustice.

By having the tender guarantee, the tender organizer knows that the participants will comply with the terms of the contract in the event that that the tender is accepted.

Tender guarantees  are usually issued for 2% to 5% of the tender amount.

On this post you can find a tender bank guarantee sample, which is prepared as per ICC sample demand guarantee forms.

Tender Bank Guarantee Sample

Issued By: First National Commercial Bank

1000 John Rogers Drive 35210 Birmingham  United Kingdom

 

Beneficiary : Aqaba Development Corporation (ADC).                                                  Date : 30.August.2014
Al-Hussein Ben Ali street
P.O. Box 2680,
Aqaba 77110,
The Hashemite Kingdom of Jordan

Tender Bank Guarantee No. : 2014/003-Adc

We have been informed that Reliance Industries Limited, Mumbai. India. , (hereinafter called “the principal”), responding to your invitation to tender No. 2014/tndr/002 for the supply of 200 Metric Ton/Metric Tons of Cleaning Chemicals, has submitted to you his offer No:15082014 dated 15.August.2014.

Furthermore we understand that, according to your conditions, offers must be supported by a tender guarantee.

At the request of the principal, we ICIDI Bank. hereby irrevocably undertake to pay you any sum or sums not exceeding in total an amount of 200.000,00 USD (say two Hundred Thousand USD) upon receipt by us of your first demand in writing and your written statement stating:

that the principal is in breach of his obligations under the tender conditions, and
the respect in which the principal is in breach.

Your demand for payment must also be accompanies by the following documents:

Proof of identity certificate issued and signed by our branch in beneficiary’s country or else one of our corresponding bank’s located in beneficiary’s country stating that the bank has verified beneficiary’s signature(s) appearing on the first demand of payment.

This guarantee shall expire on 15.October.2014 at the latest.

Consequently any demand for payment under it must be received by us at this office on or before that date.

This guarantee is subject to the Uniform Rules for Demand Guarantees, ICC publication No. 758.

Bank Guarantees

By
Ozgur Eker (CDCS)
-
0

What is a Bank Guarantee?

Guarantees are usually issued by banks, which is why they are also called ‘bank guarantees’; however, they can also be issued by other financial institutions or companies as well.

A demand guarantee could also be called as an independent demand guarantee, autonomous demand guarantee, first demand guarantee or bank guarantee as explained above.

On this article, “bank guarantee” and “demand guarantee” terms used with the same meaning.

Definition: ICC’s URDG 758 defines a demand guarantee as follows: “demand guarantee or guarantee means any signed undertaking, however named or described, providing for payment on presentation of a complying demand”.

Here is another definition of a bank guarantee:

“A demand guarantee is an irrevocable undertaking issued by the guarantor, upon the instructions of the principal to pay the beneficiary any sum that may be demanded by that beneficiary up to a maximum amount determined in the guarantee, upon presentation of a demand conforming with the terms of the guarantee.” (Affaki, 2001, s. 13)

How Does a Bank Guarantee Work in Paper Format?

How does a bank guarantee work in paper format?

  • Step 1: Principal and beneficiary sign a contract which will be demanding a bank guarantee
  • Step 2: Principal approaches Guarantor to issue a Demand Guarantee in favor of the beneficiary. On this stage principal must supply the terms and conditions of the guarantee to the guarantor by the help of the Bank Guarantee Application Form.
  • Step 3: Guarantor issues the bank guarantee and sends it to the beneficiary.

How Does a Bank Guarantee Work in Swift Format?

How does a bank guarantee work in swift format?

  • Step 1: Principal and beneficiary sign a contract which will be demanding a bank guarantee
  • Step 2: Principal approaches Guarantor to issue a Demand Guarantee in favor of the beneficiary. On this stage principal must supply the terms and conditions of the guarantee to the guarantor by the help of the Bank Guarantee Application Form.
  • Step 3: Guarantor issues the bank guarantee in swift format and sends it via secure online swift platform to the advising bank which is located in the beneficiary’s country.
  • Step 4: Advising bank advices the bank guarantee to the beneficiary in online means.

Parties to Bank Guarantees:

  • Advising Party: Advising party means the party that advises the guarantee at the request of the guarantor.
  • Applicant: Applicant means the party indicated in the guarantee as having its obligation under the underlying relationship supported by the guarantee. The applicant may or may not be the instructing party.
  • Beneficiary: Beneficiary means the party in whose favour a guarantee is issued.
  • Guarantor: Guarantor is the institution that issues the bank guarantee. As per URDG 758 guarantor means the party issuing a guarantee, and includes a party acting for its own account.
  • Instructing Party: Instructing party means the party, other than the counter-guarantor, who gives instructions to issue a guarantee or counter-guarantee and is responsible for indemnifying the guarantor or, in the case of a counter-guarantee, the counter-guarantor. The instructing party may or may not be the applicant.

Types of Bank Guarantees:

Tender Guarantee: A tender guarantee (also known as a tender bond or bid bond) is requested from the tender participants during the tender processes.

The aim of the tender guarantee is to make sure that the tender participants submit workable bids under the tender. A tender guarantee protects the tender organizers against the tender participants’ acts of injustice.

By having the tender guarantee, the tender organizer knows that the participants will comply with the terms of the contract in the event that that the tender is accepted.

Tender guarantees  are usually issued for 2% to 5% of the tender amount.

In some situations, exporters may also be asked for presentation of a tender guarantee by the importers.

Tender Guarantee Sample

Advance Payment Guarantee: An advance payment guarantee secures the advance payment made by importer (buyer, purchaser) if the exporter (seller, supplier) does not fulfill its obligations.

Advance payment guarantees are frequently issued for the exact amount of advance payment that has been given to the exporters (sellers, suppliers).

Advance Payment Guarantee Sample

Performance Guarantee: A performance guarantee (also called a performance bond) protects the importer against the failure of the exporter to meet its contractual obligations.

Performance guarantees are generally issued for 10% to 20% of the contract total; however the guarantee amount may be constraint by the local law of the importer’s country.

Obligations under a performance guarantee or bond could concern supply obligations or obligations concerning function and quality during the agreed period of the guarantee.

Performance Guarantee Sample

Retention Money Guarantee: In big projects such as building a factory plant, supply of complicated machineries and other capital goods, it is often determined that the buyer may keep around 10% of the contract amount for a further period of time even after the exporter delivered the goods or completed the assembly, for example 18 months after the production plant up and running.

The exporter may want to have the full contract amount before the end of this extended period (in the example given above, 18 months) by issuing a retention guarantee that covers the amount that would otherwise be withheld by the buyer.

The exporter will request its bank to issue a retention guarantee in favor of the buyer. Once the buyer receives the retention guarantee he will transfer the amount of the guarantee amount direct to the exporter by T/T payment.

Retention Money Guarantee Sample

Payment Guarantee: Unlike other bank guarantees a payment guarantee secures the payment of the exporter in case the importer does not fulfill its payment obligations.

A payment guarantee can be issued in the form of an endorsement on a draft, also known as an “aval”.

Rules of Bank Guarantees:

URDG (Uniform Rules on Demand Guarantees) are the set of rules that apply to bank guarantees in international scale. URDG have been published by ICC.

URDG rules, like other trade finance rules published by ICC, have a contractual nature as a result they apply to a specific bank guarantee only if parties to the given transaction choose these rules by giving express reference to the rules in the text of the bank guarantee.

History of URDG:

URDG 458: (ICC Uniform Rules for Demand Guarantees ICC Publication No. 458E, 1992 edition): The ICC Uniform Rules for Demand Guarantees has been prepared by ICC Banking Commission and International Commercial Practice Commission joint efforts.

It has been adopted by ICC Executive Council on 03.December.1991.

URDG 458 is the first set of rules that exclusively devoted to demand guarantees. URDG 458 has been published with the aim of defining obligations of principals, beneficiaries and guarantors under demand guarantees and counter-guarantees.

URDG 458 contains 28 articles, which governs the liabilities and responsibilities of the parties of bank guarantees, the nature of the demand, conditions of the expiry and the governing law jurisdiction for the guarantee or counter-guarantee.

The URDG 458 Rules will secure uniform practice in the requirements for guarantees and will join the other ICC Rules, such as the Uniform Rules for Collections, URR 522, Uniform Customs and Practice for Documentary Credits, UCP 600, in bringing order and security to international business practice.

URDG 758: (ICC Uniform Rules for Demand Guarantees ICC Publication No. 758E, 2010 edition): URDG 758 succeeded URDG 458. As of 01.July.2010 the new set of rules for demand guarantees came into effect and substituted with the old set of rules.

More than just an update of the existing rules, the revised URDG 758 could be seen as a new set of rules for the twenty-first century.

The most significant changes in URDG 758 edition are:

  • New definitions and interpretation rules for greater clarity and precision;
  • The treatment of non-documentary conditions, incomplete presentations, and many other contentious practices;
  • A comprehensive coverage of advice of guarantees, amendments, electronic documents, transfers and more;
  • A provision on force majeure that triggers an extension of a guarantee for thirty calendar days;
  • The replacement of “reasonable time” with fixed periods for the examination of demands, the extension of guarantees and the suspension of payments.
  • A clear layout of the examination process for demands and a step-by-step roadmap for handling extend or pay demands.

MT 769 Advice of Reduction or Release

By
Ozgur Eker (CDCS)
-
0

Swift is a provider of secure message platform for financial institutions mainly for banks.

Swift messages are being sent and received by banks in encrypted forms. As a result swift messages are accepted as a valid and reliable way of communication between banks.

For example, an issuing bank sends a swift message to an advising bank in order to inform issuance of a documentary credit. Similarly the advising bank sends its acknowledgement via a swift message.

Swift messages play a key role not only in letters of credit but also other payment methods in international trade such as cash in advance payment, documentary collections, open accounts and bank payment obligations.

What is MT 769 Advice of Reduction or Release?

This message is sent by a bank which has received a guarantee to the bank which has issued the guarantee.

It may also be sent by a bank which has been requested to issue a guarantee to the bank which requested the issuance of the guarantee.

This message may also be used for Standby Letters of Credit.

It is used to advise the Receiver that it has been released of all liability for the amount specified in field 33B or field 39C.

The Sender’s charges may also be accounted for in this message.

MT 769 Advice of Reduction or Release

StatusTagField Name
M20Transaction Reference Number
M21Related Reference
O25Account Identification
M30Date of Reduction or Release
O32aAmount of Charges
O33BAmount Reduced or Released
O34BAmount Outstanding
O39CAmount Specification
O57aAccount With Bank
O71BDetails of Charges
O72Sender to Receiver Information
O : Optinal           M : Mandatory

MT 769 Network Validated Rules

  • C1 Either field 25 or 57a, but not both, may be present.
  • C2 Either field 33B or field 39C, but not both, must be present.
  • C3 If field 32D is present, then field 57a must not be present.
  • C4 If field 71B is present, then field 32a must also be present.
  • C5 The currency code in the amount fields 33B and 34B must be the same.

Sample MT 769 Advice of Reduction or Release:

Narrative: On 12 January 2003, Swiss Bank Corporation, San Francisco, advises National Westminster Bank Plc, London (reference 2PG8761234), that it has been released of all liability for an amount of US Dollars 15,000.

The outstanding obligation under the guarantee is US Dollars 12,000.

Swiss Bank Corporation would like to receive payment of its charges of US Dollars 50 (being cable costs of USD 20 and commission charges of USD 30) at its account at Bank of New York, New York.

Sample MT 769 Advice of Reduction or Release

MT 768 Acknowledgement of a Guarantee / Standby Message

By
Ozgur Eker (CDCS)
-
0

Swift is a provider of secure message platform for financial institutions mainly for banks.

Swift messages are being sent and received by banks in encrypted forms. As a result swift messages are accepted as a valid and reliable way of communication between banks.

For example, an issuing bank sends a swift message to an advising bank in order to inform issuance of a documentary credit. Similarly the advising bank sends its acknowledgement via a swift message.

Swift messages play a key role not only in letters of credit but also other payment methods in international trade such as cash in advance payment, documentary collections, open accounts and bank payment obligations.

What is MT 768 Acknowledgement of a Guarantee / Standby Message?

MT 768 is a swift message type that is used by a bank which has received a guarantee to the bank which issued the guarantee or an amendment thereto.

Banks send their acknowledgement of receipt of any message relating to a bank guarantee or a standby letter of credit with a MT 768 Acknowledgement of a Guarantee / Standby Message swift message type.

MT 768 Acknowledgement of a Guarantee / Standby Message

StatusTagField Name
M20Transaction Reference Number
M21Related Reference
O25Account Identification
M30Date of Message Being Acknowledged
O32aAmount of Charges
O57aAccount With Bank
O71BDetails of Charges
O72Sender to Receiver Information
O : Optinal           M : Mandatory

MT 768 Network Validated Rules

  • C1 Either field 25 or 57a, but not both, may be present.
  • C2 If field 32D is present, field 57a must not be present.
  • C3 If field 71B is present, field 32a must also be present.

MT 768 Acknowledgement of a Guarantee / Standby Message Rules

This message type is sent by a bank which has received a guarantee to the bank which issued the guarantee or an amendment thereto. It may also be sent by a bank which has been requested to issue a guarantee to the bank which requested the guarantee or an amendment thereto.

It is used to acknowledge receipt of any message relating to a guarantee and, where applicable, to indicate that action has been taken according to the instructions.

This message may also be used for Standby Letters of Credit.

The Sender’s charges may also be accounted for in this message.

Sample MT 768 Acknowledgement of a Guarantee / Standby Message:

Narrative: On 20 August 2014, Bahamas Bank Corporation, Detroit, acknowledges to Iron Bank of Braavos, London (reference 123BROVLD), receipt of the amendment to the issue of Performance Guarantee No. PG20140102, as well as the beneficiary’s acceptance of the amendment.

Sample MT 768 Acknowledgement of a Guarantee / Standby Message

MT 767 Guarantee / Standby Letter of Credit Amendment

By
Ozgur Eker (CDCS)
-
0

Swift is a provider of secure message platform for financial institutions mainly for banks.

Swift messages are being sent and received by banks in encrypted forms. As a result swift messages are accepted as a valid and reliable way of communication between banks.

For example, an issuing bank sends a swift message to an advising bank in order to inform issuance of a documentary credit. Similarly the advising bank sends its acknowledgement via a swift message.

Swift messages play a key role not only in letters of credit but also other payment methods in international trade such as cash in advance payment, documentary collections, open accounts and bank payment obligations.

What is MT 767 Guarantee / Standby Letter of Credit Amendment?

MT 767 is a swift message type that is used by issuing banks when amending or requesting the amendment of the bank guarantee or standby letter of credit.

Issuing banks send terms and conditions of the bank guarantee amendment or a standby letter of credit amendment with a MT 767 Guarantee / Standby Letter of Credit Amendment swift message type.

MT 767 Guarantee / Standby Letter of Credit Amendment

StatusTagField Name
M27Sequence of Total
M20Transaction Reference Number
M21Related Reference
M23Further Identification
O30Date
O26ENumber of Amendment
M31CDate of Issue or Request to Issue
M77CAmendment Details
O72Sender to Receiver Information
O : Optinal           M : Mandatory

MT 767 Guarantee / Standby Letter of Credit Amendment Rules:

  • This message is sent by a bank which has issued a guarantee to the bank to which the guarantee was issued. It may also be sent by a bank which has requested the issuance of a guarantee to the bank to which the request for a guarantee was sent.
  • It is used to amend or request the amendment of the guarantee.
  • This message may also be used for Standby Letters of Credit.
  • The guarantee amendment is to be considered as part of the guarantee.
  • The terms and conditions of the original guarantee or instruction(s) not mentioned in the message remain the same.
  • The cancellation of a guarantee, ie, MT 760, takes the form of an amendment. The MT 767 must therefore be used.
  • Since a SWIFT message is restricted to the maximum input message length, more than one MT 767 may need be required to accommodate all the details of the guarantee amendment.

What Does Current Bank Guarantee Rules (URDG 758) or Standby Letter of Credit Rules (ISP 98) Say About Amendment of a Bank Guarantee or a Standby Letter of Credit?

  • URDG 758 states that an amendment issued without the consent of the beneficiary is not binding on the beneficiary except where the guarantee otherwise provides.
  • As per latest demand guarantee rules the guarantor is irrevocably bound by an amendment as of the time it issues the amendment and unless until the beneficiary rejects the amendment.
  • Uniform rules on demand guarantees signifies that an amendment of the guarantee may be rejected by the beneficiary until the time it notifies its acceptance of the amendment or makes a presentation that complies only with the guarantee as amended.
  • Partial acceptance of an amendment is not allowed as per URDG 758 rules and will be deemed to be notification of rejection of the amendment.
  • A provision in an amendment to the effect that the amendment shall take effect unless rejected within a certain time shall be disregarded.
  • According to ISP 98 rules an amendment of a standby letter of credit is binding when issued, for this reason it is enforceable against an issuer whether or not the applicant authorized its issuance, the issuer received a fee, or the beneficiary received or relied on the the amendment.
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