Bank guarantee

What legal forms can a bank guarantee take?

Answer: Sureties (simple or joint and several liability), guarantees, standby letters of credit, confirmed payment orders.

Is it true that, as the beneficiary under a guarantee payable on first demand as per the Swiss Code of Obligations, I can call upon the guarantor up to four weeks after the expiry date?

Answer: The provisions of the Swiss Code of Obligations relate to sureties as a legal form and not to guarantees. Claims under a guarantee must be submitted to the guarantor within the timeframe stipulated in the text of the guarantee.

What is the difference between a guarantee and a surety?

Answer: A guarantee is abstract by nature. In other words, it is separate from the underlying transaction. A surety, on the other hand, is accessory, meaning that it is linked to the underlying transaction. As a result, in contrast to guarantees payable on first demand, claims under a surety can be contested by both the principal and the surety (the bank).

Why are guarantees usually chosen in preference over sureties in international business?

Answer: When it comes to international business, a guarantee offers the following advantages:

  • it ensures the prompt enforcement of any claims

  • the beneficiary needs not to concern himself with the Swiss Code of Obligations

In the case of an indirect guarantee, who decides whether the claim made by the beneficiary is in accordance with the terms and conditions of the guarantee and should be honoured?

Answer: The decision as to whether a claim complies with the requirements of the guarantee and whether or not payment should be made lies solely with the mandated (foreign) bank.

Who do I contact to find out about the cost of a bank guarantee?

Answer: Your client advisor can give you that information. Depending on the type of transaction, he or she will also consult the relevant guarantee specialist where necessary.

Why does a payment guarantee cost more than a performance bond?

Answer: With a payment guarantee, credit security guarantee or indeed any guarantee which primarily covers a financial payment (in the underlying transaction) as opposed to performance in the sense of the fulfilment of a delivery obligation or a goods-related guarantee, we as a bank incur far higher capital adequacy costs (Swiss Federal Banking Commission regulations!) among other things.

Can a guarantee be terminated?

Answer: No, not unless the guarantee contains a clause to that effect.

Can a guarantee be cancelled prior to expiry if the guarantor has retained the original document?

Answer: No. A guarantee is not a security paper (such as a share or a bond, for instance). In order to cancel a guarantee prior to expiry, the guarantor would also require some form of evidence that the beneficiary had surrendered the original guarantee, e.g. a covering letter from the beneficiary stating that the guarantee had lapsed or was no longer required. Equally, a duly signed, legally valid letter of discharge from the beneficiary will normally be sufficient for the purposes of cancellation prior to maturity. In this instance, it is not essential for the original document to be surrendered.

Are guarantees negotiable?

Answer: No. Guarantees are not negotiable as they do not have the status of a security such as a share or a bond. Furthermore, a guarantee is a contingent and not a book-entry claim.

I urgently need a bid bond in Bangladesh tomorrow! How do I go about it and do I have enough time?

Answer: As a rule, bid bonds have to be issued by a local bank. If you have a local agent, they will be able to collect the bid bond issued by the local bank and attach the other tender documents.But do bear in mind that our order has to be issued with a reciprocal guarantee to the local bank and that the time difference and local practices may make it difficult for the guarantee to be issued on time. What's more, instant communication with developing countries cannot always be assured. Telephone and fax lines, for instance, may be down temporarily.

What options are open to exporters looking to cover themselves against the risk of a guarantee being misused?

Answer: The Swiss Export Risk Guarantee (SERV) scheme offers such protection against the misuse of guarantees, but only those in favour of public-sector buyers. In all other cases, we recommend that you look into whether an insurance provider such as Zurich Insurance, Hermes, Gerling or Lloyds would be willing to provide the relevant cover.

Despite any protection against the misuse of bid bonds, performance bonds and down-payment guarantees afforded by the SERV scheme, what risks are not covered?

Answer: The risk of the offer being withdrawn for reasons connected with the exporter. The risk of the exporter contravening the terms of the contract in some way (notice of defect, failure to comply with the delivery deadline, etc.). The risk of force majeure in Switzerland as a result of industrial action, fire, failure to obtain an export licence, etc.

When does a surety expire?

Answer:

  • On normal expiry
  • On binding discharge of the surety
  • On payment/assumption of the debt
  • On performance of the contract
  • On entry into force of the statute of limitations as per the Swiss Code of Obligations
  • On termination/cessation of the underlying relationship

What is the main aim of the ICC's Uniform Rules for Demand Guarantees (publication no. 458)?

Answer: These rules aim to ensure a uniform practice in the area of guarantees and to balance the interests of the respective parties. A bank which enters into an abstract payment obligation cannot simply withhold payment at the principal's request if the formal requirements of the claim have otherwise been met. The rules are an attempt to limit the risk of abuse which is intrinsic with a guarantee, by forcing the beneficiary to give a qualified declaration in case of a demand. The guidelines only apply if expressly stipulated in the guarantee agreement, Furthermore, it is possible to opt out specific provisions.

What is the main thrust of the ICC 458 guidelines?

Answer: The guidelines stipulate that guarantees be drawn up in such a way that claims can only be made on the basis of a duly certified declaration by the beneficiary. The beneficiary is required to confirm not only that the contract has been breached, but in what respect the contractual obligations have been contravened or have not been complied with.

What are the main advantages and disadvantages of a guarantee governed by the ICC 458 guidelines from the point of view of the principal and the beneficiary?

Answer:
Advantages for the principal:

  • A common code of practice (binding regulations)

  • Less risk of abuse thanks to the requirement for a duly certified declaration (default information)

Disadvantages for the principal:

  • A knowledge of the guidelines (ICC 458) is necessary

Advantages for the beneficiary:

  • A common code of practice (binding regulations)

Disadvantages for the beneficiary:

  • Unlike a normal guarantee - i.e. one which is not governed by the ICC guidelines in question - such a guarantee can only be invoked on presentation of a duly certified declaration. The beneficiary is required to confirm that the contract has been breached and specify the ways in which the applicable contractual obligations have not been met.

  • A knowledge of the guidelines (ICC 458) is necessary.

What is the purpose of a standby letter of credit?

Answer: Unlike a documentary credit (L/C or documentary L/C), a standby letter of credit functions as a guarantee (default status). The standby L/C is only called in if payment and/or performance under the underlying transaction is not effected on time.

What guidelines normally govern standby letters of credit? What are the main problems in this connection in practice?

Answer: In practice, standby letters of credit are generally subject to the same ICC guidelines as documentary credits, namely the Uniform Customs and Practice for Documentary Credits, ICC publication no. 600 (UCP 600). As such, as with documentary credits, the provisions of Articles 18 (invoice), 19-27 (transport documents), 28 (insurance) and 14 (presentation period) in particular apply. The application of Article 14 means that documents comprising of originals of transport documents must be presented no later than 21 days after the date of shipment, even if the documents are presented before the date on which the standby letter of credit expires. Should the standby L/C (UCP 600) require an original of a shipping document in addition to the actual drawing document (default declaration), Article 14 should, therefore, be opted out.

How has the ICC responded to the problem of a certain incompatibility between UCP 600 and standby letters of credit?

Antwort: With this in mind, the ICC introduced the International Standby Practices (ISP 98) with effect from 1 January 1999. In addition to various differences from UCP 600, designed to reflect the guarantee function of the transaction (in contrast to the payment function of a normal documentary credit), Articles 18-28 as well as Article 14 of the UCP 600 in particular have been dropped. Any copies of documents such as commercial invoices, transport or insurance documents which may be required are therefore checked solely to ensure that they comply with the terms and conditions of the standby letter of credit, but not for consistency with each other.

Are the inspection periods for presented documents (claims) the same for standby letters of credit under ISP 98 and UCP 600?

Answer: No. Whereas UCP 600 provides for a maximum of five bank working days for documents to be checked or for non-payment of a claim/presentation of the documents to be notified, ISP 98 simply provides for notification within a reasonable period of time. Three bank working days is considered acceptable. If notification is not forthcoming until seven or more bank working days after receipt of the documents, this is deemed to be too late. The judgement as to whether notification is received on time or not (e.g. within four to six bank working days) should depend not least on the number of documents to be checked. In practice, therefore, it is advisable not to exceed three bank working days.

Are the applicable banking regulations the same for standby letters of credit under ISP 98 and UCP 600 when it comes to the place of validity and any extensions to the paymentperiod as a result of the interruption of business due to force majeure or any other circumstances beyond the banks' control?

Answer: No! In contrast to the UCP 600 rules, which do not provide for any liability on the part of the banks, a standby letter of credit under ISP 98 will automatically be extended by a further 30 calendar days from the date on which the place of validity is re-established unless otherwise stipulated. The issuing bank can also change the place of validity to any other reasonable location. Any claims would then have to be lodged at this location.

Does it matter what language the documents required under a standby letter of credit subject to ISP 98 are written in?

Answer: Yes, all the documents required under a standby L/C must be in the same language as the letter of credit itself.