In the case of a bank guarantee, the principal debtor is the buyer or applicant. Only if the applicant does not comply with his obligation will the bank guarantee be included in the transaction. Often, a late payment is not a trigger for a bank guarantee. On the other hand, in the case of the financial instrument called a letter of credit, the seller`s claim goes first to the bank. The employer may request to determine the creditworthiness of the bank issuing the bank guarantee under the contract (usually a credit score equal to at least level 3 of credit quality is required) or to choose a bank that the employer deems acceptable. It is common for these guarantees to be issued as non-transferable, which means that the transfer of these bank guarantees requires the consent of the parties and the issuing bank. Bank guarantees are generally not seen in U.S. banks because they instead offer standby letters of credit. Standby letters of credit are legal documents that banks use to guarantee payment of a certain amount of money to a seller if the buyer does not comply with the agreement. Interestingly, bank guarantee first appeared in the 1960s, especially as a guarantee to secure works contracts when awarding high-value works. Today, however, the application of the bank guarantee is extremely widespread in national and international trade. When it comes to higher-value transactions, a bank guarantee will be the most common type of collateral.
This involves withholding a small amount from the contractor`s claim (usually 10% of the claim) until a certain value of the warranty has accumulated (usually 5% of the contract amount). In the event of default by one party, the other party may invoke the bank guarantee by filing a claim with the lending institution and receiving the guaranteed amount. Unlike LOC, bank guarantees protect both parties involved. Although a guarantee for related parties is intended to work in the same way, this rarely happens in practice. Most often, this is because the interests of the related party are consistent with the interests of the contractor. A bank guarantee is valid for a certain amount and a predetermined period of time. It clearly indicates the circumstances in which the guarantee applies to the contract. A bank guarantee can be financial or performance-related. The value of a letter of patronage depends on what is said. For example, if the letter distorts the contractor`s financial situation, if it gives assurances on future matters without having a reasonable basis to do so, it could be held liable for a breach of the misleading and misleading codes of conduct of Australian consumer law.
The bank guarantee has its own advantages and disadvantages. The advantages are as follows: Depending on the risk that the employer is trying to obtain, there are the following types of guarantees: The construction contract is a type of service contract in which the contractor undertakes to carry out certain construction work or to construct a building in accordance with a particular project within the agreed deadlines, while the employer undertakes to pay him a certain price. The construction contract is one of the most complex contracts due to its economic value, the fact that the execution of construction work usually takes longer, as well as the complexity of the contractual work. Precisely because of these characteristics, this contract represents a high risk for both the contractor and the employer, because in the event of non-compliance with the obligation of the other party, each of the parties may suffer significant damage. Insurance bonds are similar to bank guarantees in that they are issued by a third-party financial institution (usually an insurance company) and are payable to the designated beneficiary upon request. The contractor`s risk is reflected in the possibility that the employer will not meet its obligation, i.e. not pay the agreed price after the completion of the work. On the other hand, the employer is exposed to the risk that the contractor does not perform the work at all or not in accordance with the regulations, the standards of the construction profession or the contract. These circumstances encourage the parties to consider different types of guarantees when signing the contract in order to protect their interests as much as possible, while anticipating the amount of potential harm they would suffer if the other party did not comply with the contractual obligations. The early repayment guarantee is a bank guarantee by which the bank undertakes to pay a certain amount of money to the guarantor, that is, to the employer, in the event that the guarantor claimant, i.e.
the entrepreneur, does not fulfil the contractual obligation for which he received the deposit. If the construction contract provides for the employer`s obligation to pay the contractor a certain amount as a down payment before the work begins, the employer will generally want to obtain such an amount. This type of bank guarantee allows the employer to reimburse the deposit in full in the event that the contractor does not comply at all with his obligation, if he does not perform it satisfactorily and if the deposit is not used for the purposes specified in the construction contract. Once the bank guarantee is created, it contains a certain amount and a fixed period of time. The guarantee will also clearly describe the bank`s liability and what it will do if a party defaults on a loan or does not provide a service. A bank guarantee can be claimed by the beneficiary at any time if the guarantee conditions are met, everything available to the bank to verify that all the conditions of the guarantee contract are met, and for this the bank should have a reasonable period of time to verify the documents.  The use of a bank guarantee depends on the terms of the guarantee. In the case of an unconditional guarantee, the beneficiary must carry out the bank guarantee regardless of whether the dispute is ongoing. Limits: – Banks set monetary limits up to which they would open guarantees and letters of credit at any time. Limits are set based on financial capacity, the extent to which the account has been satisfactorily managed by customers, the volume of transactions, the counterparty`s history with respect to these collateral, etc. Revised limits are regularly reinstated, as well as monetary limits on overdrafts, cash advances, etc.
 Margins – Banks set monetary ceilings up to which they would provide guarantees and open letters of credit at any time. The limits expire depending on the financial capacity, the extent to which the account has been satisfactorily managed by the customers, the volume of transactions, the customer`s history with regard to such a guarantee, etc. . .