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Bank Guarantees Explained

What is a Bank Guarantee?

A Bank Guarantee is an undertaking given by a bank, on behalf of a customer, to pay money to a nominated person (commonly referred to as the Beneficiary). It is a formal financial obligation or ‘promise to pay’ and is secured with cash or against the assets of the person giving the promise (commonly referred to as the Grantor).

It is not uncommon for contracts to involve a Bank Guarantee. For example, a Bank Guarantee may be used rather than a bond or deposit to secure a Tenant or a Purchaser's obligations to a Landlord or Vendor. Other typical relationships involving Bank Guarantees include development and joint venture agreements and larger service agreements.

Why use a Bank Guarantee?

A Bank Guarantee can provide security for a Beneficiary with a valid claim for payment. For example in a contract for services, the provider of services may seek to have a Bank Guarantee in place to ensure they will be paid for their labour.

Enforcing a Bank Guarantee

A Bank Guarantee is governed by the agreement between the parties. Accordingly, it is important the contract clearly states the terms of the Bank Guarantee.

Broadly speaking, a Bank Guarantee is payable by the bank on demand by the Beneficiary. Recent legal developments suggest that a Beneficiary should act ‘‘reasonably’’ when enforcing a Bank Guarantee.

Important Tips

  • Keep the original Bank Guarantee in a secure location. A bank may not honour the guarantee if the original is not supplied;
  • Check expiry dates of the Bank Guarantee;
  • Become familiar with the terms and conditions of the relevant banking institution; and
  • Ensure your contract reflects the terms of the Bank Guarantee, clearly stating the intention of the parties such as who can ‘‘call’’ on the guarantee and in what circumstances.

If you are asked to provide a Bank Guarantee or think you are involved in a contract where you should ask for one, we can assist you. Please contact us on 03 6332 9353 or complete our simple form that can be found at http://www.cormistonlegal.com.au/contact

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