Unlike sureties, the contract of guarantee is not explicitly governed by law. As such, the following two positions are taken:

• Application of a contract to the charge of a third party (Art. 111 of the Swiss Code of Obligations)

• Presence of an accepted payment order (Art. 466 ff. of the Swiss Code of Obligations)

The following applies:
The contract of guarantee contains an abstract promise to perform and is a separate obligation independent of the underlying transaction. The guarantee is used to secure the performance of a specific obligation, irrespective of whether the performance is owed or not.

In principle, there are two types of guarantee:

• Direct guarantee: A direct guarantee occurs when the client instructs the bank to issue a guarantee directly in favour of the beneficiary.

• Indirect guarantee: With an indirect guarantee, a second bank is involved. This bank (usually a foreign bank with head office in the beneficiary's country of domicile) is requested by the initiating (Swiss) bank to issue a guarantee in return for the latter's counter-liability and counter-guarantee. In this case, the initiating (Swiss) bank will cover the guaranteeing (foreign) bank against the risk of any losses which it may incur in the event that a claim is made under the guarantee. It formally pledges to pay the amounts claimed under the guarantee upon first demand by the guaranteeing bank.

In making a claim under a bank guarantee, the beneficiary is exercising his or her right to demand payment of the guarantee amount (or part thereof). The bank checks whether the claim has been made in accordance with the conditions of the guarantee.

The beneficiary of the guarantee can normally assign his or her conditional claim for payment to a third party, or assignee (assignment of the proceeds but not the drawing right).

Reasons for expiry of direct guarantees:

• Ordinary expiry

• Payment of guarantee amount

• Premature cancellation

Reasons for expiry of indirect guarantees:

• Expiry date

• Expiry of counter-liability and -guarantee

• Payment of guarantee amount

Guarantees can, for identification and transmission purposes, be notified to the beneficiary via a third-party bank, normally in the beneficiary's country of domicile. This is primarily done electronically via SWIFT. The notifying bank does not enter into any direct guarantee obligations.