GUARANTEE

GUARANTEE
Section 126 of Indian Contract

Act,1872 defines guarantee:
“A contract to perform the promise or discharge the liability of a third person in
case of his default.”

GUARANTEE PARTIES INVOLVED
The parties to the contract of guarantee are:
a. Applicant : The principal debtor : The person at
whose request the guarantee is executed.
b. Beneficiary : The person to whom the guarantee is
given and who can enforce it in case of default.
c. Guarantor : The person who undertakes to
discharge the obligations of the applicant in case of
his default.
Thus, a contract of guarantee is a collateral contract,
consequential to a main contract between the
applicant and the beneficiary.

GUARANTEE TYPES
Guarantee may be classified by nature as
under:
1. Inland Guarantee
and
Foreign Guarantee.
2. Financial Guarantee
and
Performance Guarantee.

BANK GUARANTEE
Guarantee issued must be unconditional and for:
Definite period
Definite amount
Definite purpose
Guarantee may be based on location of beneficiary,
Purpose and Currency:
Inland: Issued with in India in favour of beneficiary
located in India for any contract or purpose
originating within India.
Foreign: Issued in India in favour of beneficiary located
in any other country in Foreign Currency.


VARIOUS TYPES OF BANK
GUARANTEES
As per nature of contract, Bank
Guarantees are classified in three types;
1) Financial Guarantee
2) Performance Guarantee
3) Deferred Payment Guarantee


FINANCIAL GUARANTEE
 Financial Guarantees are issued by bank on behalf of
customer’s requirement to deposit a cash security or
earnest money.
 Most Government department insist that before contract
is awarded to contractor, insist on a Earnest Money
Deposit.
 Issued in respect of Excise / Custom duties and Octroi
under dispute etc.
 Issued in respect liabilities towards tax, excise duties,
custom duties etc. to Govt. authorities in relation of
specific transaction;
 Issued for covering payments for supplies/services
favouring Oil Companies, SAIL, Railways etc.


PERFORMANCE
GUARANTEE Performance Guarantees are issued by the
bank on behalf of its customer whereby the
bank assure a third party, that the customer
will perform the contract as per condition
stipulated in the contract.
These are issued on behalf of customer, who
enters into contracts to do certain things on
or before a given date.
It involves a contractual obligation.



DEFERRED PAYMENT GUARANTEES
It is issued in favour of suppliers to guarantee
payment of installments for capital goods
purchased on deferred payment basis.
It required when goods or machinery are
purchase on long term credit and payment is
made through cheque or bills of different dates.
Bank issue guarantee of payment of
installments on due date, in event of default by
Fbouryeexra.mple: Rs. 50 Lacs is cost of Machinery. Repayable
in 5 yearly installments. Default in payment by the buyer.


GUARANTEE EXCLUSIONS
• Guarantees in favour of shipping
companies to obtain delivery of
goods in the absence of Bills of
Lading should not be issued unless
the import bills of the customer are
routed through the Branch and
adequate margin is taken for issue of
the guarantee.

GUARANTEE EXCLUSIONS
• Wherever specific sanction is not
available, Branches should obtain
prior approval from Head Office
before issuing any guarantee where
Foreign Exchange is involved.
• Partly secured guarantee involving
excise or disputed tax payment
should not be issued without prior
permission of Head office


GUARANTEE ONEROUS CLAUSE
Any provision in the guarantee which is likely
to give rise to further pecuniary liability like
interest or liability which is unlimited in terms
of money as well as validity period is considered
as an ONEROUS CLAUSE:
Auto Renewal / Extension.
Jurisdiction clause in different places.
Where time limit is specified for payment say
24 hours, 48 hours etc.
Payment of interest on invoked amount.


DELEGATION OF POWERS
Delegation provides full powers at all levels to
sanction issue of guarantees for periods up to 3
years in case of guarantees fully secured by
cash margin or term deposit or counter
guarantee of other Banks/FIs.
Restrictive powers for issue of guarantees not
fully secured for periods up to 3 years
provided there is no onerous clause in the
guarantee.