Principal and beneficiary - parties to the bank guarantee

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Any action in the financial sector involves the presence of two or more parties. And a bank guarantee (BG) in the field of risk insurance is no exception. A financial and credit organization operates here with a performer (principal) on the one hand, and a customer (beneficiary) on the other.

Who are the beneficiary and the principal in a bank guarantee, and who has what responsibilities? Let's try to figure it out.

Bank guarantee

BG is a way to guarantee the fulfillment of obligations of one party to the other. The document signed by the parties gives guarantees for the payment of the agreed amount to the customer if the terms of the contract are not fully or improperly fulfilled.

Such a document protects each of the participants in the transaction, but first of all - the customer of services or works. It can also be a supplier, borrower or lender.

What is a warranty?

In order to understand who the guarantor is,principal and beneficiary, it is necessary to understand the characteristics of a bank guarantee. The main features of this product are as follows:

• A bank-backed debt obligation must be independent and stand on its own.
• Irrevocable. That is, the guarantor has the right to early withdraw the BG only if there is a corresponding entry in the contract.
• Unable to transfer rights. The beneficiary will be able to transfer his rights only with a certain agreement specified in the document.
• Retribution. Guarantee services are paid to the financial and credit organization in full.

Independence among legal signs is considered the main one. From it you can derive the main distinguishing features of the BG from other types of security. They are:

• The expiration of the period of validity of the warranty certificate does not occur in the event of termination of the main obligation.
• Changing the main obligation does not change it under the guarantee.
• The objections of the bank when making claims by the beneficiary are unlawful.
• When re-applying for the payment of the amount to the creditor, it must be fulfilled without question.
• Obligations guaranteed to the beneficiary by a financial institution do not depend on the position of the debtor under the secured agreement.

Deal participants

This type of agreement requires three parties:

1. Guaranteed
2. Beneficiary.
3. Principal.

Official definitions

So, who are the principal and the beneficiary? The first is a person who applies to a financial institution for a guarantee and at the same time assumes all obligations to fulfill the concluded agreement.

The second one is the creditor for the assumed obligations, specified in the bank guarantee document. That is, it is the principal who provides the work (services) specified in the contract to the beneficiary.

The bank acts as a guarantor. He is the party providing the payment of monetary compensation in the event of a warranty event.

How does it work?

The initiator of applying for a bank guarantee is the principal. Most often this does not happen "from a good life." Sometimes such a document is the only way to get a long-term and profitable order from the state.

The principal in this case acts as an applicant, assumes the cost of paying a commission to the bank and becomes a debtor until the obligations are fully fulfilled. Like the beneficiary, he must meet the criteria set by the bank, which, in turn, analyzes the declared status of the company, history, accounting and other documentation before signing the document.

The beneficiary is the main beneficiary of the guarantee issued by the bank. He has the right to request payment of the full amount in case of non-fulfillment or improper fulfillment of the terms of the contract. In this case, the bank, having studied the submitted documents, satisfies (or does not satisfy) the presentedrequirements.

The bank, as the guarantor of the transaction, receives remuneration in the form of the commission paid by the principal. If a financial and credit organization had to pay the amount of the guarantee (or its share), then it is en titled to recover this amount from the principal.

Two years ago, the requirements for issuing guarantees by banks to enforce the terms of contracts became tougher (especially for government contracts). The list of institutions that have received the right to issue guarantees has been reduced significantly. The Central Bank annually updates the register of such banks. In addition, each warranty obligation is registered with Rosreestr (this is how authenticity is confirmed).

Rights and obligations of the guarantor, principal and beneficiary

In general terms, it may seem that it is difficult to bear the burden of a guarantee only for the principal, but the customer, in fact, has his own difficult responsibilities.

There are three situations in which the recovery by the principal from the beneficiary of a pen alty paid to the guarantor would be lawful. They are listed below:

1. Inaccuracy of documents submitted by the beneficiary. If this circumstance is proved, then the principal must be compensated for the losses that he incurred in the process of providing a bank guarantee or in the execution of the order.

2. Claims for the payment of a certain amount are not substantiated. If the requirements of the beneficiary to the guarantor regarding the payment of funds are unfounded, and this is documented, the money must be returned.

As an example, we can cite a principal who, in good faith and in full,requirements, and the customer submitted documents to the bank stating otherwise. In this case, the beneficiary has the right not only to compensation, but also to file a claim with the court.

3. Failure to comply with the terms of the contract. The contractor, that is, the beneficiary, as the creditor of the principal under a bank guarantee, is obliged to comply with the conditions specified in the contract. If they are not fulfilled, and the principal incurs losses because of this, then they will have to be reimbursed in full.

All subjects of the transaction are responsible to each other.

How to become a principal?

Warranty processing today is not an easy task. The legal requirements are very strict. Step to the left, step to the right - the contract between the principal and the beneficiary becomes invalid. And all parties suffer losses.

Experts advise to contact lawyers to avoid various incidents. Especially for those who are trying to get a guarantee for the first time. If not possible, try this.

Step One

Determine the guarantor. That is, we evaluate our prospects. The slightest inconsistency with the basic conditions of the bank guarantees refusal. In general, the requirements of the guarantor are:

• The specifics of the order and the field of activity of the organization must match.
• By the time of application, the organization must be registered as a legal entity for at least six months (in some banks - more than a year).
• The required guarantee amount must correspond to the capabilities of the organization (with a small authorizedcapital, you should not ask for millions of guarantees).
• Optional, but it is better that the organization already has experience in guarantee contracts.

When these conditions are met, it is easy to choose a guarantor. The probability of refusal will be less if the organization has accounts in this bank. Before contacting the selected bank, you need to check if it is in the register of the Ministry of Finance (if not, the document will be invalid).

At this, as well as at other stages, it is easier to conclude an agreement between the beneficiary and the principal through a broker. His services are not free, but worth it. With an intermediary, documents are processed many times faster, and the probability of refusal is almost zero. Here it is necessary to warn the potential principal. Today, cases have become more frequent when an intermediary for a day (or even less) for a couple of documents offers to issue a guarantee. With almost one hundred percent probability, we can say that this document is “gray” (that is, not registered with Rosreestr) and will not have legal force.

Step two

Collecting documents and providing them to the future guarantor. We start by confirming the official status of the organization. This is a document on the company's entry into the Unified State Register of Legal Entities. More needed:

• Application (to be completed at the bank).
• Copies and originals of constituent documents.
• Accounting statements.
• Documents confirming the authority of the management team.
• Copies of signed contracts with the customer.

This is the main package of documents. The Bank, at its discretion, may request moreany information.

Sometimes, in order to issue a guarantee, the beneficiary offers the principal his banks, with which he has been working for a long time and has established contacts. The principal has to agree, there is simply no choice.

Step three

The bank makes a decision. This is a long process. Managers of a financial organization check the candidate's credit reputation, his financial capabilities, experience and period of work in the specified field of activity. And also - solvency.

Verification of regular participants in public procurement and tenders passes quickly. Reviewers usually don't go into details. Beginners are harder. Therefore, before applying, experts recommend first of all to put financial and accounting affairs in order.

Step Four

Approval of the draft guarantee. Before signing the document, it must be carefully read, preferably by a lawyer of the candidate organization. All doubtful points must be removed before the conclusion of the contract. After the stamps and signatures have been affixed, this is much more difficult to do.

Step Five

Paying invoices. There are two options here:

1. One-time in the form of 1-3% of the amount of the issued guarantee.
2. Monthly pay the amount specified in the contract.

At this stage, you need to pay for the work of an intermediary.

Step six

Conclusion of the contract and the issuance of documents in hand. This is the result of the work done. Each participant hasguarantee remains one copy of the document. The principal also has an extract from the register of bank guarantees (to confirm authenticity).