This guarantee is required in connection with public tenders. If a company participates in such a tender, it must submit a bid bond together with its offer. Bid Bonds therefore secure payment of the guarantee amount:
1. in the event of withdrawal of the offer before its expiry date
2. if the contract, after being awarded, is not accepted by the tenderer
3. if the bid bond, after the contract has been awarded, is not replaced by a performance bond
As a general rule, the guarantee amount is normally within 1% to 5% of the amount of offer. The validity period of the guarantee is until the signing of the contract or the issue of a performance bond, usually between three and six months.
The bank undertakes, at the request of the seller, to pay the beneficiary the guaranteed amount in the event the supplier has not met or insufficiently fulfilled his contractual delivery obligations. The guarantee amount usually 10% of the contract amount. The bond remains valid for the full amount until complete performance of the contract. Where contracts for works and materials are concerned, this generally includes the warranty period for the correct functioning of a machine or system. The period of validity of performance bonds may be two years or longer.
Advance Payment Guarantee (Letter of Indemnity)
The terms of payment for major export orders generally stipulate that the buyer pays an installment for the purchase of raw materials and for the cost of production. However, such a down payment will only be agreed to by him after receipt of so called advance payment guarantee which ensures repayment of the advance by the seller in the event of non-performance of his contractual obligations. The amount guaranteed is 100% of the advance payment. In contrast to the performance bond, the advance payment guarantee should stipulate that the guaranteed amount be automatically reduced in proportion to the value of any partshipments made. A utilization of the related documentary credit is usually recognized as avidence of delivery. The validity of the advance payment guarantee should be limited in such a way that it expires on the date the covered performance is made.
The advance payment guarantee must usually be issued before prepayment is made, but should enter into force only after receipt of such payment. Therefore a clause to this effect should be included in the guarantee whenever possible.