What are the different types of Guarantees?

What are the different types of Guarantees?

Direct Guarantees

By far the most common way to issue a Guarantee, as these are issued by the Guarantor directly the Beneficiary, who must present demand for payment direct to the Guarantor. This demand can be issued by letter, telecommunications, or via SWIFT. In this instance, the Guarantee is issued by the Applicant’s bank and forwarded to the Beneficiary through its bankers.

The advising party is not obligated to the Beneficiary under the Guarantee – it merely acts as a kind of ‘post office’.

Indirect Guarantees

The Beneficiary receives a bond issued by a bank in its own country. This is usually its own bank, although it can be originally issued by the Applicant. In this case, it is called a Counter Guarantee. In practice, the Applicant’s bank issues the Counter Guarantee to the Beneficiary’s bank and instructs it to issue its own Guarantee to the Beneficiary.

A Counter Guarantee may be defined as:

“An undertaking given by the counter-Guarantor to another party which names that party as the Beneficiary to procure the issue by that other party of a local guarantee to be issued to the Beneficiary in the underlying contract/relationship.”

These separate and distinct Guarantees each provide payment upon the presentation of a complying demand. If the demand is to be made under a local Guarantee, the Guarantor will present its demand under the Counter Guarantee. This is common practice in many Middle Eastern countries.

In this case, the Counter Guarantor is obligated to the Guarantor and the Guarantor is obligated to the Beneficiary. The Counter Guarantor undertakes to reimburse the Guarantor should a complying demand be made under the Guarantee.