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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