It is very common to witness one or the other kind of 'Guarantee' being insisted upon by one or more parties in any commercial transaction.
Thus, we see different types of guarantees provided by one party to another party or to some third party to provide assurance of performance or fulfilment of certain terms and conditions of the contractual relationship.
Simply stated, a guarantee is an assurance of certainty to infuse confidence into the relationship of the parties involved in the transaction or any third party associated with the transaction.
Types of guarantees (listed below) varies from contract to contract depending on the nature of the transaction and relationship of the parties.
1) Guarantees with respect to financial and commercial transactions:
a) Payment guarantee: It is common in many commercial contracts, cash or something of equivalent value will be the consideration to be paid by one party to another party for concluding the transaction. Payment guarantee is a guarantee provided by a party who owes the payment that it will make the payment to the other party or to any third party as directed by other party or otherwise such third party is directly involved in the transaction.
b) Financial guarantee: In the current world, credit is a financial lifeline to many companies or high profile individuals to expand their line of business or to scale their economic prospects to next level. As a reason such companies or individuals will get required credit from banks, or financial institutions by providing a guarantee, in this case, payment of finance will be guaranteed by third party surety to the bank. This is most prevalent in credit or loan arrangements.
c) Advance payment guarantee: It is common to make an advance payment to seller in case of purchase of product, service, property or to service provider in case of engagement to perform certain works. Advance payment guarantee is a way of guarantee to a person making advance payment that in case of failure of seller or service provider to fulfill their promises, respective seller or service provider will pay back the advanced amount to such buyer or a third party who is entitled to receive such advance payment on behalf of buyer.
d) Retention money guarantee: In construction industry, home buyer or owner may make last leg of payment for the property in advance, prior to completion of construction of property and receiving the possession of such property. In such case, retention money guarantee is an assurance to such home buyer or owner by the bank or financial institution that builder or contractor will continue to fulfill their pending obligations without fail following the receipt of final and full payment of consideration for sale of property.
2) Guarantees with respect to products, services, equipment, and real estate assets:
e) Maintenance guarantee: In a real estate segment, the core business is construction of houses, apartments and gated communities. Job of builder is not only to hand over finished real estate asset to the buyers, but ensure its maintenance is intact. In this context, maintenance guarantee is an assurance by a builder or contractor to home buyers or owners of real estate asset about coverage of maintenance costs for a specific period of time following the occupancy of such real estate asset by home buyer or owner.
f) Lease guarantee: Every one may not have their own property or equipment, and will have the only option of leasing of a real estate asset or equipment as per their business or personal needs. In context of leasing a real asset property or equipment, lease guarantee is a way of ensuring that lessor will get their lease payment from the lessee in case of any payment default.
g) Product warranty guarantee: A product manufacturer or supplier will provide a product warranty guarantee for a specific designated time period within such time period manufacturer or supplier will have to honor their obligations and commitments given to buyer or end user of the product. This is to ensure buyer of the product to get timely and appropriate resolution with respect to any defects in the functionality of the products.
h) Service warranty guarantee: In service industry, a supplier or service provider will provide different types of services to customers, pursuant to which they will provide a service warranty to the effect that service will be performed in a professional like manner with qualified and competent professionals. Service warranty guarantee is an assurance to buyer that services will be performed by supplier as specified in the warranty and buyer will be able to enjoy such services uninterruptedly
i) Performance guarantee: Performance of guarantee is a guarantee assuring a specific condition for a contract, milestone in a project or functionality of a product or service will be fulfilled as guaranteed in the contract. This guarantee especially specific and suitable for construction projects, certain products or services. Performance guarantee at times also include performance bond, which bond is used to provide assurance about timely and satisfactory completion of a project or milestone.
3) Others:
j) Bid bond guarantee: Bidding is a process undertaken to invite interested parties to file their bidding to procure a contract to perform certain works. This bidding process is especially prevalent in public sector works, private maintenance and security services, Merger and Acquisition transactions etc. In this context, bid bond guarantee is provided to a third party that a contract will be entered into with such third party by the bidder, in case if bidder gets the bid.
k) Customs guarantee: Now a days once luxury item become a necessity for people, there is no hesitation on part of people to spill money to get their hand on import luxury items such cars, motor cycles, watches etc. However, importing of luxury items means payment of customs for importing such items. Customs guarantee will come into play in such context, failure of importer to make timely payment of customs will enable custom or other competent authorities to invoke custom guarantee to realize payment of pending custom duties.
l) Indemnity guarantee: Indemnity is an obligation on one party to make good the loss suffered by other party. Indemnity provision mostly used in all types of contracts to ensure breaching party will indemnity and hold harmless non-breaching from the consequences of the acts of breaching party. Indemnity assurance is a guarantee that indemnified party will get indemnified by the indemnifying party in case of default.
m) Credit guarantee: In some cases, credit letters will be issued to a company or a person, the purpose of such credit letter to guarantee credit to the company or the person specified in the credit letter.
n) Bank guarantee: In some cases, a company or person may not be in position to provide guarantee with respect to financial payouts. In such cases, banks will provide guarantee on behalf of such company or person with respect to financial payouts, based on such bank guarantee, third parties will proceed with the business deals they have or intend to have with such company or person.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.