Introduction:
Bank guarantees have several functions which vary according to the point of reference. Their paramount functions is the furnishing of security for either financial obligations namely payment of the agreed amounts or non financial obligations namely payment of damages. This purpose is achieved by assuring the creditor/beneficiary financial compensation in the event of default by the principal debtor / account party.
By agreeing to issue a guarantee the bank assumes an obligation of its own to the beneficiary, but for the risk and account of the principal debtor. Should the bank be obliged to effect payment, it is entitled to immediate recourse against the principal debtor. The bank thus, accepts credit risk, which is ordinarily limited by requiring security for reimbursement, and it does not act as an insurer.
Benefits
The benefit for beneficiary of a bank guarantee is that he receives immediate payment when he is of the opinion that the principal debtor defaulted, without the need of having to establish his case first and regardless of the account party’s objections. It is the precise purpose of the of a bank guarantee to put the beneficiary in possession of the funds pending the final resolution of their dispute.
A bank guarantee enables the beneficiary to put pressure on the principal debtor account party to complete the contract to his satisfaction by threatening to call the bank guarantee. This constant threat certainly constitutes a forceful pressure for the principal debtor to perform his obligations promptly and satisfactorily.
A Bank guarantee also protects the beneficiary against the risks of advance and interim payments to the supplier. Another function of the bank guarantee i ...