|
Letter Of Guarantee
Letter of guarantee (also known as a bank guarantee) may be defined as the
irrevocable obligation of a bank (“ issuing bank”)
to pay a sum of money to a third party (“ the
beneficiary”) in the event of non-performance
under a contract by the customer of the bank (“the applicant”). The letter of guarantee issued by
the bank is valid only for a period of time as
specified in the letter of guarantee.
A guarantee is a separate obligation independent
of the principal debt of the contractual
relationship between the applicant and the
beneficiary. Under a guarantee, the issuing bank
has to pay on first demand provided the terms and
conditions contained in the guarantee are
fulfilled.
Guarantees are, as a rule subject to the laws of
the country of the issuing bank.
Letters of guarantee fall under two main
categories:
4
General Guarantees Letters
4
Specific Guarantees
Top
General Guarantees
Letters
-
Bid bond
(Tender bond) is issued in connected with public
tenders. If the applicant participates in such a
tender, he must submit a bid bond together with
the offer. Bid bonds secure the payment of the
guarantee amount in the event of withdrawal of
the offer before its expiry date or if the
contract, after being awarded, is not accepted
by the applicant or if the bid bond, after the
contract is awarded is not replaced by a
performance bond.
Guarantee amount: As a rule 1-5% of the
amount of the offer.
Period of validity: Till the signing of
the contract or the issue of a performance Bond
(usually between three and six months)
-
Performance
bond: the issuing bank undertakes to pay the
beneficiary the guaranteed amount, in the event
the applicant does not meet or sufficiently
fulfills his contractual obligations.
Performance bonds are issued by an issuing bank,
as guarantor, on behalf of the applicant who has
entered a contract to supply goods or perform
other services and the issuing bank guarantees
compensation in terms of money in the event of
non-performance of such contracts.
Guarantee amount: usually 5-10% of the
contract sum.
Period of validity: The bond remains
valid for the full amount until complete
performance of the contract. Where contracts for
work and materials are concerned, this generally
includes the warranty period for the contract
functioning of a machines or system. The period
of validity of performance bonds may be two
years or longer.
-
Advance
payment guarantee is issued where the
applicant receives an advance payment in respect
of the work to be performed or goods supplied
under a contract undertaken by him and the
issuing bank, as guarantor, undertakes to repay
the amount of advance payment if the work
covered thereby is not duly and properly
performed or the goods not supplied according to
contract.
Reductions: In contrast to the
performance bond, the advance payment guarantee
should stipulate that the guaranteed amount be
automatically reduced in proportion to the value
of any part shipments made. A utilization of the
related documentary credit is usually recognized
as evidence of delivery.
Period of Validity: The validity of the
advance payment guarantee should be limited in
such a way that it expires on the date the
covered delivery is made.
Entry into force: The Advance payment
guarantee must usually be issued before
prepayment is made, but should enter into force
only after receipt of such payment. Therefore a
clause to this effect should be included in the
guarantee whenever possible
-
Payment
/Financial guarantees are issued by the issuing
bank to suppliers of goods or plant and
machinery, on deferred payment terms to
guarantee payment of the installments and
interest as they become due.
OR
Mainly issued for the securing of payments on an
“open account” basis but it may be used for
several purposes. For instance, the bank
guarantee can be issued as security for the full
payment of the delivery of goods or services.
The payment of a claim under the guarantee is
usually made against the beneficiary’s written
declaration that he has delivered the goods but
has not received payment at maturity.
Top
Specific guarantees include:
4
Shipping guarantees: Are required to enable
customers to obtain goods before the arrival of
the documents of title and are issued to the
shipping companies by the Bank against an
undertaking to forward the bills of lading when
they are received.
4
Air Way Bill guarantees: Are required to
enable customers to obtain goods before the
arrival of the documents of title and are issued
to the Oman Aviation by the Bank against an
undertaking to forward the Air Way Bills when
they are received.
Within the above categories, guarantee may be
further sub-divided as follows:
4
Direct L/G: This may be defined as a bank
guarantee issued by BankMuscat SAOG in favour of
the beneficiary as per the request of the
applicant.
4
Indirect L/G: This may be defined as a bank
guarantee under which BankMuscat SAOG instructs
and requests its correspondent Bank to issue a
bank guarantee in favour of the beneficiary as
per the request of the applicant.
For further assistance please mail to:
tradefinance@bankmuscat.com
Top
Back
|
