DKVA: Bank guarantees for payment obligations - what do you need to know?

As a Czech entrepreneur you may sell your products to Dutch clients. You may also buy goods from Dutch parties. The risk that your Dutch buyer cannot pay, or the risk that you cannot pay, is not always a risk that one of you wants to take. You may be asked for a bank guarantee or you may want one yourself. A few things will be good to know.

What is a bank guarantee?

A bank guarantee is an obligation of a bank to pay a specified (maximum) amount to a beneficiary. A Dutch bank of the Dutch company you sell products to, may issue the bank guarantee to you for say EUR 100,000. Normally payment will be made by the bank if the beneficiary (you) delivers a document to the bank, stating that the Dutch company did not pay you this amount (or less) when it had to pay. Other conditions may be included, for example evidence of the payment obligation. This evidence could be a court judgment that confirms that the Dutch company has to pay you. The bank will simply pay when it receives the document from you and if the conditions are satisfied. The bank will claim the money back from the Dutch company, usually a client with a bank guarantee facility or cash deposit as security.

Good to know:

• A bank will check if the conditions are satisfied, but not if statements are true or false, unless it is aware of it being false. If you state that you have not received payment, the bank will simply pay. It will not check if it is true that you did not receive payment. The bank only ‘deals with documents’.
• Bank guarantees are based on the principle: ‘first pay, then talk’. If the conditions are satisfied, the money will be paid and in your pocket. The Dutch company has paid, but it may not solve a problem about the products delivered. It may now complain or sue you for bad products, but it has already paid so it needs to get the money back from you.
• If you ask your Dutch buyer for a bank guarantee, it will either need to have a bank guarantee (credit) facility in place, or it needs to deposit the bank guarantee amount in a blocked account with the bank. If the company has a bank guarantee facility in place with its bank, the bank guarantee may be issued in no time. If it doesn’t, the whole process may take much longer, i.e. two weeks.