Listed On

corporate law firms in Egypt - corporate law firms in Egypt
The Legal 500 EMEA

Bank guarantee letter and its importance in contracting operations

خطاب الضمان المصرفي - bank guarantee letter

The contracting by and between two parties to some extent requires granting a guarantee for the counterparty to fulfill its agreed-upon obligations, precisely, if a party provides an installment to the other party, such guarantee shall be stated in contracting related to constructions and supplies of different types.

The aim of the letter of guarantee is to serve as one of the methods, which ensure that the counterparty shall perform its obligations as agreed-upon way and at the agreed-upon time

Arguably, the party who pays the advance installment may be known as the owner or the beneficiary and the counterparty may be known as the contractor.

When the owner intends to contract with the contractor to build a building or undertaking a supply process, the owner shall pay an installment in advance for the contractor, then the owner will need a guarantee that the contractor will implement the contract, but the owner will need a quick way to implement the same contract without incurring another advance payment to another contractor if the contractor fails to do so.

Consequently, in such case, the role of the letter of guarantee is focal to provide the owner with a principal method to redeem the advanced installment expeditiously, in case of the owner’s failure to implement its obligations.

So, the owner shall oblige the contractor to extract a letter issued by the bank including the bank’s commitment to pay the owner a determined amount, and the latter to some extent shall be equivalent to the granted installment for the contractor, this is when the owner requests the liquidation of the letter of guarantee so that the bank does not have the right to refuse to liquidate the letter of guarantee in favor of the owner who is the beneficiary of the letter of guarantee.

The importance of bank guarantee letters

It should be noted that the banking letter of guarantee has pivotal importance either in international or internal trade, as it serves as a method of ensuring the implementation of the obligations and the presence of a bank has a financial adequacy to settle the amount of the letter of guarantee.

The basic principle is that the bank disburses the value of the letter of guarantee to the beneficiary “the owner” as soon as the beneficiary notifies the bank of that within the period mentioned in the letter of guarantee.

However, there are some letters of guarantee that include a condition for disbursement, for example, that the beneficiary submits evidence that the contractor has stopped the works or warned the contractor to liquidate and the passage of a period.

Types of guarantee letters

There are various kinds of letters of guarantee based on its objective, as there is a revocable letter of guarantee as mentioned above and a business letter of guarantee, which is mostly related to construction agreements, whereby the contractor shall provide the owner with a letter of guarantee to cover the amount of defects in the implemented work.

And there are some letters that gradually decrease as much as the works carried out by the contractor, as is the case if the contractor submitted a letter of guarantee for one hundred million pounds and included a condition for a gradual reduction in the value of the letter of guarantee according to the goods supplied

So the contractor supplied goods in the amount of 70 million pounds, then the bank has no right to disburse to the beneficiary only 30 One million pounds only as long as there is no dispute between the “beneficiary” owner and the contractor about the supply of goods worth seventy million pounds.

Characteristics of letters of guarantee

One of the distinguishing characteristics of the letter of guarantee is that the bank is obligated to liquidate it without regard to any objection from the ordering contractor, and without regard to any relationship between the bank and the ordering contractor, even if the contractor is indebted to the bank

So a direct relationship arises between the bank and the “beneficiary” owner that is not linked to the agreement contract concluded between The owner and the contractor, the bank’s obligation towards the beneficiary under the letter of guarantee is an independent commitment from any other relationship that binds the bank to the contractor/order, and the bank may not raise any objection from the order to refrain or delay in disbursing the letter of guarantee.

The letter of guarantee shall include inter alia, the name of the bank, the name of beneficiary, the amount of the letter of guarantee, the currency and the term of the letter, provided that such letter shall be executed the bank’s official in question, and it shall be stamped with the bank’s seal.

And from the previous presentation, it can be said that each of the parties to the letter of guarantee achieves a benefit for him, as the bank gets a commission for issuing the letter of guarantee.

The letter of guarantee also helps the order / contractor to obtain the deal by presenting the letter of guarantee instead of the cash insurance, and the commission that he pays to the bank for the letter of guarantee

It is less than the benefit of obtaining a loan to provide cash insurance, and on the one hand, it guarantees the owner / beneficiary obtaining compensation – so to speak – in the event that the contractor does not implement the deal according to the agreed terms, so everyone is a winner as long as each of them is committed to implementing his agreed obligations

It is worth mentioning that the letter of guarantee is governed and regulated by the provisions of Trade law No. 17 of 1999, namely, articles 355 to 360, as well as all disputes pertaining to the letter of guarantee shall be settled by Economic courts in accordance with law No. 120 of 2008.