Payment guarantee is a form of protection connected with the guarantee for payment of goods issued by the buyer or proprietor to the seller or contractor. The guarantee ensures that the purchaser shall fulfill its contractual obligation of payment. There are payment guarantees often in construction contracts. We can classify them into those by the contractor and by the subcontractor. Those, by the contractor, ensures the subcontractors (and suppliers, and workers) that the contractor shall pay for all costs and wages under the terms of the contract. The second ones ensure the contractor that the subcontractor shall pay workers and suppliers for all costs and wages arising from the contract (for example construction contract). In the contract the contractor should provide the period of validity of the payment guarantee (J. C. M. Kao i in. 2015, in. s. 191).
From the end of 2010, The Canada Mortgage and Housing Corporation (CMHC) had two programs connected with mortgages. The first, National Housing Act Mortgage- Backed Securities (NHA MBS) program provides a timely payment guarantee on privately issued securities combined of pools of amortizing, residential mortgages insured against borrower default by the Corporation or private mortgage insurers. The second program, the Canada Mortgage Bond (CMB) Program, facilitates the housing funding. In CMB the Canada Housing Trust (CHT) issue the securities. CHT was established especially for funding insured residential mortgages, where the proceeds are used to purchase the National Housing Act Mortgage- Backed Securities. The Canada Mortgage and Housing Corporation provide a timely payment guarantee of Canada Mortgage Bond's principal and interest. The Government of Canada back ultimately the guarantee provided by CMHC under both programs (E. Tsounta 2011, s.27).
Forms of guarantee
Payment guarantee is one of the forms of guarantee issued by all types of entities like corporations, banks, sovereigns and also individuals. The seller is assured by the payment guarantee that the purchase price will be paid on the agreed date if the contractual obligations are met. The other forms of guarantee are (M. Choudhry 2018):
- An advanced payment guarantee, which assures that if the seller does not meet contractual delivery obligations in full, the advanced payment will be reimbursed to the buyer
- A bid bond which is called tender bond also; it is a security to the organiser's expenses in tenders which requires from participants to pay if their bid is accepted but withdrawn
- A performance bond, which provide goods and services promptly and as contractually agreed when the seller failed; it is a collateral for cost incurred by the buyer
- A warranty obligations guarantee, which is a security in case of defects appearing after delivery
- A credit security bond, which is collateral for loan repayment
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- Istrate L. G. (2019), The Role of Credits and Bank Guarantee Letters in Financing Trading Companies, "Ovidius", volume 19
- Kao J. C. M. (red.) (2015), Green Building, Materials and Civil Engineering, CRC Press, London
- Luoa P., Wang H., Yang Z. (2015), Investment and ﬁnancing for SMEs with a partial guarantee and jump risk, "European Journal of Operational Research", no.249
- Tsounta E. (2011), Home Sweet Home: Government's Role in Reaching the American Dream, International Monetary Fund, Western Hemisphere
- Vliet K., Reindorp M. J, Fransoo J. C. (2013), The price of reverse factoring: Financing rates vs. payment delay, "European Journal of Operational Research", no. 242
Author: Joanna Milowska