What is a Bank Guarantee?

A Bank Guarantee is an instrument that can be transferred from one bank to another and is utilised as security to underpin a financial transaction where the beneficiary of the Bank Guarantee fails in their obligation to repay a loan. There are varying types of Bank Guarantee, usually referred to as direct or indirect Bank Guarantees, and are issued and transferred from all major financial jurisdictions. The bank that issues the Bank Guarantee is the Issuing Bank and their client who instructs them is known as the Provider or Applicant. The Bank Guarantee is transferred to the Receiving Bank for the account of their client referred to as the Beneficiary.

It is common knowledge that a Bank Guarantee (BG) differs from a Standby Letter of Credit (SBLC) and a Documentary Letter of Credit (DLC). However, some confusion has arisen in the past concerning claims for payment against these instruments where mistakenly it has been thought that the payment methods are similar. Whereas a Bank Guarantee is a security for payment a Standby Letter of Credit and a Documentary Letter of Credit are a means of payment.

A Bank Guarantee is legally bound by the laws of the country where the issuing bank is domiciled. So, for example, if the issuing bank is domiciled in Paris, the Bank Guarantee is legally bound by French law. It is pertinent to note that each Bank Guarantee must be examined individually as financial legalities differ from country to country.