Contract guarantee

Contract guarantee (known also as ancillary guarantee)is a common way to secure the implementation of contracts and is a type of guarantee in which guarantor not only gives letter of credit, but also becomes a co-signatory of the contract. That means that he is able to challenge obligee's demand for payment of the guarantee sum.It is also an obligation of the insurance company to pay to the beneficiary a certain amount, that is to say the amount of the guarantee sum if the applicant fails to meet his obligations, which is part of the guarantee. They are a key element for contractors and subcontractors who take active part in tenders and execute contracts and, therefore, are obliged to provide collateral for investors and general contractors. If there are entities that contain many contracts and often take part in tenders, it is necessary to conclude a general agreement that ensures better obtaining of warranty documents.

Contract guarantees are not allowed in certain countries, e.g. in U.S.

Basic warranty information

The guarantee is a situation when third person (not involved in contract) guarantees to repay in case of default of the guaranee. In contract guarantee that third person is in fact involved in contract, as he/she gains some powers.The guarantor participates in the guarantee contract, that is the insurance company and the payer, called the debtor.

What does a contract guarantee require

Contract guarantee requires:

• concurrence of all the parties,
• liability,
• existence of a debt,
• consideration,
• should be written,
• essentials of a valid contract,
• no concealment of facts,
• no misrepresentation.

Advantages of the warranty

Basic benefits of contract guarantees:

• your financial contribution is not required to provide collateral that requires counterparties,
• you can unlock financial collateral,
• they confirm the credibility of the contractors,
• an element protecting domestic and export contracts,
• increase the credibility of the company,
• they ensure financial independence from banks,
• quick refund of the amount constituting the security for the contract.

Types and stages of contract guarantees

The basic types and stages of the guarantee are:

• payment of the tender bond (tender) - in this type of guarantee, the entrepreneur is exempt from the obligation to pay the bid bond in cash. It is insurance for companies that offer their services to other entities through tenders. By issuing a guarantee to the beneficiary, the insurer undertakes to pay the amount indicated therein, should the entrepreneur who won the tender refuse to sign the contract on the terms of the offer.
• content performance of the contract (contract conclusion) - intended for all contractors and subcontractors. It is granted at the request of the entrepreneur who won the tender secured by a guarantee and is obliged to provide security for the proper performance of the contract.
• advance payment (execution of the contract) - required by the investor who finances the performance of the contract by paying the advance payment to the contractor.
• the removal of defects and faults (post-construction period ) - constitutes a security for the investor that the defects and faults of the completed contract will be removed.

Examples of Contract guarantee

• Performance guarantee: A performance guarantee is a written commitment from a third-party guaranteeing that a contractor will complete a project to the satisfaction of the customer. The guarantee is typically issued by a bank or insurance company, and it covers the contractor’s performance of the contract.
• Advance payment guarantee: An advance payment guarantee is a guarantee from a third-party guaranteeing that a contractor will repay an advance payment if the contractor fails to perform the agreed upon work. This type of guarantee is typically issued by a bank or insurance company, and it ensures that the customer is protected in the event that the contractor does not meet their obligations.
• Bid bond: A bid bond is a guarantee from a third-party guaranteeing that a contractor will enter into a contract if they win the bid. This type of guarantee is typically issued by a bank or insurance company, and it ensures that the customer is protected in the event that the contractor does not fulfill the terms of the contract.
• Retention guarantee: A retention guarantee is a guarantee from a third-party guaranteeing that a contractor will return a portion of the contract amount if they fail to perform the agreed upon work. This type of guarantee is typically issued by a bank or insurance company, and it ensures that the customer is protected in the event that the contractor does not fulfill their obligations.
• Warranty guarantee: A warranty guarantee is a guarantee from a third-party guaranteeing that a contractor will provide a warranty on their work. This type of guarantee is typically issued by a bank or insurance company, and it ensures that the customer is protected in the event that the contractor does not fulfill their warranty obligations.

Limitations of Contract guarantee

Contract guarantee has its own limitations, which are as follows:

• Firstly, it is limited to the amount of the guarantee that was agreed upon in the contract. If the amount of the guarantee is not enough to cover the losses, the guarantor is not liable for any additional losses.
• Secondly, the guarantor is only liable for the amount of the guarantee and not for any other liabilities that might arise from the contract.
• Thirdly, a contract guarantee only covers losses that are incurred during the period of the contract and not after the conclusion of the contract.
• Fourthly, the guarantor may be liable to the beneficiary only if the guarantor has not been informed of any changes in the terms of the contract.
• Finally, the contract guarantee is only applicable if the obligee has fulfilled all of his obligations under the contract.

Other approaches related to Contract guarantee

An introduction to the other approaches related to contract guarantee is that they are all methods of providing additional security to ensure that a contract is fulfilled. These approaches include:

• Performance bond - A performance bond is a form of guarantee that is provided to a third party when a contract is agreed. It is a guarantee that the contractor will fulfill their contractual obligations as agreed.
• Retention money - Retention money is a form of guarantee that is held back by the client during the performance of a contract. It is held back until the contractor has fulfilled the contractual obligations as agreed.
• Advance payment guarantee - An advance payment guarantee is a form of guarantee that is provided by a third party to cover the cost of an advance payment made by a client to a contractor. It is used to ensure that the contractor will fulfill their contractual obligations as agreed.
• Guarantee of quality - A guarantee of quality is a form of guarantee that is provided by a third party to ensure that the contractor will deliver goods or services that meet the agreed quality standards.

In summary, contract guarantee is a form of guarantee provided by a third party to ensure that the contractor will fulfill their contractual obligations as agreed. Other approaches related to contract guarantee include performance bond, retention money, advance payment guarantee and guarantee of quality.

Contract guarantee — recommended articles

Retention bond — Back-To-Back Letters Of Credit — Advance payment bond — Payment guarantee — Corporate guarantee — Warranty bond — Shipping guarantee — Collecting bank — Cash Collateral

References

• Lowry J., Rawlings P. (2004)Insurance Law: Cases and Materials International Specialized Book Services, p. 119-121
• Financial Accounting Standards Board, (2008). Accounting for Financial Guarantee Insurance Contracts: An Interpretation of FASB Statement, Wydanie 60 Financial accounting series, p. 1-57.
• Yan, N., Sun, B., Zhang, H., & Liu, C. (2016). A partial credit guarantee contract in a capital-constrained supply chain: financing equilibrium and coordinating strategy. International Journal of Production Economics, 173, 122-133.
• Philips J.C, O’Donovan J. (2010) The Modern Contract of Guarantee Law Book Company, p. 1-919
• Hardy M. (2003). Modeling and Risk Management for Equity-Linked Life Insurance Hoboken, New Jersey, p. 1-255

Footnotes

Author: Anna Śliwa