Verification and Claims Involved in Bank Guarantee

If the two sides concerned in foreign-related commercial intercourse locate in different countries or regions, it would be relatively difficult for them to get wise to their potential partners' contractual capability, business integrity and so on. Once some disputes occur, both arbitration and litigation are complicated and expensive. Therefore, it is a convention that a bank guarantee would be necessary by signing a contract in international trade.

Bank guarantee means that the bank opens a written certificate to the beneficiary at the consignor's request. As the guarantor, bank has the responsibilities to handle the debt or obligations instead of the consignor. The rights and obligations of both parties would be prescribed by the contract. If the consignor fails to perform his contractual obligations, the beneficiary may claim for compensation from the guarantor according to the bank guarantee. This paper will introduce how the beneficiary verifies the letter of guarantee and how he claims for compensation.

(1) The beneficiary's verification

The guarantee mainly contains the consignor, beneficiary and the address and the responsibility, effective term, commitment of the bank, as well as the validity of the letter of guarantee, the laws regarding jurisdiction, etc. for there is no unified guaranteeing format, so the beneficiary must verify seriously when receive guarantee, once the above terms go wrong, one shall immediately request the bank modify in order to reduce the risks and hidden dangers in performances of the contract. Concretely speaking, the guarantee can be verified from the following aspects:

1.The bank

The bank which issues the guarantee shall be an internationally reputable one. And thus the interests of beneficiary can be safeguarded. The guarantor bank must have agent relation with the beneficiary's transmitting or corresponding bank, so that the beneficiary can verify the signature to determine the validity of the guarantee.

2.Effective terms

Usually, letter of guarantee shall be effective since it is issued, but in actual operations, we often receive guarantees with effective terms. For example, advanced payment guarantee would become effective after receiving the written confirmation that the guarantor bank or the seller has received the buyer's advance payment, and such condition we can not accept. If the guarantee can not take effect due to various reasons (for example, the seller has no written confirmation) after the buyer's paying, and the seller can not fulfill his contractual obligations to deliver the goods, in that way the buyer can not ensure his interests by right of the guarantee, as thus, the guarantee will lose its significance of "responsibility". Therefore, when receive the letter of guarantee with effective terms, we must verify strictly the terms and make sure there is no risk.

3.Responsibility and commitment of the bank

In guarantee issued by the bank, the commitment must be "unconditional" and "irrevocable". "Unconditional" means that when beneficiary claims that the consignor fails to fulfill his contractual and requires the guarantor bank to pay the amounts guaranteed, the beneficiary needs not provide any other certification, in addition, whatever the actual cause is, bank must immediately and unconditionally pay the amounts which are guaranteed.

4.The validity

The validity of most guarantees is from the opening day to the day when corresponding obligations are accomplished. However, in the practice of foreign trade, the differences in geographical positions would lead to jet lag, thus the beneficiary has no time to deal with relevant formalities of claims. In this way, the validity should be some days later since the last performance is completed.

In addition, if the guarantee needs modification, the beneficiary and consignor must reach an agreement. Traditionally, guarantee will be governed by the local laws where the guarantor bank locates.

(2) Claims of the beneficiary

Beneficiary only needs to present a written request and invoices specified in the document, and the guarantor bank would pay after review the authenticity. Usually, guarantee would stipulate the form of claim, which is telegraphic claim or letter claim. Telegraphic claim refers to the form of telegram, while letter claim is sent through the mail.

Generally speaking, beneficiary can entrust a domestic bank to claim instead, and the beneficiary should provide the letter of guarantee and the invoices specified in the document, meanwhile, write a letter of attorney. The correspondent bank can claim for the payment according to the agreed form (telex or letter) after verifies the guarantee and relevant documents. In China, the charge of agential claim is about 1‰ of the guaranteed amount and no less than RMB1,000 at the same time. The mailing cost or telegraphic expense should be paid by the consignor, and the period for dealing with this service may be 1 or 2 working days. It needs to be noted that the correspondent bank only transmits the message between the guarantor bank and the beneficiary, and the compensation should base on the concrete contents and the credibility of the guarantor bank.

In brief, in order to play the guaranteeing role of the bank guarantee, avoid the risks in trade, the beneficiary shall better consult a lawyer on the basic contents, terms and format of the guarantee before the business negotiation. And one should negotiate the contents, terms and format beforehand in the business negotiating stage. The agreed format should be attached as the accessory contract. After the guarantee is issued, the above elements still need be verified. Once any problem is discovered, one should immediately require the seller to inform the bank and make the corresponding modification.