Bank guarantee

In Russian law, a bank guarantee is called an independent guarantee and is governed by the Civil Code. The guarantor, usually a bank, undertakes to pay the beneficiary the amount of the guarantee when the beneficiary makes a demand. The guarantor does not look into who is right in a dispute under the contract. It checks whether the demand complies with the terms of the guarantee.

Who is involved

• Principal: the party on whose behalf the guarantee is issued. For example, the supplier.
• Beneficiary: the recipient of the payout. For example, the buyer.
• Guarantor: the bank that takes on the obligation.

Types

In foreign trade, the most common are:

• advance payment guarantee: the buyer gets the prepayment back if there is no delivery;
• performance guarantee;
• payment guarantee: the seller gets the money if the buyer does not pay;
• customs guarantee for the payment of duties and taxes.

For international guarantees, the parties often choose the rules of the International Chamber of Commerce, URDG 758.

How it differs from a letter of credit

A letter of credit is a method of payment in itself: the bank pays when the seller has presented the documents. A guarantee works like insurance: a payout is needed only if something goes wrong.

What to watch for

The wording of the guarantee decides everything: the amount, the term, the conditions for a demand, the governing law. Missing the deadline for a demand means losing the right to the payout. A guarantee from a bank in another country is useful only if your bank can work with that bank. Issuing a guarantee costs money and requires checks on the principal.

A broker does not issue guarantees. At VEDmost, the money can be protected differently: on request, the roubles wait for execution in a special escrow account at a Russian bank and are released only upon execution, for an additional fee. More details on the Payment protection page.