L/O/G/O

International Payment

LESSON 7

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 Contents

ü Type of guarantee.

ü Standby LC.

ü International standby practices.

ü Uniform rules for demand guarantees.

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 Types of guarantee
Ø Guarantees, or bonds as they are otherwise known, are widely used in
international trade to support performance and payment obligations.
Ø Two basic types of guarantee :
• True guarantee.
• On-demand guarantee (bảo lãnh theo yêu cầu)
Ø Principal types of guarantees used in international trade :
• Bid bonds: Bảo lãnh dự thầu
• Performance bonds: Bảo lãnh thực hiện hợp đồng
• Retention bonds:
• Advance payment 5/31/2023
bonds: bảo lãnh tiền đặt cọc
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 The true guarantee

• Is used when a guarantor undertakes to be responsible for the

debt or debts of a third party.

• The essential feature of this guarantee is the fact that the

guarantor is secondarily liable. The beneficiary cannot call for
payment under the guarantee until the failure of the first
requested repayment from the principal.

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 The on-demand guarantee

• Is an undertaking by a bank to pay the beneficiary a certain

sum to cover the action or default of a third party.

• In this form of guarantee, the guarantor is primarily liable; the

beneficiary has only to make a demand, worded precisely as

indicated in the guarantee and will be paid.

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 Principal types of guarantees

• Bid bonds: Bảo lãnh dự thầu

• Performance bonds: Bảo lãnh thực hiện hợp đồng

• Retention bonds:

• Advance payment bonds: bảo lãnh tiền đặt cọc

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 Bid bond/Tender Guarantee
• Principal: người xin bảo lãnh (usually the buyer)
• Benerficiary: người thụ hưởng bảo lãnh (bidder)
Þ A bid bond is issued to ensure that the exporter submits realistic bids under
the tender process and to protect the importer for any loss that might occur if
the exporter fails to sign the contract.
Þ A bid bond also assures the importer that the exporter will comply with the
terms of the contract in the event that the tender is accepted. Bid bonds are
usually issued for 2% to 5% of the tender amount.
A bid bond is often a condition for the consideration of a bid.
Þ Ends when:
1) Bidder is successful and provide a performance guarantee
2) Bidder fails
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 Performance guarantee

• Principal: seller/exporter – Beneficiary: buyer/importer

Þ Exporter is obligated to fulfill the contract

• Compensate the importer in case of undelivery, short-delivery, sub-

quality…

=> Ends when the supplier fulfill his obliagation.

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 Advance payment guarantee

• Principal: seller/exporter – Beneficiary: buyer/importer

• In high-value international contract, importer may provide exporter with
an initial capital as a deposit of contract value.
• An advance payment bond ensures repayment to the importer of an
agreed percentage of the contract amount (typically 10%-30% of the
contract amount) if the exporter does not fulfil its contractual obligations.
=> Need guarantee to ensure full receipt of advance payment in case the
exporter fails to fulfill the contract

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 Retention bond
• With the supply of factory plant, machinery and other capital goods, it is
often agreed that the buyer may withhold 5%-10% of the contract amount
for a guarantee period, for example 12 months after the plant or
machine(s) are up and running.
• The exporter may wish to receive the full contract amount before the end
of the contract period (in the example given above, 12 months) by issuing
a retention bond that covers the amount that would otherwise be withheld.
• The exporter will request its bank to issue a retention bond in favour
of the buyer. Once the buyer receives the retention bond he will transfer
the amount of the bond value direct to the exporter by international money
transfer.
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 Standby L/C

• Standby L/C: Tín dụng dự phòng

• Undertakes payment when the applicant fails to carry out the contract
with the beneficiary. The credit is therefore similar in many respects
to an on- demand guarantee.

• Example: Universal Power Station Ltd and Australian Open Mines

Ltd

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 Standby L/C

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 Standby L/C

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 Standby L/C

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 Standby L/C
Used for:
• In support of construction contracts where default or improper performance
by the contractor would be financially detrimental to the buyer.
• To cover reinsurance companies against failure by their insurers to
reimburse them for claims settled within the terms of an agreement
between the companies.
• In cases where companies are purchasing oil in the market and the cargoes
which are offered have already been bought and sold several times. Thus,
the original bills of lading have been issued to a third party and require a
number of endorsements before they can give title to the final buyer.
• To reduce the cost of providing a continuous stream of documentary
credits covering trade between a buyer and an overseas supplier.

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 Standby L/C

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International Standby Practices
ISP98 :
– Nature of standbys (Article 1.06).
– Undertaking to honour by issuer and any confirmer to beneficiary
(Article 2.01).
– Complying medium of presentation (Article 3.06).
– Examination for compliance (Article 4.01).
– Required signature on a document (Article 4.07).
– Demand for payment (Article 4.16).
– Negotiable documents (Article 4.18).
– Timely notice of dishonour (Article 5.01).
– Conditions to transfer (Article 6.03).
– Right to reimbursement (Article 8.01).
– Duration of standby (Article 9.01).
– Time of day of expiration (Article 9.04).

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Uniform rules for demand guarantees

URDG758:
– Issue and effectiveness (Article 4).
– Independence of guarantee and counter- guarantee (Article 5).
– Content of instructions and guarantees (Article 8).
– Presentation (Article 14).
– Examination (Article 19).
– Force majeure (Article 26).

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L/O/G/O

Thank You!

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