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An Ultimate Guide to the Different Guarantees

An Ultimate Guide to the Different Guarantees

Contract Directory
Blog
October 25, 2025

Estimated reading time: 4 minutes

Introduction

Securities and Guarantees are vital in contractual relationships. They protect parties from risk and ensure performance. From banking to insurance, these instruments provide financial and legal security. In this guide, we explore the major types of contractual guarantees and how they function. We also group them based on their nature and source.

Bank-Issued Guarantees

Performance Bank Guarantee (PBG)

A PBG assures the project owner that the contractor will fulfill the terms of the contract. If not, the bank pays compensation. PBGs are common security in construction, engineering, and government projects.

Advance Payment Guarantee (APG)

APG secures any advance payment made to a contractor. If the contractor fails to deliver, the bank recovers the funds. This guarantee is usually required before any upfront payments.

Retention Bank Guarantee

Instead of withholding a portion of payment, the employer may accept a retention guarantee. It ensures that the contractor will fix defects during the maintenance period.

Payment Bank Guarantee (BG)

A payment BG ensures that the buyer pays the seller on time. It offers security in supply and procurement contracts.

Bid Bond / Bid Security

This guarantee ensures that the bidder will accept the contract if awarded. It protects the project owner from bidders who withdraw or fail to sign the agreement.

Standby Letter of Credit (SBLC)

An SBLC is a promise by a bank to pay if the client defaults. It works like a guarantee but under letter of credit rules. It’s often used in international trade.

Corporate And Personal Guarantees

Parental Guarantee or Parent Company Guarantee (PCG)

A parent company guarantees the performance of its subsidiary. If the subsidiary fails, the parent steps in. This type is frequent in joint ventures and large infrastructure projects.

Corporate Performance Guarantee

Corporations may issue internal performance guarantees as security to support contract execution. It shows strong corporate backing and reduces counterparty risk.

Personal Guarantee

An individual, often an executive or owner, guarantees the obligations of a company. If the company defaults, the guarantor becomes personally liable. These are common in small business loans.

Commission Payment Guarantee

Used in agency or brokerage contracts, this guarantee ensures timely commission payments to agents.

Insurance-Based Guarantees

Surety Bond

A surety bond involves three parties: the principal, the obligee, and the insurer. The insurer promises compensation if the principal fails. It functions like a performance guarantee.

Contract Works Insurance

This policy covers the cost of redoing incomplete or defective work. While not a formal guarantee, it plays a similar risk-mitigation role.

Government and Sovereign Guarantees

Sovereign Guarantee

A sovereign guarantee is issued by a national government. It backs the obligations of state-owned entities or infrastructure projects. These carry high creditworthiness.

Contractual Clause-Based Guarantees

Liquidated Damages Clause

This clause sets a fixed penalty for delay or non-performance. It is pre-agreed and enforceable. It motivates timely project completion.

Joint and Several Liability Clause

Each party in a group contract becomes fully liable for the entire obligation. This clause protects the beneficiary in case of failure by one member.

Negative Pledge Clause

This clause prevents the borrower from pledging assets to others during the contract term. It safeguards lenders’ rights.

Guarantee of Funding

While not always formalized, this assurance comes in high-value projects. A party promises to secure or inject needed funds during execution.

Letter of Comfort

Although not legally binding, this letter confirms the intent to fulfill contract obligations. Parent companies often issue it.

Conclusion

Choosing the right contractual guarantees reduces risk and builds trust. Each type serves a unique purpose. Their classification helps stakeholders understand the protection level they offer. Whether you’re a contractor, employer, or lender, knowing your options is key. Always align your guarantees with project needs and contract value.

Templates for the above Guarantees, as well as many others, are available here:

Refrences

Related Topics: #ContractLaw #LegalGuarantees #BusinessContracts #ContractualObligations #RiskManagement #LegalAdvice #CommercialLaw #GuaranteeClauses #ContractDrafting #LegalCompliance