Properly securing claims arising from a contract not only reduces financial risk but also ensures the due performance of contractual obligations, including claims under warranty for defects and quality guarantees. For this reason, choosing the right protection instrument is one of the most important issues when negotiating and concluding contracts. One of the most commonly used security instruments in practice is the bank guarantee.
Bank guarantees are used in a variety of situations. As practice shows, creditors accept them as security for loan or credit repayment, proper performance of a contract, payment for purchased goods or services, as well as so-called bid bonds issued in connection with tenders or when applying for public procurement contracts.
A bank guarantee is a unilateral commitment by a bank (guarantor) on behalf of a client (principal) to make a payment to a beneficiary (guarantee recipient) if certain conditions are met by the beneficiary. The guarantee should specify which claim is covered by it, the bank’s obligations, the beneficiary’s details, and which documents proving that the conditions for payment have been met are to be attached to the request for payment.
Additional clauses that facilitate payment to the beneficiary include the “on first demand” clause and a declaration that the guarantee is irrevocable and unconditional. These provisions mean the guarantor may not examine objections or documents related to the underlying contract for which the guarantee was issued.
An important aspect to pay attention to is the deadline for submitting a demand for payment under the bank guarantee. The creditor cannot benefit from the guarantee if the claim becomes due after the guarantee has already expired and the contract does not include provisions obliging the debtor to extend the guarantee, make payment, or provide a deposit.
It is recommended that, if the guarantee is valid for a shorter period than the contract term, payment term, or warranty period, a clause should be included in the guarantee allowing the beneficiary to demand full payment if the guarantee is not extended.
A bank guarantee must be issued in writing under pain of nullity (usually as a document bearing a qualified electronic signature).
Choosing the appropriate form of claim security, including a bank guarantee, depends on the nature of the specific transaction, the individual needs of the business, and the relationship between the contracting parties. It is therefore advisable to seek professional legal assistance to minimize risks and avoid the consequences of ineffective claim security.