Every Guarantee/Surety Bond must be carefully examined to determine its legal significance and viability.

Guarantees and Surety Bonds

By issuing a guarantee/surety bond, the bank or the insurance acts as the guarantor for an obligation owed by the debtor. What these two instruments have in common is the bank’s/insurance’s promise to stand in for the payment of a debt or performance of service should the debtor fail to fulfill his or her contractual obligations. With this promise, the bank/insurance undertakes to pay a maximum specified amount when the conditions of the guarantee/surety bond are met.

Difference between a Guarantee and a Surety Bond

Guarantee

A guarantee is a distinct promise to pay and is not dependent on the principal obligation. The guarantor (the bank) may not raise any objections or defenses based on the underlying transaction. This means the guarantor pays upon the first written demand (claim) on the part of the beneficiary, i.e. on the presentation of the confirmation specified in the guarantee text and any required documents.

The standard wording used by banks in individual cases either complies with the local legal framework or the policies of the International Chamber of Commerce (ICC). 

Uniform Rules for Demand Guarantees and Bank Guarantees (URDG 758), and Uniform Customs and Practice for Documentary Credits and Standby Letter of Credit (UCP 600).

The URDG 758 and UCP 600, Their wording is based on the internationally recognized issued by the ICC. 

Surety Bond

A surety bond generally serves the sole purpose of protecting the claims of creditors. The surety bond is completely dependent on the principal debt relationship (accessoriness). The principal debtor may submit a written objection to the Surety issuer (bank or insurance) regarding the principal debt, stating the reasons for non-payment. The bank or insurance, in turn, is obliged to notify the beneficiary (the creditor) of any entitlement to appeal on the part of the principal debtor. In practice, this means that a bank or insurance acting as a surety will generally meet a claim from the creditor only if expressly authorized to do so by the principal.

Distinction in Practice

If accessoriness is evident, it is a surety bond. In the absence of accessoriness, a guarantee has been agreed upon. In contrast to a surety, the guarantor may not raise any objections or defenses based on another debt obligation.

Types of Surety Bond

Bid Bond

Bid bonds are frequently demanded in connection with public invitations to tender. The purpose of the bid bond is to prevent companies from tendering bids but not accepting or executing the contract once it has been awarded to them. The buyer wishes to safeguard against the submission of frivolous or unqualified tenders.

To make a claim under this guarantee, the beneficiary is generally required to declare in writing that the bidder did not sign the relevant agreement within the defined time frame after being awarded the contract, and/or did not provide the required performance bond.

Performance Bond

The performance bond serves as collateral for any costs incurred by the buyer if services or goods are not provided promptly or as contractually agreed.

To make a claim under this guarantee, the beneficiary is generally required to declare in writing that the seller did not fulfill his or her contractual obligations properly or on time.

Warranty Bond

The warranty bond serves as collateral to ensure that ordered goods are delivered as promised/agreed.

To make a claim under this guarantee, the beneficiary is generally required to declare in writing that the exporter did not fulfill his or her warranty obligations as contractually agreed.

Indemnity Bond

Transportation documents known as bills of lading can be lost or delayed in the mail. However, a carrier may be liable for damages if it delivers a consignment before receiving the original

bill of lading. The damages covered by the guarantee can arise if the presenter of the bills of lading demands that goods be handed over that have already been delivered to a third party in return for the provision of a bank guarantee. This can lead to court, legal, and other costs. Parties generally agree that the guarantee covers between 100% and 200% of the value of the goods, thus securing the carrier against any costs.

Depending on the wording of the individual guarantee, assert- ing a claim generally requires that the beneficiary issue a written statement that the amount required by the guarantee serves to cover costs and/or claims for damages that have arisen as a result of the delivery of goods without presenting the original bills of lading.

Credit Security Bond

The credit security bond serves as collateral for the repayment of a loan. A loan is often made subject to the provision of collateral by the borrower him or herself or a third party.

The beneficiary can generally assert claims under this guarantee by declaring in writing that the borrower has not repaid the loan upon maturity.

Advance Payment Guarantee/Bond

The advance payment guarantee serves as collateral for the reimbursement of an advance payment made by the buyer in the event the seller does not supply the ordered goods at all or as contractually agreed.

To make a claim under this guarantee, the beneficiary is generally required to declare in writing that the seller did not fulfill his or her contractual obligations properly.

Payment Guarantee/Bond

The purpose of the payment guarantee is to assure the seller that the purchase price will be paid on the agreed date. A payment guarantee can be issued as an alternative to a letter of credit. However, it must be remembered that a payment

guarantee does not offer the buyer the same level of security as a documentary credit. The documents required under a bank guarantee are merely checked against the details given in the guarantee itself, and not to the same extent as with a letter of credit.

To make a claim under this guarantee, the beneficiary is generally required to declare in writing that he or she has fulfilled all of his or her contractual obligations but not received any payment as of the due date.