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Group Members

Rashid aqeel Zohaib Ali Khalid Hussain Tausif Irfan Rashid Iftikhar Aroosha Shoib

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Outline of Presentation

Definition

Parties

Documentation of Guarantee

Types of Guarantees

Benifits of Guarantees

Comparison of Guarantee and Indemnity

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Aroosha Shoaib

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Gurantee

It is undertaking by a guarantor at the request of a party.

Gurantor in the event of default by the principal in fullfilment of his obligation to make payment to the benificiary within limits of specified sum of money within specified period of time.

Gurantees are generally given by Banks, Insurance companies and other guarantors.

Gurantees are usually limeted with respect to amount and time.

Gurantee is provided in shape of cash and other assets.

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Parties involve in Gurantee1. The Beneficiary2. The Principal3. Guarantor

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The Benificiary

He is the person who wants to receive a

compensatory sum of money incase the

tenderer fails to perform his obligations or

fails to perform the contract in accordance

with its terms or to secure repayment of

any payment or advances made by him if

the principal fails to perform the contract.

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The Principal

He is the party tendering the contract or He is

the party to whom the contract has been

awarded.

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Guarantor

Guarantor is a party who will meet his commitment in

terms of the guarantee, without becoming involved in

possible disputes between beneficiary and principal. 

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The Instructrating Party

The new rules recognise the existing widespread

practice whereby an instructing party may forward to the

guarantor instructions received from or on behalf of the

principal and counter-guarantee such instructions.

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The Instructrating Party

The new rules recognise the existing widespread

practice whereby an instructing party may forward to the

guarantor instructions received from or on behalf of the

principal and counter-guarantee such instructions.

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Who provide Guarantee

Guarantees are generally given by

banks, insurance companies and

other guarantors.

These guarantees are given in the form

of tender bonds, performance

guarantees and repayment guarantees

Why Gurantee Needed

1. To provide an assurance of the intention of the

principal to sign the contract.

2.To safegaurd against the principal failing to

meet his obligations under such a contract

3.To protect interest of a party awarding the

contract (beneficiary) in respect of the repayment

of payments and advances made by him in the

even of principal not fulfilling the contract terms.

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Rashid Aqeel

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Contracts of Gurantee

1st contract is in between Principal and Guarantor

2nd contract is in between Beneficiary and Guarantor

At the same time principal can get one letter of guarantee.

Essential elements of Gurantee1. Time must be defined

2. Amount of Gurantee is defined

3. Single beneficiary will be specified.

Amendement in GuranteeAmendement in guarantee can't be made

without prior permission of both beneficiary and Principal.

If it is amended without prior permission than it can be revocked by either party.

Expirey of Guarantee

Bank guarantee expires when – the validity

period has ended or the BG is returned for

cancellation or the entire amount of BG is

paid by the bank or the bank is released

from its obligations.

Documents for Gurantee

>Hypothecation / Pledge agreement for

collateral security formalities connected

with registration charges where necessary.

Vetting

Scruitiny/ Examine of documents for protection of legal interest is called vetting.

Contradidtory clause

No any clause must come which is agains the bank's benefits.

Counter Gurantee/Indemnity from Principal

Binding principal legaly to follow all terms and conditions established in Contract of gurantee.

If principal fail to follow these conditions than this contract of gurantee can be revocked and some penalty can be charged to applicant borrower/principal.

Revocation of Contract of Guarantee1. Contract of gurantee can be revocked in

performance of counter guarantee.

2. If contract is amended without consent of principal

and beneficiary than either party can revoc the

contract.

3. In case of miss representation by the principal in

process of generating guarantee.

4. In case of miss representation by the benefiaciary

in sales transaction.

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Rashid Iftikhar

MBK-11-27

Types of guarantee

1.Conditional and Unconditional

Guarantees.

2.Fixed and Fluctuating Guarantees.

3.Financial Guarantees.

4.Performance / Non-financial

guarantees.

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Cnoditional Gurantee

In case of conditional guarantees, the right to claim payment is conditional on external factors besides the beneficiary’s demand for payment. For example – If a guarantee states the clause that this guarantee is payable only on a particular ruling of a court

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UnCnoditional Gurantee

An unconditional / demand guarantee on the other hand, is payable on first demand by the beneficiary. Generally, banks prefer to issue unconditional guarantees so that they can avoid their obligation to pay being contingent on external factors. Because, these unconditional guarantees will afford them certainty about their obligation.

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Fixed and flexible Gurantee Under a fixed guarantee, the bank;s liability can be ascertained at the time of issuance.

On the other hand, in case of fluctuating guarantee, the bank’s liability can fluctuate subject to a fixed maximum amount. 

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MBK- 11-24

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Khalid Hussain

Financial Gurantees

A guarantee to ensure strictness to a financial commitment is a financial guarantee.

1.Disputed income tax / Customs & excise

duties : Banks will issue guarantee to guard

against non-payment of tax / duty amount.

2.Customs / Excise guarantee for clearance

of goods : To guard against non-payment of

duty amount after final assessment by the

competent authority. 

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Cont.....

3.Insurance premium guarantee : To guard against non-payment of premium on demand from the insurance company.4.Guarantee for grant of facilities to another company : To guard against non-payment of dues by the company to whom such facilities are granted.5.Deferred payment Guarantee : To guard against non-payment of bill of exchange / loan instalment on the due date.6.Bill of lading / Shipping guarantee : Indemnifies the transporter against all adverse consequences resulting from the delivery of goods without surrender of the transport document.

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Performance/ Non Financial A guarantee to ensure adherence to a commitment to perform a certain act as per stipulated conditions is a performance guanrantee.

1.Advance payment guarantee / Prepayment bond :  To guard against non-delivery of goods/services for which advance has been received from the buyer.2.Performance guarantee / Retention bond :  to guard against non-performance of contracted obligations by the seller of the goods or the provider of the services.

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MBK-11-25

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Tausif Irfan

Benifits of Insurance

Benefits to the parties:

Benefits to the bank : It gets commission income.

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Cont........

2. Benefits to the principal / Instructing party :

(a) It enables better liquidity by deferring payment and making it contingent on non-performance.

(b) Cheaper than fund-based facilities except where it involves credit substitution.3. Benefits to the beneficiary : Certiainty of payment, in the event of non-performance, guaranteed by the bank.

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Zohaib Ali

MBK-11-23