Question 1: What is a letter of guarantee?

Question 2: What does a letter of guarantee mean?

Letter of Guarantee: A written credit guarantee certificate issued by a bank, insurance company, guarantee company or individual to a third-party beneficiary at the request of the applicant. The guarantor is responsible for the applicant's debt or obligation. Bear liability for compensation.

English name: L/G

Synonyms: Letter of Guarantee

A letter of guarantee is a special form of guarantee that combines the commercial reputation of both parties in business transactions. Translated into bank reputation. A letter of guarantee is different from a general guarantee contract and a standby letter of credit. Therefore, banks should pay more attention to reducing their own risks when issuing a letter of guarantee.

Bank guarantee: A bank guarantee refers to a written commitment document with a guaranteed nature issued by the bank at the request of the client. Once the client fails to repay the debt or perform as stipulated in the contract signed with the beneficiary, When obligations are agreed upon, the bank shall perform the guarantee liability. It has the following two characteristics:

1. The letter of guarantee is issued based on the business contract, but is not attached to the business contract and has legal effect. When the beneficiary makes a reasonable claim under the guarantee, the guaranteeing bank must bear the responsibility for payment, regardless of whether the principal agrees to pay, and regardless of the actual facts of contract performance. That is, a letter of guarantee is a commitment and is basically a documented transaction.

2. Bank credit serves as a guarantee and is easily accepted by both parties to the contract.

There are three main parties involved in bank guarantee business: the client, the beneficiary and the guarantor bank. In addition, there are often counter-guarantors, advising banks and confirming banks. An interlocking contractual relationship is formed between these parties, and the legal relationship between them is as follows:

1. The creditor-debt relationship between the principal and the beneficiary based on the contract signed by each other. or other rights and obligations. This contract is the basis for the rights and obligations between them. It is the main contract compared to the letter of guarantee agreement and the letter of guarantee. It is the prerequisite for the creation and existence of the other two contracts. If the content of this contract is not comprehensive, it will bring risks to the bank's guarantee obligations. Therefore, when a bank accepts a guarantee application, it should require the principal to provide the contract signed between him and the beneficiary.

2. The legal relationship between the client and the bank is an entrustment and guarantee relationship based on the "Letter of Guarantee" signed by both parties. The "Letter of Guarantee" should include the content, amount, type of guarantee, deposit of security deposit, collection of handling fees, conditions and time for the bank to issue a letter of guarantee, guarantee period, liability for breach of contract by both parties, change and termination of the contract, etc. Make a detailed agreement to clarify the rights and obligations of the client and the bank. The "Letter of Guarantee" is the evidence that the bank collects handling fees from the principal and recovers reimbursement from the principal after fulfilling its guarantee obligations. Therefore, after receiving a guarantee application from a client, a bank must carefully evaluate and review the client's credit standing, debt, guarantee content and operating risks to minimize its own risks.

3. The legal relationship between the guarantor bank and the beneficiary is a guarantee relationship based on the letter of guarantee. A letter of guarantee is a unilateral contract whereby the beneficiary has the right to require the bank to repay the debt. In most cases, once a letter of guarantee is issued, the bank will directly assume the guarantee responsibility.

Demand bank guarantee: Depending on the nature of the guarantee, it can be divided into subordinate guarantee and demand guarantee. A demand guarantee is a letter issued by a bank that expresses in writing that it will assume unconditional payment responsibility when the beneficiary submits a claim that complies with the terms of the guarantee or other conditions stipulated in the guarantee.

The bank’s responsibilities in a demand guarantee.

(1) The bank only has the obligation to carefully examine the documents specified in the letter of guarantee on their surface. According to the Uniform Rules for Demand Guarantees promulgated by the International Chamber of Commerce in 1992 and the United Nations Convention on Sexual Guarantees and Standby Letters of Credit signed by the United Nations in 1995, although the guarantor is not responsible for the accuracy of the documents submitted by the beneficiary, However, the guarantor should first exercise reasonable care and examine whether the documents are superficially appropriate. If the documents are complete, the guarantor shall pay as long as the submitted documents are examined with reasonable caution and meet the superficial requirements stipulated in the letter of guarantee. Even if The content of the document is false and the form is forged, and the guarantor does not bear fault liability, that is, the guaranteed party cannot use this as a defense to compensate the guarantor.

(2) The bank has the obligation to notify the beneficiary of the compensation request. When the beneficiary formally files a claim, the guarantor shall immediately notify the client and pass all the documents submitted by the beneficiary to the client so that the client can defend the beneficiary's claim based on the specific performance of the underlying contract. If the guarantor fails to notify and thereby causes losses to the principal, the guarantor shall bear this part of the losses himself and has no right to demand compensation from the principal. In addition, unless the guarantor can prove with absolute certainty that the beneficiary's claim is fraudulent, that is, the beneficiary made the claim in bad faith knowing that the principal had not breached the contract, any delay by the guarantor in making the beneficiary's claim will constitute a breach of the demand bank guarantee. .

Issues that banks should pay attention to when issuing letters of guarantee

In international guarantee business, the vast majority of banks use demand guarantees. Once a demand guarantee is issued, The bank will be the first payer and take on a lot of risk.

Therefore, in order to reduce risks, banks should pay attention to the following issues when issuing a demand guarantee:

(1) The guarantee should specify the compensation conditions, including the specific guarantee amount, beneficiary, and entrustment person, validity period of the guarantee, etc.

(2) The bank should require the client to provide corresponding counter-guarantee or provide a certain amount of deposit, and the bank will issue a letter of guarantee within the amount of the deposit.

(3) When a bank issues a letter of guarantee to an overseas beneficiary, it is an external guarantee. You must also pay attention to the legal provisions for external guarantees such as reporting to the Administration of Foreign Exchange for approval.

(4) When a bank issues a letter of guarantee, it should also carefully review the authenticity of the basic contract to prevent fraud.