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The Rules and Regulations Governing Bank Guarantees

History 

Before concerning ourselves with the rules behind Bank Guarantees we need to discuss a bit of history. The International Chamber of Commerce (ICC) was set up in 1919. Its modus operandi was to promote trade and investment. Today, it has over 45 million members in over 100 countries, with the headquarters located in Paris. 

The ICC is responsible for the rules and regulations for business that is conducted on an national and global basis. All members, which include all major and minor banks adhere to these rules. Therefore, the ICC provides rules and regulations for all Bank Guarantees. 

However, the interpretation of these rules may differ from one country to another. All Bank Guarantees therefore are subject to the laws pertaining to the jurisdiction of the issuing bank. For example, take a Bank Guarantee issued in Zurich with a beneficiary in Frankfurt. This Bank Guarantee will be governed by the laws of Switzerland. 

Rules and Regulations 

There used to be different rules and regulations pertaining to different classes of Bank Guarantees. Today this is not the case. 

Demand Bank Guarantees – are governed by ICC Uniform Rules for Demand Guarantees, (URDG 758). They are specifically issued for monetisation purposes. Rule 758 ensures all Demand Bank Guarantees contain precise and specific wording. This will ensure that all lenders understand that this guarantee can be monetised. Rule 758 further ensures this guarantee is payable of First Demand. 

Bank Guarantees are split into two separate classifications, Financial Guarantees and Performance Guarantees. 

Financial Guarantees 

A Financial Guarantee is a promise by the issuing bank to pay the beneficiary should the applicant renege on their financial commitment. 

A Demand Bank Guarantee can be used for straight monetisation purposes. They may for example be utilised to finance a project. They can be presented to a lender for immediate monetisation. 

There are other examples of Demand Bank Guarantees. In these cases, they are not for immediate monetisation. They are financial guarantees for payment at a future date. If a specific financial promise is not met then a claim will be paid immediately. These are financial guarantees and are represented by Guarantee of Payment, Advance Payment Guarantee and Customs Guarantee. These guarantees are treated as demand guarantees. They are therefore governed by ICC Uniform Rules for Demand Guarantees, (URDG 758). 

Performance Guarantees 

Performance guarantees are different to financial guarantees. The issuing bank will cover losses if specific agreements in contracts are not met by the applicant. 

They are mainly utilised in construction contracts. If a hotel build overruns on time a performance guarantee will cover any losses. If a build does not pass quality control any losses are covered by a performance guarantee.  

Also, non-construction performance guarantees may be used. For example, if perishable goods e.g. flowers or food are delivered late. If they cannot be used a performance bond will cover the loss. Examples of performance guarantees are Contract Execution Guarantee, Warranty Execution Guarantee and Tender Guarantee. 

Interestingly the rules covering Performance Guarantees now fall under ICC Uniform Rules for Demand Guarantees, (URDG 758). There were too many instances of claims being taken to court. If the beneficiary made a claim under the guarantee, the applicant (the construction company for example) would fight the claim in court. Today, contracts are much tighter and any claims are paid on demand.  

It is interesting that in today’s world, both financial and performance guarantees are governed by ICC Uniform Rules for Demand Guarantees, (URDG 758). Whilst a performance guarantee is not a financial guarantee, in essence it is when a demand for payment is made.  

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