Bank Guarantee-i is an irrevocable obligation in the form of written undertaking of a Bank to pay an agreed sum, in case of default by a third party in fulfilling their obligations under the terms of the Bank Guarantee-i.

Customer approaches the Bank for guaranteed surety. The Bank agrees to discharge the customer's liability in case of defaults. The Bank gives the guarantee under the concept of Kafalah . Bank Guarantee-i is not a financing instruments but merely a guarantee.

a) The concept of Al-Kafalah refers to guarantee in regard to two categories

i. Guarantee in regard to goods :

Refers to the guarantee provided by a person to the owner of a goods who had placed or deposited his goods with a third person, whereby any subsequent claim by the owner for his goods must be met by the guarantor and the third person.

ii. Guarantee on a person :

Refers to the guarantee provided by a person (1 st party) to the 2 nd Party whereby the 1 st Party guarantees joint-responsibility with the 3 rd Party.

b) Bank Guarantee may be issued in respect of ‘Performance of a task'.

Types of guarantee:

1.1 Tender Guarantee/Bid Bond

This guarantee is issued to government, semi-government or private bodies in lieu a certain sum to be deposited with them as ‘Earnest Money' when they call for tenders. Tender Guarantee/Bid Bond is required as an indication of good faith that the tenderer is serious in tendering for the contract.

1.2 Performance/Contract Guarantee

Sometimes called Security Guarantee. It is issued on behalf of the successful tenderer in favour of the principal. The contract requires the contractor to provide the principal with a deposit for a nominal sum of the contract value in lieu of which a performance guarantee provided by the bank is acceptable. This will act as an assurance that the contractor will fulfill his obligation.

1.3 Credit Guarantee/Supply Guarantee

This guarantee is issued to a supplier who extended his credit facility to our customer for the purchase of goods on credit and therefore, it acts as a security deposit.

1.4 Custom Bond

This type of guarantee is only issued to the Custom Department. For instance, a forwarding agent is required to furnish to the Custom Department a custom bond to guarantee the good behaviour of its employees.

Also included under this category is the guarantee in respect of temporary importation of goods into Malaysia . Certain goods are imported as samples or for temporary use.

1.5 Guarantee for Exemption of Custom Duties

This guarantee is used for import ation of goods into Malaysia on temporary basis goods are exempted from import duties provided they are re-exported. The Custom Department requires a bank guarantee to ensure that the goods are re-exported on time failing which a claim will be made under the bank guarantee.

1.6 Advance Payment Guarantee

The Bank issues this guarantee to government bodies that have granted the contract to the customer (the contractor). Advance Payment Guarantee allows the government to gives advance payment to the contractor in order to carry out government projects according to the terms and conditions of the contract.

1.7 Guarantee for Honouring of Cheque

This type of guarantee is issued to government departments to ensure that such issuance cheque would be good for payment upon presentation.

BANK GUARANTEE

Targeted heading at payments and services

Unlike sureties, the contract of guarantee is not explicitly governed by law. As such, the following two positions are taken:

·                                 Application of a contract to the charge of a third party (Art. 111 of the Swiss Code of Obligations)

·                                 Presence of an accepted payment order (Art. 466 ff. of the Swiss Code of Obligations)

·                                 In addition, in the case of a contract of guarantee a number of important clauses also apply.

·                                 The guidelines issued by the International Chamber of Commerce aim to ensure uniform application.

The following applies:
The contract of guarantee contains an abstract promise to perform and is a separate obligation independent of the underlying transaction. The guarantee is used to secure the performance of a specific obligation, irrespective of whether the performance is owed or not.

In principle, there are two types of guarantee:

Direct guarantees are used primarily in domestic business. However, an accessory security in the form of a surety is often enough. This is issued directly to the beneficiary in the same way as a direct guarantee.
Guarantees apply whenever the bank's undertaking to provide security is not contingent on the existence, validity and enforceability of the principal obligation. For this reason guarantees are frequently opted for in cross-border transactions, because the beneficiary is able to assert his or her claims rapidly due to the abstract legal nature of the guarantee. Guarantees have the added advantage of being easier to adapt to foreign legal systems and practices, because there are no form requirements. Due to cost and risk considerations, direct guarantees are increasingly being used in foreign business as well.

·                                 View the process as flash animation

Indirect guarantees are mainly issued in connection with export business – in particular when government agencies or public entities are the beneficiaries.
In addition, many countries do not accept foreign banks as guarantors due to legal provisions or other form requirements (e.g. Middle-Eastern countries).
With an indirect guarantee, a second bank (usually a foreign bank with head office in the beneficiary's country of domicile) is involved.

Formal verification

In making a claim under a bank guarantee, the beneficiary is exercising his or her right to demand payment of the guarantee amount (or part thereof). The bank checks whether the claim has been made in accordance with the conditions of the guarantee.

Signature check:
In general, guarantees contain a clause (identification clause) whereby the beneficiary's bank has to confirm his or her signature in the event of a claim. This procedure ensures that the claim is only signed by a person or persons authorized to do so.

Form of claim:
The claim generally has to be submitted in written form. The conditions of the guarantee often permit claims to be made via encrypted telex or SWIFT communications.

Time-limit of claim:
The claim must be received in the specified form, at the latest on the expiry date, by the branch of the bank stipulated in the guarantee.
The beneficiary is responsible for the mailing risk and any other delays (force majeure).

Special aspects

The beneficiary of the guarantee can normally assign his or her conditional claim for payment to a third party, or assignee (assignment of the proceeds but not the drawing right).
Things to note:

·                                 The assignee does not automatically receive the right to invoke the guarantee. Only the beneficiary specified by name in the guarantee document can claim under the guarantee.

·                                 Any change in the beneficiary of the guarantee requires the agreement of all parties involved, i.e. the existing beneficiary, the UBS client and the guaranteeing bank.

·                                 In contrast to the law concerning sureties, the assignment of the guaranteed claim arising from the underlying transaction does not result in the simultaneous transfer of the conditional guarantee claim.

Reasons for expiry

1. Ordinary expiry :
If the beneficiary has not made a claim by the date specified in the expiry clause of the guarantee document, the guarantee will expire. This applies irrespective of whether the guarantee document was returned to the bank or not.

2. Payment of guarantee amount :
In the event of the definitive and final settlement of the guarantee amount due to a claim by the beneficiary, the guarantee will expire.

3. Premature cancellation :
Formal discharge by the beneficiary.

1. Expiry date:
Expiry of the bank guarantee issued by the guaranteeing (foreign) bank to the beneficiary.
Expiry of the counter-liability and counter-guarantee of the initiating (Swiss) bank in favour of the guaranteeing foreign bank (15 to 30 days following the expiry date).

2. Expiry of counter-liability and -guarantee:
Some countries do not allow time-limits for counter-guarantees from the initiating bank. In this case, the obligations of the initiating (Swiss) bank do not expire until the bank is discharged definitively and in full by the guaranteeing (foreign) bank.

3. Payment of guarantee amount:
If a claim is made under the guarantee by the guaranteeing bank or the end-beneficiary, it will expire when the guarantee amount has been definitively paid by the principal's bank.

Notification of a guarantee

Guarantees can, for identification and transmission purposes, be notified to the beneficiary via a third-party bank, normally in the beneficiary's country of domicile. This is primarily done electronically via SWIFT or encrypted telex. The notifying bank does not enter into any direct guarantee obligations.

Guarantee from a third-party bank in your favour:

Naturally, the guarantee notification also functions in the opposite direction to the procedure referred to above. We forward the third-party guarantee with no commitment on our part – merely for identification and transmission purposes – to you as the beneficiary. We will be happy to provide you with advice in the event of uncertainties regarding the content of the guarantee (technical guarantee-related language), the creditworthiness of the bank or the current country risk. You can often avoid problems of this kind by requesting that the foreign company with which you are doing business arrange for this guarantee to be issued by a first-rate bank in Switzerland. We're here to answer your questions.