Design of a Low Risk Guarantee Flashcards
Fundamental Principles for Guarantees (4)
1) Must contain a maximum liability amount
2) Must only be issued based on underlying transaction (only bid bonds and customs bonds are exempt)
3) Guarantee must only be issued if it includes formal requirements regarding its call
4) No non-divestment clause within the guarantee
Mandatory Clauses 1: Limitation Clause
Guarantee must contain defined rules for its termination. Essential to limit the validity period of the guarantee
Mandatory Clauses 2: Choice of Law
Generally, guarantees should be governed by the laws or to be subject of jurisdiction of countries in which at least one of the parties to the transaction is based. German, Swiss, English Law is always acceptable
Mandatory Clauses 3: Return of the Guarantee Document
Guarantees shall contain obligation that beneficiary is obligated to return guarantee after expiry date
Mandatory Clauses 4: Payment Clause
Guarantee amount must be limited.
Bid Bonds: max 5% of expected CV
Advance payment: Advance amount
Performance: should not exceed 20% of CV
Warranty: Should not exceed 10% of CV
Mandatory Clauses 5: Calling requirements
Formal requirements regarding calling needed. As a minimum the beneficiary has to inform issuer of the guarantee about its demand in writing
Mandatory Clauses 6: Effective Clause
Clear wording (e.g. advance payment deposited in sellers account)
Risk Mitigating Clause: Reduction Clause
Enables obligor to reduce the amount of advance payment guarantee in line with progress.
High Risk Clause 1: Non-divestment clause
No-Go per Circular. Clause whereby parent company undertakes not to sell all or part of its stake in Siemens entity or to guarantee the continued existence of a particular company. Would not allow Siemens to restructure its business without consent of the customer. Written approval is required from the managing board
