Structure of a bank guarantee

Preamble, guarantee clause and expiry clause

The following three points must form part of the bank guarantee:

1. Introduction: preamble :
The contractual relationship between the obligor in the underlying transaction and the beneficiary is set out in the preamble.

2. Main section: guarantee clause :
The guarantee clause is the core component of any guarantee. It obligates the guarantor (bank), on behalf of the principal obligor (bank client), to pay a sum of money to the beneficiary. Payment must be made upon first demand and is independent of the underlying transaction (abstractness).

The guarantee clause contains the following elements:

  • Name of the guarantor and the beneficiary

  • Guarantee amount (amount and currency)

  • Definition of circumstances under which bank can be required to pay.

3. Duration of obligation - expiry clausel:
The expiry clause governs the duration of the obligation entered into.

Other clauses

Reduction clause:
The reduction clause establishes the conditions under which the liability of the guarantor may be reduced.

"Our guarantee will be reduced by each payment made by us as a result of a claim."

Identification clause:
This clause ensures that the signatures appearing on a claim are known to the bank of the beneficiary.

"For the purpose of identification your request for payment must bear or be accompanied by a signed confirmation of one of our correspondent banks confirming that such bank has verified your signature(s) appearing on the said request for payment."

Effective clause:
This clause provides additional details on the duration of the obligation and is generally combined with the expiry clause.

"This guarantee shall enter into force on (...) and will remain valid until (...)" or "This guarantee shall enter into force upon receipt of the amount (...) for the account of company X at (bank) in XY and will remain valid until (...)"

Applicable law and jurisdiction

Unless otherwise agreed, bank guarantees are subject to the prevailing laws at the location of the issuing bank.
The above principle does not apply to indirect guarantees. Here the guarantee is not given directly to the beneficiary, but via a second bank authorized to do so - under the counter-liability and counter-guarantee of the first bank.
Nowadays, foreign banks stipulate that this counter-guarantee from the Swiss bank should also be subject to the law of the country in which the foreign bank is located. In this case, the law of the relevant country will also apply in respect of claims made by the foreign bank under the counter-guarantee of the Swiss bank.