(A Practical Guide for Beneficiaries)
When a party defaults on its contractual obligations, a bank guarantee becomes a critical financial safeguard. A properly executed Notice of Demand activates the guarantee. But success depends on strict compliance with its terms, especially for first-demand or unconditional guarantees.
Why Enforcing a Bank Guarantee Matters
Bank guarantees offer security when contractors, suppliers, or buyers fail to perform or pay. A Performance Guarantee, for instance, covers project completion risks. An Advance Payment Guarantee protects prepayments. A Bid Bond Guarantee ensures serious bidding. Regardless of type, a guarantee shares risk with a bank.
When a default happens, beneficiaries rely on the guarantee to avoid major financial losses or project delays. Acting promptly and correctly is key.
Know the Type: Unconditional vs. Conditional
Guarantees come in two main forms.
Unconditional or First-Demand Guarantee: the bank must pay on demand, without reviewing the default justification. It serves as immediate financial backing.
Conditional Guarantee: this requires supporting evidence of default, such as invoices, certificates, or contract excerpts, before payment.
Identifying the guarantee’s nature early is essential. It determines how to frame your Notice of Demand and what documents to include.
Prepare the Claim Package: Be Precise
Whether conditional or not, a solid Claim Package includes a Notice of Demand as the main document, the original guarantee, a statement of default if conditional, relevant contract documents such as purchase orders or engineer’s certificates, proof of authority for the signatory, and any other required documents listed in the guarantee (velaw.com, lexology.com).
Banks follow strict compliance. A minor mismatch – like a typo in a name or wrong annex number – can nullify the claim.
Step-by-Step: Calling the Guarantee
- Review the Guarantee Carefully
Check the wording, expiry date, currency, and amount. Confirm the correct beneficiary.
- Draft the Notice of Demand
State the guarantee number, amount, and date clearly. For unconditional guarantees, note: “We demand immediate payment. No further justification required.” For conditional ones, outline the default and attach proof.
- Assemble Annexes
Match each annex to your Notice of Demand. Label them clearly: Annex I (Guarantee copy), Annex II (Default statement), and so on.
- Deliver the Notice
Submit the original demand to the issuing bank before expiry, usually by courier or SWIFT. Keep delivery proof for your records.
- Anticipate Fast Payment
For unconditional guarantees, the bank typically pays quickly, often within hours or days. Delays may signal compliance issues.
Checklist: Avoid Common Pitfalls
Before calling, verify that the guarantee is still valid and has not expired. Confirm that you hold the original document. Ensure party names exactly match the contract. Check that the guarantee references the correct contract. Verify that the claim amount does not exceed the stated limit. Ensure that claim conditions, such as written demand and signatory authority, are met.
Skipping any step may delay payment or render the claim unenforceable.
What If the Bank Refuses Payment
If the bank rejects your call, review the rejection reasons carefully. Confirm compliance with guarantee terms and delivery. For unconditional guarantees, defenses are extremely limited – lack of default alone may not stop payment (constructionblog.practicallaw.com). Consider swift legal action if the call is valid but still unpaid.
Best Practices for Beneficiaries
Track expiry using a register to alert you before the guarantee lapses. Store originals securely, as many guarantees are treated as cash, and losing them can void your claim.
Maintain a template Notice of Demand that incorporates best drafting practices. Act early to avoid rushed calls at expiry. Seek legal counsel in cross-border or high-value claims.
Conclusion
Enforcing a bank guarantee in the event of default is straightforward, but only if you follow each step precisely. Identify the guarantee type, draft a compliant Notice of Demand, compile a perfect Claim Package, and deliver it properly. With accuracy and speed, beneficiaries can enforce their rights effectively and recover financial losses promptly.
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