Bank guarantees are a common tool used in commercial transactions
to reduce risk and increase confidence between the parties involved. A bank
guarantee is a written promise from a bank to pay a third party a certain
amount of money if the principal debtor fails to fulfill their obligations
under a contract.
The legal framework
of bank guarantees is governed by a number of different sources of law,
including contract law, banking law, and international trade law. The specific
laws that apply will vary depending on the jurisdiction in which the bank
guarantee is issued and the nature of the underlying transaction.
Rights and
obligations of the parties
The main rights and
obligations of the parties to a bank guarantee are as follows:
· The
bank is obliged to pay the third party the amount of the guarantee if the
principal debtor defaults on their obligations.
· The principal debtor is
obliged to reimburse the bank for any amounts that the bank pays out under the
guarantee.
· The third party is
entitled to receive payment from the bank if the principal debtor defaults on
their obligations.
Guarantees in
international trade
Bank guarantees
are often used in international trade transactions to reduce the risk of
non-payment by the buyer or seller. For example, a buyer may require a
performance bond guarantee from the seller to ensure that the seller will
deliver the goods on time and to the agreed-upon specifications.
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