Counter guarantee is all cash obligations, guarantees of the requesting party, which are given in writing to pay the money. This is the type of contract that is provided by the debtor to repay. The counter guarantee is paid back when the debtor does not comply with the contract. The creditor demands from the debtor to fulfill the contract. "When a performance bond is issued by a bank on behalf of an exporter, the exporter is usually required to provide a counter - guarantee to reimburse the bank. Often more than one counter guarantee is involved. Thus, if an importer requires a performance bond to be issued by his local bank, the exporter will give an instruction and a counter - guarantee to his local bank, which will then give an instruction and a counter guarantee to the importer's local bank" (Takahashi K., 2000, p.228) It is also called counter indemnity. In international trade transactions, counter guarantee looks (step by step) like:
- At the very beginning, the principal and the contractor sign a contract. Both parties should visit the guilty countries, because then they can benefit from counter guarantee. Otherwise, they can use a bank guarantee.
- The client orders the bank to issue a counter guarantee.
- The client's bank issues guarantees for the benefit of the guarantor bank.
- The bank makes guarantees for the beneficiary
Advantages and specifications of a counter guarantee
"The requirement for a counter guarantee for all IDA PRGs is an advantage in some situations, but a constraint in others. The IBRD Articles of Agreement require IBRD guarantees to be backed by a sovereign counter guarantee, but the IDA Articles do not. Instead, the requirement of a counter - guarantee for all IDA guarantees is a Board decision. Although in some circumstances there are clear benefits to requiring a counter - guarantee - such as the need to fully engage the Ministry of Finance in a project - in other cases the counter - guarantee requirement may be less necessary and serves to discourage government engagement because of its contingent liability implications" (The World Bank Washington, 2009, p. 50)
- Counter guarantee eliminates the economic and political crisis
A bank guarantee issued by a creditor bank may not always be sufficient. Especially if the guarantor's bank is located in a different country than the beneficiary's bank. The risk grows if such a country has an unstable economic situation. Therefore, to reduce this risk are issued a counter guarantee.
- Counter guarantee eliminates the risk of foreign law
It is often the case that payments are stopped by local courts. This is done by virtue of bank guarantees. Having a counter guarantee eliminates the risk of a foreign jurisdiction.
- Independence of Counter-Guarantee
A counter guarantee is an individual and independent form. It is bound only by its own regulations. Such independence matters in law matters.
- Beck T., Klapper L.F., Mendoza J.C., (2008), The Typology of Partial Credit Guarantee Funds around the World
- Chatzouz M., Gereben A., Lang F., Torfs W., (2017), Credit Guarantee Schemes for SME lending in Western Europe
- Karafolas S., Woźniak M., (2014), Loan Guarantee Schemes: Private and Public Examples
- Leone P., Porretta P., (2014), Microcredit Guarantee Funds in the Mediterranean: A Comparative Analysis, Palgrave Macmillan, New York
- Takahashi K., (2000), Claims for Contribution and Reimbursement in an International Context, Oxford University Press, New York
- The World Bank Washington, The World Bank Group Guarantee Instruments 1990-2007: An Independent Evaluation, (2009), The World Bank Washington D.C., Washington
- Voskuil C.C.A, Parać Z., Wade J.A., (1987), Hague-Zagreb Essays 6: On the Law of International Trade: Credit and guarantee financing transfer of technology, Martinus Nijhoff Publishers, Boston
Author: Edyta Krzyczman