Bank Guarantees on Behalf of Constituents
Definition:
As per Section 126 of the Contract Act, “A guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.”
Parties to Guarantee:
1. A person who gives a guarantee is called the ‘Surety.’
2. A person on whose behalf a guarantee is given is called the ‘Principal Debtor.’
3. A person/party in whose favor a guarantee is given is called the ‘Creditor and/or Beneficiary.’
Categories:
1. **Financial Guarantees:**
This type of Bank Guarantee is issued by the bank and furnished by the bank's customer in lieu of earnest money or the security to be deposited with the beneficiary of the Bank Guarantee for the performance of a contract. These guarantees are given in lieu of purely monetary obligations, e.g., the obligation of a contractor to make an earnest money deposit or guarantees given to the sales tax department, etc.
2. **Performance Guarantees:**
These types of guarantees are issued in respect of the performance of a contract or obligation. In such guarantees, in the event of non-performance or short performance of the obligation, the bank will be called upon to make good the monetary loss arising out of non-fulfillment of the guarantee obligation. The bank cannot perform the contract itself, but by this Bank Guarantee, the bank undertakes to reimburse the loss incurred by the beneficiary due to non-performance. The amount of loss to be reimbursed is ascertained at the time of default. The purpose of this Bank Guarantee is to fix the liability in the eventuality of default by the customer.
3. **Deferred Payment Guarantees:**
The bank, at the request of the customer, issues such a Bank Guarantee when he purchases goods or machinery from a creditor on the terms of payment after a specified time in a lump sum or in installments. The creditor requires such deferred payment terms to be guaranteed by the bankers of the principal debtor. Such a Bank Guarantee contains an undertaking by the banker that the deferred payment shall be made by the principal debtor, failing which the banker shall pay the amount to the creditor. These types of guarantees normally arise in the case of purchases of machinery or such capital equipment by industries or other parties. The manufacturer or its agent supplies the machinery against cash payment, say 10% to 15%, and obtains accepted bills for the balance amount by the purchaser's banker for a deferred period, say 3 to 5 years.