Guarantees issued by banks have a wide range of applications but are designated direct or indirect guarantees. A direct guarantee is where a Bank Guarantee is transferred direct from one bank to another bank. An indirect guarantee is where the Issuing Bank instructs their correspondent bank to issue a Bank Guarantee on their behalf. As security the correspondent bank may ask for a counter guarantee from the issuing bank or block the equivalent in value on the issuing bank’s account. Whilst there are varying types of guarantee it is important to note the difference between a Bank Guarantee and a Performance Guarantee or Surety Bond. A Bank Guarantee is payable on DEMAND and a Performance Guarantee or Surety Bond, being a type of insurance, is only payable on receipt of proof that certain criteria have been met.

The availability of new credit in today’s world is proving to be particularly difficult to find. However, using a Collateral Transfer Facility that utilises Demand Bank Guarantees, companies are finding it a lot easier to raise loans or credit lines, commonly alluded to as Credit Facility Guarantees. Under ICC Uniform Rules for Demand Guarantees, (URDG 760), the Demand Guarantee has an explicit format and is payable on FIRST DEMAND.

A popular form of security is a direct or indirect Bank Guarantee or Letter of Guarantee. The Bank Guarantee, which is transferred by one bank to another bank, is used by the receiving bank to act as security in the event that the beneficiary of the Bank Guarantee does not repay an obligation. A Bank Guarantee can take many different forms, and the mechanics for transferring a Bank Guarantee is actually quite simple. A client (The Provider or Applicant) instructs their bank (The Issuing Bank), to transfer a Bank Guarantee to another bank, (The receiving Bank) in favour of their client (The Beneficiary).

Three very popular banking instruments are the Bank Guarantee (BG), the Standby Letter of Credit (SBLC), and the Documentary Letter of Credit (DLC). However, there has been some confusion regarding reimbursement against these banking instruments. The underlying rules and regulations regarding these instruments are, the Standby and Documentary Letters of Credit are a MEANS of payment, whereas a Bank Guarantee is a security for a payment and therefore carry totally different instructions regarding reimbursement.

Laws governing Bank Guarantees differ from one jurisdiction to another and therefore it is the laws of the country in which the issuing bank is domiciled that govern each Bank Guarantee. It is therefore prudent to examine the legal position of each Bank Guarantee on a separate basis.

Although Bank Guarantees vary in their type and application, there are two types of underlying guarantee a direct and indirect guarantee. As the name implies, a Direct Bank Guarantee is where one bank transfers a Bank Guarantee direct to another bank. An Indirect Bank Guarantee, is where a correspondent bank receives an instruction from their client the Issuing Bank, to transfer on their behalf a Bank Guarantee to the beneficiary’s bank. As mentioned above there a many different forms of guarantee and it would be remiss not to point out the difference between a Bank Guarantee and a Surety Bond or Performance Guarantee. A Bank Guarantee is quite simply payable on DEMAND. A Performance Guarantee or Surety Bond are more complex and reflect insurance undertakings and demands for payment will only be met once certain criteria have been satisfied.

More and more companies are looking for new ways to raise credit lines, loans or capital injections, referred to as Credit Facility Guarantees, (See More Information). The Collateral Transfer Facility, utilising Demand Bank Guarantees, have made access to lines of credit much less cumbersome. Demand Bank Guarantees have specific wording and are payable on FIRST DEMAND, and are governed by ICC Uniform Rules for Demand Guarantees (URDG 760).