Bank Guarantee and Indemnity:

What is Bank Guarantee?:

As per Contract Act 1872 (Section 126) states "a contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default".

Bank Guarantee (BG) is a contract among the three parties - Bank (Guarantor), Creditor (Beneficiary), and Debtor (Customer). Bank Guarantee (BG) refers that a bank promises to the principal creditor that if the debtor (who is primarily liable to perform the obligation) fails to cover a debt or fails to pay or fails to perform as per contract, the bank, as a guarantor (who is secondarily liable if the principal debtor fails to pay) will cover it or pay the ultimate debt to the principal creditor. Generally, a Bank Guarantee is a written contract given by the Bank to Creditor/Beneficiary (or other institution) assuring that if his party/debtor fails, Bank will pay the debt. Bank takes security (or Counter Guarantee) from his party/debtor against issuance of the guarantee. A Bank Guarantee is valid for specific period, as per contract and/or all parties consent; it may be renewed after the expiration of specific period.

There are three parties in a Guarantee:
1. The Principal Creditor/The Beneficiary (who gets the money)
2. The Principal Debtor (who primarily liable to pay to the Creditor)
3. The Guarantor (That is Bank) who, is also called Surety, pays to the Principal Creditor if the Debtor does not pay/fails to perform as per contract.

Bank generally issues following types of Guarantees:
1. Tender Guarantee
2. Performance Guarantee
3. Bid Bond Guarantee
4. Shipping Guarantee
5. Advance Payment Guarantee
6. Customs Guarantee
7. Retention Money Guarantee
8. Return of Bond Deduction Guarantee
9. And More...

What is Indemnity?:

Indemnity is a contract between the two parties Indemnifier (Promisor) and the Indemnified (Promisee) that provides security against a loss, damage, or liability. Indemnity also called 'hold harmless' contracts/agreements. It is a contractual obligation of one party has to compensate the loss or damage incurred by another party if the loss occurs in the transaction.

Indemnity defers from Bank Guarantee in the way that Indemnity has two parties they are - Issuer and Beneficiary also called Indemnifier (Promisor) and the Indemnified (Promisee); whereas Bank Guarantee three parties they are - Bank (Guarantor), Creditor (Beneficiary), and Debtor (Customer). In an Indemnity one person bears the cost of certain claims brought against another person in specified occurrences or circumstances.

Published Date: 11/06/2023