 | Richard Ciemny is Vice-President, Director & Branch Manager of The First National Bank of Anthony, Wichita Branch. Richard has been in the banking profession for many years in the Wichita area. He has been an active member of the Kansas Bankers Association and the Community Bankers Association of Kansas. The First National Bank of Anthony, Wichita Branch, is located at 10111 W. 21st St. North. You may contact Richard at (316) 721-9000. |
Banking & Finance
2003-04-01 12:22:00
What is a bank guarantee?
: What does the term 'bank guarantee' mean?
ANSWER: A bank guarantee is a commercial instrument in the nature of a contract, intended between two parties, to secure compliance with the contract. It is an off-shoot of the main contract between two parties.In simple terms, a bank guarantee is defined as an accessory contract, whereby the promisor undertakes to be answerable to the promisee for the debt, default or miscarriage of another person, whose primary liability to the promisee must exist or be contemplated.The instances when a bank guarantee may be given are as follows:A bank guarantee may be given by a buyer to a seller as a guarantee for the future payment. A bank guarantee may be given by the contractor as a guarantee for any amount advanced. A bank guarantee (letter of credit), given by an importer to safeguard against governmental policy changes and as a guarantee of due payment.Since this guarantee is called a bank guarantee as it is provided by a bank or a financial institution.QUESTION: How do bank guarantees help in commercial contracts?ANSWER: Guarantees are important instruments used to minimize the risks that are involved in commercial contracts. For the enforcement of ordinary guarantees, the construed dependence of the guarantee on the main contract may lead to unnecessary disputes and litigation, arising from the main contract. These disputes may have a material effect on the guarantee, thereby blocking funds in litigation. Hence, there was a need for an innovative instrument which would enable the guarantee to serve its original purpose; namely, providing a form of security.The bank guarantee is one such innovative financial instrument whereby, if the beneficiary perceives that there has been a breach of contract by the other party, he can encash the guarantee and avail of the amount immediately, without having to undergo the hassles of litigation. Thus, the relevance of a bank guarantee achieves relevance.QUESTION: What is the difference between a bank guarantee and a usual guarantee?ANSWER: Following are some points of difference between a bank guarantee and a usual guarantee:A usual guarantee is governed by Sec. 126 of the Indian Contract Act, 1872. A bank guarantee is not directly governed by Sec. 126. An ordinary guarantee is a tri-partite (3 parties) agreement involving the surety, the debtor and the creditor. But a bank guarantee is a contract involving two parties i.e. the bank and the beneficiary. In an ordinary guarantee, the contract between the surety and the creditor arises as a subsidiary to the contract between the creditor and the principal debtor. The bank guarantee is independent of the main contract. In an ordinary guarantee, the inter se disputes between the debtor and the creditor have a material effect upon the surety's liability. However, the bank guarantee is independent of the disputes, arising ex contractu (arising out of the contract). An ordinary guarantee does not have any time limit before which the debt has to be claimed. Bank guarantees generally have a specific time within which they are functional.
