International Bank Guarantees!

International Bank Guarantees:

International Bank Guarantees are availed for commercial and non-commercial purposes. Commercial guarantees are related to commercial contract between the supplier and the customer. Non-commercial guarantees are not directly related to commercial contracts but those are obligatory to be able to make a business. The demand guarantees may serve several purposes from indefinite range of payment, performance or non-performance obligation. Considering the structure, two types of guarantees are issued: direct and indirect. A demand guarantee, as defined by the URDG, involves a minimum of three parties: the principal; the guarantor and the beneficiary. Normally, the guarantor in the three-party structure is the principal’s bank and conducts business in the same country as the principal, while the beneficiary conducts business in a foreign country. Such three-party demand guarantees are known as ‘direct guarantees’, because the guarantee is issued directly by the principal’s bank and not by a local bank in the beneficiary’s country.

An indirect guarantee is a four-party demand guarantee, and there is an additional contract, that is, the contract between the instructing party (principal’s bank) and the guarantor (local bank in the country of the beneficiary). This contract has two aspects: one, the mandate from the instructing party to the guarantor regarding the instruction to issue the demand guarantee, which the guarantor as mandatory must comply with if he accepts the instruction; and two the counter-guarantee (or counter-indemnity) that the guarantor requires from the instructing party as a pre-condition for issuing the guarantee and that is distinct from the mandate. In indirect transactions the principal’s contract (mandate) is with the instructing party, not with the guarantor.