What is Performance Guarantee?

Topic Overview

  • Performance Guarantee is an agreement between a Client and a Contractor
  • Bank Offer a guarantee to the client on behalf of a contractor¬†that work will be done as the agreement
  • There is two types of Performance Guarantee – Advance Payment Guarantee and Tender Guarantee.

Definition of Performance Guarantee

Performance guarantee is the agreement between a client and a contractor to assure client to perform contractor’s obligation as per agreement.

In this respect, the Bank gives an undertaking to its client that contractor will do their job as per agreement. If the contractor fails to perform his duties as per contract, the bank will pay the damage up to the guaranteed amount. This guarantee might include a clause to protect the client against the losses incurred if the contractor fails to perform.

Types of Performance Guarantee

There are different types of guarantees that a bank will offer to its clients and parties. Following two types of Guarantee is very familiar and commonly used in the corporate field. These two are:

Advance Payment Guarantee

Advance taken from the buyer is very common practice in today’s business. In this respect, the bank provides a guarantee to the buyer that the money given by him to the seller against advance payment to deliver the required goods. If the seller fails to comply with requirements as mentioned in the sale agreement, the seller will be liable to back the amount to the buyer. The Bank offered the guarantee to back the advance payment for non-compliance with the conditions.

Tender Guarantee

This guarantee also referred to as the ” Bid Bond” guarantee. Both in International Tender and in Local Tender this guarantee is used where a contractor/supplier is obliged to comply with the conditions as mentioned in the agreement.