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Guarantees and Surety Bonds
Find out more about the different types of guarantees and what they mean.
Types of Guarantees
Bid bonds are frequently demanded in connection with public invitations to tender. The purpose of the bid bond is to prevent companies from tendering bids but not accepting or executing the contract once it has been awarded to them. The buyer wishes to safeguard against the submission of frivolous or unqualified tenders.
To make a claim under this guarantee, the beneficiary is generally required to declare in writing that the bidder did not sign the relevant agreement within the defined time frame after being awarded the contract, and/or did not provide the required performance bond.
The performance bond serves as collateral for any costs incurred by the buyer if services or goods are not provided promptly or as contractually agreed.
To make a claim under this guarantee, the beneficiary is generally required to declare in writing that the seller did not fulfill his or her contractual obligations properly or on time.
Advance Payment Guarantee
The advance payment guarantee serves as collateral for the reimbursement of an advance payment made by the buyer in the event the seller does not supply the ordered goods at all or as contractually agreed.
To make a claim under this guarantee, the beneficiary is generally required to declare in writing that the seller did not fulfill his or her contractual obligations properly.
The warranty bond serves as collateral to ensure that ordered goods are delivered as promised/agreed.
To make a claim under this guarantee, the beneficiary is generally required to declare in writing that the exporter did not fulfill his or her warranty obligations as contractually agreed.
Letter of Indemnity (LOI)
Transportation documents known as bills of lading can be lost or delayed in the mail. However, a carrier may be liable for damages if it delivers a consignment before receiving the original bill of lading. The damages covered by the guarantee can arise if the presenter of the bills of lading demands that goods be handed over that have already been delivered to a third party in return for the provision of a bank guarantee. This can lead to court, legal, and other costs. Parties generally agree that the guarantee covers between 100% and 200% of the value of the goods, thus securing the carrier against any costs.
Depending on the wording of the individual guarantee, asserting a claim generally requires that the beneficiary issue a written statement that the amount required by the guarantee serves to cover costs and/or claims for damages that have arisen as a result of the delivery of goods without presenting the original bills of lading.
The purpose of the payment guarantee is to assure the seller that the purchase price will be paid on the agreed date. A payment guarantee can be issued as an alternative to a letter of credit. However, it must be remembered that a payment guarantee does not offer the buyer the same level of security as a documentary credit. The documents required under a bank guarantee are merely checked against the details given in the guarantee itself, and not to the same extent as with a letter of credit.
To make a claim under this guarantee, the beneficiary is generally required to declare in writing that he or she has fulfilled all of his or her contractual obligations but not received any payment as of the due date.
Credit Security Bond
The credit security bond serves as collateral for the repayment of a loan. A loan is often made subject to the provision of collateral by the borrower him or herself or a third party.
The beneficiary can generally assert claims under this guarantee by declaring in writing that the borrower has not repaid the loan upon maturity.
The rental guarantee serves as collateral for payments in connection with a rental agreement. It is either limited to the payment of rent installments or covers all payments owed in connection with the rental arrangement (e.g. repair costs following the termination of the rental arrangement).
To make a claim under this guarantee, the beneficiary is generally required to declare in writing that the tenant did not fulfill his or her contractual obligations under the rental agreement properly or at all.
Confirmed Payment Order
A confirmed payment order is an irrevocable obligation on the part of the bank to pay the beneficiary (i.e. the creditor) a specific amount on a specific date on behalf of the client.
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