Counter guarantee

From CEOpedia | Management online

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.

Examples of Counter guarantee

  • A bank may provide a counter guarantee to a borrower to cover the loan amount in case of default. The counter guarantee is provided by a third party, such as a family member or friend of the borrower.
  • A tenant may provide a counter guarantee to a landlord to cover the rent in case of non-payment.
  • A company may provide a counter guarantee to a supplier to cover the amount of goods purchased in case of non-payment.
  • An individual may provide a counter guarantee to a creditor to cover a debt in case of non-payment.

Limitations of Counter guarantee

Counter guarantee has some limitations, including:

  • Not all contracts are eligible for a counter guarantee. It is not applicable to contracts related to services, as they are not tangible assets.
  • Counter guarantees are also limited to certain types of assets, such as real estate, jewelry, and vehicles.
  • Counter guarantees are usually not applicable to high-value assets, such as stocks and bonds.
  • Counter guarantees are typically short-term agreements and may not be suitable for long-term contracts.
  • Counter guarantees can be expensive, and the fees associated with them can be high.
  • Counter guarantees are also subject to fluctuating interest rates, which can make them unpredictable.
  • Counter guarantees require the debtor to have some level of financial stability in order to guarantee payment. If the debtor does not have sufficient assets, the creditor may not be willing to accept a counter guarantee.

Other approaches related to Counter guarantee

Introduction: Aside from the traditional counter guarantee, there are other approaches to guarantee payment.

  • The use of letters of credit is an alternative to counter guarantees. It involves a bank issuing a guarantee of payment to the creditor on behalf of the debtor. The bank is responsible for ensuring that the payment is made to the creditor in the event the debtor fails to comply with the contract.
  • Bank Guarantees are another form of security given to the creditor. It is a written promise from a bank to the creditor to make payment if the debtor fails to comply with the terms of the contract.
  • Collateral agreements are also used in some cases. This involves the debtor providing the creditor with another asset, such as property or shares, as security. If the debtor fails to pay, the creditor can seize the asset and use it to cover the debt.
  • A third party guarantee is also an option. This involves a third party, such as another company or individual, agreeing to cover the debt if the debtor defaults.

Summary: Counter guarantees are a traditional method of guaranteeing payment, but there are other approaches. These include using letters of credit, bank guarantees, collateral agreements, and third party guarantees.


Counter guarantee — recommended articles
Back-To-Back Letters Of Credit — Payment guarantee — Revolving letter of credit — Mortgage deed — Transferable letter of credit — Depository bond — Sovereign guarantee — Assignment of insurance — Credit instrument

References

Author: Edyta Krzyczman

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