Transcript
Foreign guarantees
A bank guarantee is a surety or a guarantee issued by the bank on behalf of its customer for the
benefit of a domestic or foreign beneficiary, with which the bank as the guarantor undertakes
financial responsibility. A foreign bank guarantee refers to a guarantee issued
for the benefit of a
foreign beneficiary
. An exporter or an importer can ask for a bank guarantee from its foreign
trade partner to guarantee the fulfilling of all the contractual obligations. It is advisable for the
exporter and the importer to make sure with the help of one's bank that the guarantee is valid and
binding. A foreign guarantee can be issued as a surety or a guarantee on first demand. A bank
guarantee is issued by the bank on behalf of its customer, for the benefit of a domestic
beneficiary is usually directly enforceable and accessory to the principal obligation. In other
words, the beneficiary has the right to claim its due receivables either from the company or
directly from the guarantor bank. The bank is then able to present the same claims to the
beneficiary. In case of a surety, the bank is entitled to restrain payment to the beneficiary until the
company's obligation to pay on the basis of a contractual relationship has been established.
Sureties are governed by the Act on uaranties and Third!"arty "ledges #$%.&.$%%%&($).
Elements Of A Bank Guarantee
uarantees usually involve a minimum of three parties*
The beneficiary
– the person in whose favour the guarantee has been issued, who
requires security against the risk of the principal’s non-performance or default
under the primary contractual obligation.
The beneficiary is the person who has authority
to draw on the bank guarantee in the event that the bank+s client fails to make payment. The
beneficiary is named specifically on the bank guarantee, and can claim the full value of the bank
guarantee at such time as he or she makes proper claim that they have not received payment for
the provision of goods or services.
The applicant
– applies for the issue of a guarantee which covers a particular
performance by him. The applicant can expect to be informed in writing why and
how he is in breach of contract.
The guarantor
–
the bank or party that issues the guarantee on behalf of the
applicant. The guarantor is usually the applicant’s bank which is situated in the
same country as the applicant. The issuing bank is the bank which is providing the
guarantee to the beneciary, on behalf of their client. The issuing bank is legally
required to make full payment on the bank guarantee if the conditions laid out in
the bank guarantee are met.
Types of Bank Guarantee .
There are two main types of bank guarantee. The first of these is a irect -ank uarantee. A
direct bank guarantee is a guarantee which will result in payment directly to the beneficiary.
The second type of bank guarantee is an Indirect -ank uarantee. An indirect bank
guarantee is payable not directly to the beneficiary, but to the beneficiary+s bank.
Direct guarantee
•
The bank will issue a direct guarantee specifically in behalf of the beneficiary, thus
establishing an immediate legal relationship between the guarantor bank and the
beneficiary
Indirect guarantee
•
In the case of an indirect guarantee, another bank is involved. The principal+s bank will
issue an indirect guarantee #a counter guarantee) made in behalf of the other bank, based
upon which the latter will issue its guarantee in behalf of the beneficiary.
•
In case the other bank+s guarantee is eventually used by the beneficiary, a counter!
guarantee serves to provide security to the other bank that is based upon an irrevocable
abstract commitment by the bank to pay a defined amount upon the first written demand
of the other bank in case of performance under the guarantee.
•
Indirect guarantees are mostly used in special territories #such as Arab countries), where
local regulations prevent acceptance of guarantees issued by foreign banks.
ommonly used guarantees
!erformance Bond
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The most common type of guarantee
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sually re/uired for the duration of a contract, plus a grace period to allow the
beneficiary to make a demand in the event of non!performance of the obligations covered
by the guarantee.
Tender Guarantee"Bid Bond
•
0ften called for in support of contract tenders, particularly in international trade
situations
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"rovides the beneficiary with a financial remedy if the applicant fails to fulfill any of the
tender conditions.
Ad#ance !ayment Guarantee
•
sed where the applicant calls for the provision of a sum of money at an early stage of
the contract
•
The beneficiary can recover the amount paid in advance, or part thereof, if the applicant
fails to fulfil their underlying contractual obligations.
Facility Guarantee
1nables an applicant to secure banking facilities for a subsidiary, associate company or
personal account in other countries.
Bank Guarantee $sage
-ank guarantees can be used in a variety of ways to cover different trading scenarios. The
following are different types of guarantee usage which range from being so common as to be
standard practice in international trading.
!ayment Guarantee
A payment guarantee is simply an assurance provided by the buyer to the seller that payment will
be made upon shipping of goods. This is the most common form of bank guarantee usage in the
global trading, and buyers can expect most sellers to re/uest a bank guarantee for the purpose of
securing payment in the case of the buyer defaulting on the contract.
!erformance Bond Guarantee
A performance
bond guarantee is a bank guarantee which is issued by the seller and given to the
buyer. If the seller fails to meet the terms of the contract, then the buyer is entitled to claim
payment on the bank guarantee, which is normally around ten percent of the total value
stipulated on the contract. It is standard practice for the seller to issue the buyer a performance
bond guarantee.
Ad#ance !ayment Guarantee
If the seller has re/uested an advance payment, then the buyer can re/uest a bank guarantee to
cover the advance payment in the event that the seller fails to fulfill its obligations as stipulated
in the contract. This is rarely needed in sugar trading, as payment is usually made by a letter of
credit, under which payment is only made to the seller in the event that the conditions of the
contract are fulfilled.
Guarantee on first demand
uarantees on first demand are widely used in international trade. They are payable on demand,
and the bank cannot refuse payment if it has received a claim that is formally valid. In case of a
guarantee on first demand, the bank is obliged to pay the beneficiary on the grounds of the claim
that is presented according to the provisions of the guarantee obligation without further
examining whether the beneficiary has the right to receive the payment.
%tandby letter of credit
Standby letter of credit is a guarantee in a form of a letter of credit. It is an independent
obligation in relation to the main contract and sub2ect to the I33 niform 3ustoms and
"ractice for ocumentary 3redits by the International 3hamber of 3ommerce or to
International Standby "ractices 4ules #IS"%5).
Assigned guarantee
sually a bank guarantee is a direct guarantee between the contract partners, in which the
bank issues the guarantee directly for the benefit of the foreign beneficiary. 6owever, in
some countries the legislation, currency regulations or the general customs of trade are
against accepting guarantees from foreign banks. In such cases, a guarantee can be arranged
through our correspondent bank as an assigned guarantee. 7e re/uest the correspondent
bank to issue a guarantee to your company's contract partner and oblige to reimburse the
correspondent bank for all payments that it may have to make to the beneficiary on the basis
of the guarantee.
Guarantees for e&port trade
A bid bond
, also known as
tender guarantee
, compensates the damages if the exporter
reverses the tender, refuses to sign the contract after the tender has been accepted or fails to
arrange the performance bond presumed by the contract. sually, the bid bond covers 89:
of the value of the tender. The bid bond is valid from the submitting of the tender until its
acceptance.
The contract partners may agree on a part of the contract price to be paid in advance.
Ad#ance payment bond or guarantee
ensures that the buyer recovers the advance payment
if the delivery is not accordant with the contractual obligations or if the delivery is not
realised.
!erformance bond or guarantee
compensates the losses for the buyer in the event of non!
performance of the performance obligations in the contract. The guarantee is valid from the
signing of the contract until the delivery.
The exporter gives a
'arranty guarantee
#also known as
maintenance guarantee
or
retention money bond
) when the delivery or the performance has been effected. The
guarantee compensates the losses for the buyer if the exporter fails to reimburse the possible
deficiencies or defects within the guarantee period.
Guarantees for import trade
A guarantee securing the payment of the purchase price
is one of the most common
guarantees associated with import trade. 7hen the foreign seller gives the ;innish importer
payment time after the delivery, the collateral is usually arranged either as a separate
guarantee concerning a single transaction, as an aval, i.e. a guarantee for a bill of exchange
accepted by the importer, or as an overdraft facility guarantee limit.
Bank guarantee for a
bill of e&change
, also known as
a#al
, is an international guarantee term. In ;inland, it
usually refers to a guarantee specified in the bill of exchange.
Other types of guarantee
In addition to the aforementioned forms of guarantee, guarantees can be issued to secure
various contractual obligations #for instance exclusive sales, leasing or rent agreement), or to
fulfil some obligations to officials provided by the law or orders of the authorities #for
instance customs guarantee). There are also many guarantees associated with financing.
Bill of lading guarantee
is sometimes needed in import trade, for example when the
products spoil /uickly or have high storage costs in customs. If the original bills of lading
are not yet at the importer's disposal, the importer can claim the product against the
guarantee.
A customs guarantee
is needed, for instance, when the importer re/uests temporary
exemption from duty or a position as a charge customer from the customs authorities. A
guarantee given for the community's customs procedure is comparable to a customs
guarantee. The guarantee is given to ;innish authorities but it covers customs duties and
other payments throughout the 1 area that the customer has to pay.
ounter(obligation for a bank guarantee
A 3ompany and the bank agree upon the issuance of a bank guarantee through a counter!
obligation. The counter!obligation means that the company obliges to reimburse the bank for
all payments that it may have to make on the basis of the bank guarantee. The counter!
obligation also includes provisions on the guarantee fee charged on the bank guarantee and
other terms and conditions between the company and the bank.
Guarantee limit
The company can also be granted a guarantee limit that makes it easy to order bank
guarantees from the bank without signing any separate counter!obligation. An order can also
be submitted to the bank by 7eb services.
!rospects of Bank Guarantee)
The re/uest for bank guarantees in support of contractual obligations has become common
practice in the market and different forms of guarantees have evolved to cater for the diverse
types of commercial and financial transactions.
A guarantee is a written undertaking issued by a bank in favour of the receiver of the goods
or services, whereby it pledges to make certain payments on behalf of its client, if the latter
fails to make a payment or to carry out specific functions in terms of the commercial
contract. The bank+s commitment is legally independent of the underlying commercial
contract.
A guarantee #bond or suretyship, as it is sometimes called) supports commercial contracts by
providing trading partners with the flexibility to reduce credit and performance risk. It is a
supplementary agreement or form of collateral or security relating to a specific transaction,
for example*
A seller may not be able to assess a buyer+s ability to pay for goods or a service rendered
and wants protection against non!payment.
The buyer /uestions the seller+s financial capability, resources and ability to perform under
the commercial contract and needs protection against non!performance.
Business benefits of bank guarantee.
-ank guarantee 3reate stronger business relationships ! provides the security of knowing
that payment has been guaranteed by one of the world+s strongest financial institutions to the
customers and supplier.
4eduction of risks inherent in transaction
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A bank guarantee is a reliable security instrument in both international and domestic trade
•
It provides security for various types of risk*
o
limitation of risk related to your business partner+s potential insolvency or
unwillingness to pay
o
limitation of risk related to breach of contractual obligations
o
security for risks even beyond the realm of trade and services #e.g. provision of
$>, are the most reasonably balanced code of practice
available for international independent guarantees, and were endorsed by ?3IT4A@ in 8>$$.
The
ICC Uniform Rules for Demand Guarantees
#4) reflect international standard practice
in the use of demand guarantees and balance the legitimate interests of all parties.
Since their first adoption in $%%$, I33's 4 have gained international acceptance and official
recognition by bankers, traders, industry associations and international organiations including
?3IT4A@, ;II3 and the 7orld -ank. The current edition, 4 B95, was officially
endorsed by the ? 3ommission on International Trade @aw #?3IT4A@) at its CCth annual
session in Dienna from 8B Eune F 5 Euly 8>$$.
Gore than an update of the existing rules, the revised 4 B95 is a new set of rules for the
twenty!first century that came into effect on $ Euly 8>$>. 4 B95 contains significant
changes practitioners will need to know, including*
•
?ew definitions and interpretation rules for greater clarity and precisionH
•
The treatment of non!documentary conditions, incomplete presentations, and many other
contentious practicesH
•
A comprehensive coverage of advice of guarantees, amendments, electronic documents,
transfers and moreH
•
A provision on force ma2eure that triggers an extension of a guarantee for thirty calendar
daysH
•
The replacement of $, 8>$> sub2ect to the 4
means sub2ect to 4 B95.7here, at the re/uest of a counter guarantor, a demand guarantee is
issued sub2ect to the 4, unless the counter guarantee exclude the 4. 6owever, a
demand guarantee does not become sub2ect to the 4, merely because the counter guarantee
is sub2ect to the 4.
7here a demand guarantee or counter!guarantee issued on or after $ Euly 8>$> states that it is
sub2ect to the 4 without stating whether the $%%8 version or the 8>$> revision is to apply or
indicating the publication number, the demand guarantee or counter!guarantee shall be sub2ect to
the 4 8>$> revision.
This revision of
ICC Uniform Rules for Demand Guarantees
#
$*DG +,-
) creates a new set of
independent guarantee rules for the twenty!first century. The new
$*DG
are clearer, more
precise and more comprehensive than their predecessor,
$*DG ,-
.The present revision uses
language consistent with that in I33+s universally accepted
Uniform Customs and Practice for
Documentary Credits
#3" (>>).It contains new provisions that practitioners will need to know*
•
?ew efinitions and interpretation rules to provide greater clarity and precisionH
•
The solution to non!documentary conditions, asymmetrical guarantees and counter!
guarantees, incomplete presentations, and many other contentious practicesH
•
A comprehensive coverage of advice of guarantees, amendments, electronic documents,
transfers, and other innovative aspects in guarantee practiceH
•
A clear layout of the examination of demand processH
•
A step!by!step road map to handling extend or pay demands and force ma2eureH and
•
A checklist of drafting recommendations and ready!to!use model forms.
;irst adopted by I33 in $%%$, the 4 reflect international practice in the use of demand
guarantees while at the same time balancing in the most reasonable way the legitimate interests
of the beneficiary, the applicant and the guarantor. International organiations and professional
federations have endorsed the 4, lawmakers have used them as model for national statutes,
and banks and businesses apply them across the world in their way to day to day guarantee
business.
Bangladesh Bank Guideline)
-angladesh -ank provides some guideline in 3hapter $( from
paragraph 5 to$C about foreign bank guarantee.
-
.uarantees on behalf of residents in favour of non!residents*
As may furnish guarantees to
non!residents on behalf of residents only within the authority set out in the following
paragraphs*
i/
As may issue bid bondsperformance bonds on behalf of suppliers in -angladesh in
favour of international agencies inviting tenders for supply of goodsservices. In such cases
As should ensure genuineness of the tendersupply contractwork order etc. before issuing of
bondguarantee.
ii/ 0inor Guarantees
As may freely give guarantees on behalf of their customers in their ordinary course of business
in respect of missing documents, authentication of signature, release of goods on Trust 4eceipts
and defects in documents negotiated under @3 or otherwise.
iii/ E&port guarantee
As may furnish performance bonds or guarantees in favour of overseas buyers on account of
-angladeshi exporters without prior approval of the -angladesh -ank sub2ect to usual banking
norms and the following conditions*
#a) the tender floated by the foreign buyer calls for bank guarantee performance bondH
#b) the tenderer is a bonafide importerusertrader of the commodityproduct concernedH
#c) there is no export ban in -angladesh on the commodityproduct to be suppliedH
#d) the past performance of the exporter is considered satisfactory by the A.
The remittance, if any, to the beneficiary as a result of invocation of the bond or guarantee can
be made sub2ect to report to the -angladesh -ank.
1. *epayment guarantees against suppliers2 credits
As have to take prior permission from ;oreign 1xchange "olicy epartment, -angladesh
-ank before issuing any guarantee on behalf of industrial concerns under publicprivate
sector favouring foreign suppliers towards repayment of suppliers' credits.
$>.
Guarantee on behalf of non(residents in fa#our of residents in Bangladesh
As have to take prior permission from ;oreign 1xchange "olicy epartment, -angladesh
-ank before issuing any guarantee on behalf of industrial concerns under publicprivate
sector favouring foreign suppliers towards repayment of suppliers' credits.
#a) Sub2ect to such conditions as may be imposed by -anking 4egulations and "olicy
epartment from time to time, As may issue Taka guarantees on behalf of foreign or foreign
controlled companiesfirms operating in -angladesh in favour of residents in -angladesh* #i)
against $>>: cash deposit andor where the guarantee is re/uired to be submitted with
tender documents in lieu of earnest money deposit, sub2ect to the condition that validity of the
guarantee issued in lieu of earnest money will be limited to the period within which the decision
regarding acceptance or re2ection of the tender is taken, #ii) against ad2ustment of the amount
from the overdraft limit, if any, allowed to the companyfirm concerned.
3b/
An A may without prior approval of -angladesh -ank, issue guarantee, bid bond or
performance bond in foreign currency on behalf of a non!resident firmcompany favouring
residents in -angladesh provided a back to back guarantee covering the guaranteed
amount from an overseas correspondent or other bank abroad is held by the A. The A should
satisfy itself about the bonafides of the overseas guarantee before issuing its own
guaranteebid bondperformance bond there against.
3c/
In all other cases not specified above prior approval of the -angladesh -ank is re/uired for
issuing guarantees on behalf of non!residents in favour of the residents in
-angladesh. Applications for these cases should be made by letter in duplicate giving full
particulars of the guaranteebond, the period, purpose and the method by which the A will be
reimbursed in the event of the guaranteebond being invoked.
44.
Guarantee fa#ouring local pro5ect authorities on behalf of residents.
As may issue, on behalf of residents, bid bondsperformance bondsguarantees in foreign
currency in favour of local pro2ect authorities against goodsservices procurement tenders
financed by internationalforeign donor agencies, on the condition that in case the guarantee is
invoked the claim there against would be paid only in Taka e/uivalent and not in any other
currency.
46.
Guarantee fa#ouring a non(resident on behalf of another nonresident
?on!resident international agencies may demand bank guarantees from non!resident
contractors against supply of materialsdown payment for the ongoing pro2ects in -angladesh
financed by them. Such guarantee on behalf of a non!resident contractor in favour of the non!
resident beneficiary may be issued by an A against $>>: counter guarantee from a
reputed international bank abroad, or against $>>: cash collateral in foreign exchange
received from abroad through banking channel.
47.
Guarantees and pledging of collateral in fa#our of o#erseas bank branches and correspondents
As may not, without prior approval of -angladesh -ank, furnish guarantees to or hold
collaterals on behalf of overseas bank branches or correspondents in respect of credit
facilities or guarantees to be extended by them or for any other purpose. All applications to
-angladesh -ank should be made by letters giving details of the purpose for which guarantee is
to be furnished or collateral deposited. "rior approval is not however, necessary in cases
where the As are satisfied that the amount of the fixed deposit or other collateral held by
them represents funds remitted to -angladesh through normal banking channel from the country
of residence of the borrower.
4.*ene'als of loans 8o#erdrafts and guarantees
In cases where the extension of loans or overdrafts or guarantees re/uires prior
approval of the -angladesh -ank, the renewal of such loans, overdrafts or guarantees shall
also re/uire prior approval of the -angladesh -ank.
!ractice in !ubali Bank 9imited
At
!ubali Bank 9imited
we have extensive experience of bank guarantees, together with a
worldwide network of correspondent banks to meet domestic and international needs.
!ubali
Bank 9imited
is providing foreign guarantees with attractive terms.
!ubali Bank 9imited
is
providing valuable support for international business.
!ubali Bank 9imited
is arranging
following types of guarantees to cover many other kinds of risk.
!erformance Bank Guarantee
* Sometimes
!ubali Bank 9imited
issues
"erformance -ank
uarantee. ;or 1xample*
nicredit S.".A,Gillano #3orresponding -ank) has re/uested "ubali
Bank 9imited
to
issue a -ank uarantee #"erformance uaranty) for 140 B,&$5.>> in favour
of eputy irector, overnment "rinting "ress,Te2gaon#beneficiary) under the re/uest of Smyth
Srl,4egione ;ormica,Italy #"rincipal) against the counter guarantee for the same amount issued
by nicredit S.".A,Gillano. Smyth Srl,4egione ;ormica, Italy #"rincipal) has entered into a
contract with eputy irector, overnment "rinting "ress, Te2gaon#beneficiary) for the supply
of SG8> Semi Automatic -ook -inding Gachine .After receiving swift Gessage from nicredit
S.".A,Gillano International ivision of
!ubali Bank 9imited
authorie their
"rincipal -ranch
to issue a -ank uarantee #"erformance uaranty) for 140 B,&$5.>> in favour of eputy
irector, overnment "rinting "ress,Te2gaon.
!ubali Bank 9imited
commits to pay to the
beneficiary the guaranteed sum, in the case that the supplier does not fulfill his contractual
obligations within the expiry date of guarantee
.
Then
!ubali Bank 9imited
will claim to
nicredit S.".A,Gillano bank to repayment of the guaranteed sum.
Foreign ounter Bank Guarantee)
"ubali -ank @imited also issues ;oreign 3ounter -ank
uarantee. ;or 1xample * "ubali -ank @imited has issued a ;oreign 3ounter -ank uarantee
for Saudi Arabian 4iyal $.>> lac 1vt.to tk 88.5( lac #approx.) against $>: our bank ;4
coverage favouring our Saudi 3orrespondent -ank Al -ilad, Eeddah,Jsa for providing
corresponding - ;or &(> days favouring ?AE 40" 30. for mrah Services
,Eeddah,Saudia Arabia on Account of Gs.columbia Travels International.
.
Bank Guarantee !itfalls
.
These are some common pitfalls which can easily cause problems when applying for or
accepting bank guarantees
.
3orrect -eneficiary etails F It sounds easy enough to get right, but if the details on the bank
guarantee do not match the beneficiary+s actual details, then the bank guarantee may be void.
3orrect ate F -ank guarantees only come into effect at a certain date, and they also have expiry
dates. It should be ensured that there is a reasonable period of time in which one can draw on the
bank guarantee, if someone are receiving one, or that the seller will have enough time to draw on
the bank guarantee, if someone are sending one. .
3orrect 3ontract etails F The contract which the bank guarantee refers to will be referenced in
the bank guarantee. It should be ensured that the details provided on the bank guarantee match
the contract. 1ssentially, we must check and double check that all details listed on the bank
guarantee are correct, otherwise the bank guarantee could have no value whatsoever.
!re#enting Bank Guarantee Fraud
The prospect of bank guarantee fraud is a scary one, because it potentially involves the loss of
millions of dollars. 6owever, the good news is that you can keep yourself safe by following
some common sense procedures when it comes time to obtaining a bank guarantee, or accepting
one.
;irst, a warning. If you are given a bank guarantee that you suspect is false, it is not a good idea
to take it to a bank to have it checked. oing so is rather akin to walking into a police station
with a suitcase full of cocaine to ask them if it is the real thing. Gany people have been arrested
in banks after simply trying to authenticate fraudulent bank guarantees. If you suspect there is a
problem with a bank guarantee, have your attorney deal with the issue.
@isted below are some common forms of bank guarantee fraud that have been encountered in the
sugar trading industry.
Since there is a lack of legislative regulation for demand guarantee in -angladesh, and because
of their highly international in nature, the available international rules,such as the 4,make it
a natural choice for local banks to use. It has ever been accepted by the world bank as the rules
for its standard guarantees. At present -angladesh banks are not generally issuing demand
guarantees sub2ect to the 4. It is recommended that banks investigate the possibility of
making the 4 part of their current practice. As I33 is currently in the process of reviewing
the existing 4, banks should start to appoint the appropriate teams so that they can study the
revised 4 when it becomes available.This will enable banks to determine whether or not
they should issue demand guarantees sub2ect to it.It will also place them in a position to
ade/uately advise their customers on whether they should issue or accept demand guarantees that
are made sub2ect to it.
The 4 govern demand guarantees and IS"%5 govern standby letters of 3redit. Although the
demand guarantee and the standby letter of credit are essentially same in character, they are still
different products, and therefore they need different rules to apply them. It is recommended that
the banks use the international rules of the I33. -y incorporating the 4 into the demand
guarantees and the IS"%5 into standby letters of credit, it will be easier for banks, lawyers and
courts to interpret them and to learn about their exact use, as they will provide them with some
form of international standard to which they can compared.
