A Bank Guarantee is an unconditional undertaking given by the Bank on behalf of the customer to pay the recipient of the Guarantee the amount of the Guarantee on the written demand. It can also be defined to be an alternative to providing a deposit directly to the supplier or vendor. A Bank Guarantee can have an expiry date after which the Guarantee automatically ceases.
Alternatively, you might also obtain a Bank Guarantee that can be open-ended, where the completion date is not certain or defined.
An Unconditional Bank Guarantee is defined to be an unconditional and unilateral promise provided and issued by a Bank or Financial Institution to pay a specified amount of sum upon the occurrence of certain events. For example, when a tenant breaches an obligation under the lease. It is like having cash in the bank – it is very common in the construction and commercial leasing industries/transactions for a party to request for an Unconditional Bank Guarantee, and for the other party to provide an Unconditional Bank Guarantee to secure the performance of Contractual Obligations.
An Unconditional Bank Guarantee does not require any proof of default and the owner or beneficiary will generally receive payment of the full amount upon the presentation of a written statement to the issuer, stating that the contractor has failed to perform. However, a Conditional Bank Guarantee may only be called on the actual proof of default or damage. The payment will only cover the proven loss sustained by the beneficiaries or the owner, and up to the amount stated in the Bank Guarantee.
The distinction between Conditional and Unconditional Bank Guarantees can be muddied at times, due to ambiguous drafting or the confusion verbal discussions held between parties. Generally, the Conditional Bank Guarantees can be defined with regards to the wording which makes the payment under the Guarantee conditional upon the proof of breach of the underlying contract being referred to, or the existence of notice provisions being defaulted, as condition precedent to any call on the Bank Guarantee.
A Conditional Bank Guarantee contains no express provision outlining the time of the release. However, a normal Bank Guarantee is usually called upon the surety satisfying damages sustained by the owner in the event of a default of the contractor or determination of or the performance of all of the contractor’s obligations under the contract.
A person can only call on the Unconditional Bank Guarantee by issuing a written demand to the issuer, stating the contractor’s failure to perform.
We advise that careful and prudent consideration and advice should be sought before you consent to a Bank Guarantee or Unconditional Bank Guarantee being agreed to be provided on your behalf.
If you wish to discuss the same, please do not hesitate to contact Freedman & Gopalan Solicitors on 8917 8700.
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