PERFORMANCE

GUARANTEE
GROUP 3

What is a guarantee
It is a simple and practical way of ensuring
that a business or its trading partner
receives compensation in the event of
breach of contract.
It is issued by a bank on behalf of its
customer, the Exporter, as financial
assurance to the Importer to be collected
in the event that the Exporter defaults on
certain specified contractual obligations.

Guarantees
Mechanics: How does a transaction involving a
Guarantee work?
During contract negotiations, the
Importer requests that the Exporter
provide a Guarantee securing an
aspect of the contract (e.g. bid,
advance payment). The Exporter
(Applicant) enlists its bank (Issuing
Bank) to issue the Guarantee in
favour of the Importer (Beneficiary)
for a specified amount and within a
stated time frame.
In the event of default by the
Exporter, the Importer would demand
against the Guarantee through the
Advising Bank.

2
Exporter/
Applicant

Applies for
Guarantee.

Issuing
Bank

1
Guarantee is sent
to a
correspondent
bank of the
Issuing Bank for
3
advice to the
Importer.

Contract
Negotiations

AAcorrespondent
correspondentbank
bankisisaaforeign
foreign
bank
with
which
the
Issuing
bank with which the IssuingBank
Bank
Importer/
has
established
a
relationship
where
has established a relationship where Beneficiar
secure
securetransactions
transactionsmay
maybe
beprocessed.
processed.

Advice of
the
Guarantee.

Advising
Bank

Who are the parties

The guarantee applicant
requesting the guarantee

the

party

The guarantor the bank that guarantees

that the agreed compensation amount will
be paid if the guarantee applicant fails to
meet its contractual obligations
The guarantee beneficiary the party in
favour of whom the guarantee is issued

What is a performance guarantee

A Performance Guarantee is issued by an
insurance company or bank to a contractor
to guarantee the full and due performance
of the contract according to the plans and
specifications.
It ensures that the importer receives an
agreed compensation if the exporter fails
to meet its obligations towards the
importer.

Continued......
A Performance Guarantee permits the Importer
to draw on the Guarantee if the Exporter fails
to perform according to the terms of the
contract.
For example, in the event that the Exporter is
unable to complete the contract as agreed
halfway through a project, the Importer is
compensated with the amount of the
Performance Guarantee. Such
failure of
performance may relate to delivery, function
or quality.

Characteristics and
Functions
A performance guarantee
is issued by a bank
behalf of its customer, the Exporter,
a financial assurance to the Importer
collected in the event that the Exporter
defaults on certain specified contractual
obligations

We

understand

that

you

have

entered

into

contract

with . . . . . . . . . for the supply of . . . . . . . . . and that in

accordance with the terms of that contract . . . . . must provide a
Bank Performance Guarantee for an amount of . . . . . . . . .
being . . . . .% of the value of the contract. Now, we . . . . . . . . . . . .
hereby guarantee payment to you on demand of up to . . . . . . . . .
(figures) . . . . . . . . . . . . . (words) in the event that ........... .fails to
fulfill the said contract, provided that your claim is received in
writing at this office accompanied by your signed statement
that . . . . . . . . . has failed to fulfill the contract. Such claim shall
be accepted as conclusive evidence that the amount claimed is
due to you under this guarantee. For the purpose of identification,
your request for payment must bear the confirmation of your
bankers that the signatories thereon are authorized so to sign.
This guarantee shall expire at close of banking hours at this office
on . . . . . . . . . And any claim hereunder must be received at this
office before expiry. After expiry this guarantee shall become null
and void whether returned to us for cancellation or not. Any

claim

or

ineffective.

statement
This

received

guarantee

may

after
not

expiry
be

shall

transferred

be
or

The performance guarantee is a relatively simple

instrumentandconsequentlytheICCrulesgoverningits
use are uncomplicated. Article 3 sets out the principal
detailsrequiredinaguaranteeandemphasizestheneed
toavoidexcessivedetail.Theguaranteeshouldstipulate:
theprincipal
thebeneficiary
theguarantor
theunderlyingtransaction
themaximumamountpayableand
currencyinwhichitispayabletheexpirydateor
expiry event the terms for demanding payment any
provisionforreductionoftheguaranteeamount.