The international banking community has developed two main financial instruments: documentary credits and international bank guarantees.
The former is designed to reassure exporters that they will be paid on the agreed date or upon completion of a contract (e.g. sale of goods or provision of services), while the latter is designed to reassure importers that their suppliers will fulfil their contractual obligations in good and due form.
The international community has established uniform practices for this purpose, the rules of which are laid down by the International Chamber of Commerce (ICC).
FIRST DEMAND BANK GUARANTEES:
International bank guarantees are often issued according to a precise timetable, depending on the progress of the contractual project. This starts with the bid guarantee at the tender stage, followed by the advance or down-payment refund guarantee at the start of the contract. Next comes the performance guarantee when the provisional and/or final acceptance report is signed. Finally, there is the holdback guarantee, which extends for one year after the contract is delivered to the beneficiary.
BID BOND:
In the context of procurement, national companies and institutions issue invitations to tender or hold auctions to identify various international suppliers and select the best offer for executing the contract. If a bidder is selected, they are obliged to honour their commitment to carrying out the contract in accordance with the criteria set out in the specifications.
The bid bond is payable during the pre-contractual phase and compensates the beneficiary if the bidder withdraws their offer during the selection period or refuses to provide the other stipulated guarantees.
The amount of the bid bond varies between 1% and 5% of the bid amount, and it is valid for six months from the date of the tender opening. The bidder must notify the release of the bid bond in the following cases:
1. When the bidder's offer is rejected, i.e. when it is not selected to perform the contract in question.
2. When the bidder is selected to perform the contract and provides the other guarantees required.
ADVANCE PAYMENT BOND:
Contracts generally call for an advance payment of up to 15% of the contract amount prior to execution. This advance is also known as a repayment guarantee and is essentially a facility granted to the prime contractor to enable them to begin executing the contract.
The guarantee takes effect when the funds are deposited in the customer's account at the bank specified in the contract. It generally remains in force until the provisional acceptance report is signed, or until it is reduced in proportion to the services provided, until it is repaid in full.
PERFORMANCE BOND:
This guarantee ensures that the beneficiary is reimbursed if there is non-compliance with the contract clauses relating to the quality or quantity of the goods and/or services provided.
The bond is put in place as soon as the contract is signed and remains in force until final acceptance, in accordance with the contractual provisions.
In some cases, the guarantee may be reduced to 50% upon provisional acceptance and a further 50% upon final acceptance of the goods and/or services.
RETENTION MONEY BOND:
Also known as a maintenance guarantee or a warranty waiver guarantee, this bond covers construction or maintenance services during the trial period between the provisional and final acceptance of the contract.
It comes into play to stop the retention of funds, which can amount to 10% of the contract value.
While a performance bond covers the period from contract completion to provisional acceptance, it is replaced by a maintenance bond during the trial period and becomes invalid upon final acceptance.
A retention bond is triggered if the supplies and/or services provided do not meet the agreed contractual standards, or if the contractor refuses to maintain the equipment during the trial period.
CUSTOMS GUARANTEES:
This type of commitment is mainly reserved for work contracts that require the temporary admission of materials or the use of customs procedures that have an economic impact, such as the suspension of customs duties and taxes.
Companies carrying out such contracts are exempt from paying duties and taxes if they provide a guarantee covering the amount of the said duties.
Additionally, for imports with insufficient documentation, the customs guarantee authorises importers to take possession of the goods and produce documents proving ownership.
- TEMPORARY ADMISSION: certain foreign contractors are authorised by the customs administration to temporarily import equipment without paying duties and taxes on the condition that the equipment is re-exported once the work is complete (Instruction 866/82/Ministry of Finance). This guarantee secures a specific amount of duties and taxes due on temporary imports.
- REMOVAL CREDIT: foreign companies with a high volume of imports can deposit the value of their imports in an account with the customs administration. They can then charge the duties and taxes due against this account as shipments arrive until it is fully exhausted.
This is equivalent to a line of credit granted by the customs authorities to foreign companies liable for customs duties.
LITIGIOUS SUBMISSION: This guarantee can also be used to cover goods that have arrived without one or more of the documents in the binder. The importer can then remove his goods and complete the formalities as soon as he has the missing document.
BONDED OBLIGATIONS: This credit facility is granted by the customs authorities to an importer and enables them to pay duties and taxes using 120-day endorsed drafts, which are covered by a global counter-guarantee of an equal amount.
OTHER FIRST-DEMAND BANK GUARANTEES:
In practice, the bank's involvement in commitments is not limited to traditional international transactions (transfers, remdocs, credocs, etc.), but has been extended to related foreign trade transactions.
Indeed, maritime traffic accounts for the lion's share of multimodal transport, strongly encouraging the bank to play a greater role as an international intermediary and gradually establishing itself as a means of reducing the problems arising from international transactions.
LETTER OF GUARANTEE FOR ABSENCE OF BILL OF LADING
Under the Brussels Convention of 1924, the carrier is liable for any damage or loss to goods from the moment they are taken into their possession until they are delivered, provided that the original bill of lading is surrendered. If the bill of lading is not surrendered, the bank will intervene on the instructions of the principal — generally the consignee of the goods or their forwarding agent — to issue a guarantee to the carrier or their consignee (agent) enabling them to take possession of the goods in exchange for the original bill of lading. The bank issues this undertaking on behalf of the carrier or his consignee (agent) to enable them to take possession of the goods against surrender of the original bill of lading or payment of the value of the goods in the event of irregularities in delivery without a bill of lading.
However, it is important to avoid confusing this guarantee for the absence of an original bill of lading in favour of the carrier with the contentious tender allowing the removal of goods in the absence of one or more formalities in favour of the customs authorities.
PAYMENT GUARANTEE:
Sometimes, the importer may experience financial difficulties when settling charges related to the export transaction, at which point the guarantor bank will issue guarantees in favour of the exporter within the framework of certain credits (buyer or financial).
This guarantee can also be issued in favour of a court with jurisdiction over a case, to ensure reimbursement of costs and fees incurred in legal proceedings.
A payment guarantee covering external credits comes into effect as soon as it is issued and remains valid until the credit is fully repaid. A guarantee issued in favour of a court comes into effect as soon as it is issued and is cancelled by an arbitration sentence made by a competent judicial body.
SETTING UP AND MANAGING BANK GUARANTEES:
Algerian regulations ban direct guarantees. In fact, any bank guarantee issued by an Algerian bank for the benefit of a resident economic operator must be counter-guaranteed in first class guarantee by a foreign bank (Ministry of Finance note No. 171/F/DCA, 21 January 1989).
IMPLEMENTATION OF THE GUARANTEE:
Receipt of counter-guarantee: Upon receiving instructions from the foreign exporter, the foreign bank issues a counter-guarantee in favour of the Algerian bank, which covers the guarantee to be issued by the latter in favour of the Algerian buyer.
The Algerian bank's International Department examines the counter-guarantee, assessing the creditworthiness of the issuing bank and ensuring that the text of the counter-guarantee conforms to the standard text drawn up by the Ministry of Finance (Note 532 SG dated 25/06/1985).
If the counter-guarantee is accepted by the guarantor bank, the guarantor bank communicates the terms of the guarantee to be set up to the beneficiary for approval. The beneficiary has ten days to express any reservations. After this time, the conditions are tacitly accepted and the guarantor issues the guarantee deed (Banque d'Algérie Instruction N°05/94, Article 07).
Under the terms of the guarantee deed, the Algerian bank is officially committed to paying the amount of the guarantee to the Algerian beneficiary upon request.
OBILGATORY NOTICES FOR THE FIRST DEMAND GUARANTEE:
A. DESIGNATION OF THE PARTIES: The principal, the beneficiary and the guarantor bank are the main parties to a guarantee deed. However, it is particularly important to designate the beneficiary in order to preserve the intuitu personae nature of the guarantee deed, unlike the claim represented by the guarantee, which can be assigned or transferred.
b. PURPOSE OF THE GUARANTEE DEED: The deed of guarantee may only cover the contract for which the guarantee is issued. In other words, it covers any risks linked to non-compliance with the clauses of the basic contract between the purchaser and the supplier.
c. THE AMOUNT OF THE GUARANTEE: Revising the contract amount may automatically lead to a change in the guarantee amount. For this reason, the ratio of the guarantee amount to the basic contract amount must be clearly stated in the deed of guarantee, particularly for phased contracts where the guarantee amount is amortised according to the volume of work carried out.
EXTINCTION OF THE WARRANTY DEED:
According to Articles 18 and 24 of the RUGD, the non-return of the guarantee deed does not affect its validity; however, its return irrevocably presumes the expiry of the guarantee.
Therefore, a calendar date and/or an event may prompt the beneficiary to release the guarantee under favourable conditions for the performance of the contract. However, there is nothing to prevent unfavourable factors from arising that could affect the normal course of the contract, thus requiring the guarantee to be enforced in accordance with the principle of first demand, at the beneficiary's request (Art. 20 RUGD).
APPLICABLE LAW:
In the event of disputes arising from the execution of bank guarantees, article 27 of the RUGD requires guarantors and counter-guarantors to submit their commitments to the law of the bank providing the service, unless otherwise agreed by the parties involved.
- The guarantee is governed by the law of the issuing bank.
The counter-guarantee is governed by the law of the domicile of the issuer of the counter-guarantee.
MANAGEMENT OF THE BANK GUARANTEE:
- MODIFICATIONS: All modifications must be notified to the beneficiary before they can be carried out. These generally concern the amount, rate, address and/or nature of the contract.
EXTENSION: The beneficiary often approaches the guarantor bank to request an extension to the date indicated in the guarantee deed.
This is usually due to a failure observed during the performance of the contract.
RELEASE FROM THE WARRANTY:
The warranty ends if one of the following conditions is met:
1. Waiver of the guarantee: This formula reflects compliance with the contractual commitments of the co-contractors and the consensual release of the guarantee by the beneficiary. If this measure is not taken, the principal will be charged additional commissions, sometimes equalling the amount of the guarantee.
2. ENFORCEMENT OF THE GUARANTEE: If the foreign supplier fails to fulfil their contractual obligations to their Algerian partner, the latter will request that their guarantor bank pay the guarantee amount.
