Guarantees issued by banks

When a bank issues a guarantee on your behalf, it guarantees the performance of an obligation assumed by you, and will cover its payment in the event that you default. The bank incurs a risk when it issues a guarantee on your behalf, so that normally you will have to pay a fee while the guarantee is in force. In addition, you need to consider carefully your rights and obligations, as specified in the text of the guarantee.

Thus, before you sign the guarantee, it is essential that the bank should advise you of, among others, the following matters:

  • The identification of the guarantor (your bank), the obligor (you) and the beneficiary (who receives the money if you default).

  • The guaranteed obligation, so that there is no doubt about what may give rise to enforcement of the guarantee.

  • When the guarantee is for a fixed period, whether this is an expiry period (meaning that the guarantee ends at a specific time, after which it cannot be enforced) or whether this is a guarantee period (after which the guarantee continues to be enforceable with respect to the obligations arising during the guarantee period).

  • The requirements for the beneficiary to be able to enforce the guarantee or demand that it be honoured: your bank may only ask for what is specified in the guarantee document.

  • The conditions for its termination, with special mention of the requirements that may be made if the original document has been lost or destroyed.

    The fees and expenses to be paid by the obligor. In this respect, you should be aware that charging a fee for a risk must always be justified. Thus, in the event that there is still an exposure for your bank when the fixed period of the guarantee expires (i.e. when the fixed period is specified to be a guarantee period and not an expiry period), the charging of a fee for risk can be justified.

    However, when the exposure ceases to exist because, for example, the original document has been returned, an equivalent guarantee has been provided, the guaranteed obligations have been discharged, or the beneficiary has expressly waived the guarantee, the charging of a fee would be contrary to best financial practice.

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