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Understanding Bank Guarantees in EPC Contracts

Bank guarantees play a significant role in EPC contracts by mitigating risks for both customers and contractors. A bank guarantee is a written promise issued by a bank to compensate the beneficiary, either the customer or contractor, for a guaranteed sum if the obligor does not fulfill its contractual obligations. Key parties in a bank guarantee are the principal debtor, beneficiary, and guarantor bank. Bank guarantees come in various types and have important clauses regarding invocation, validity periods, and governing laws. Companies have internal procedures to carefully review bank guarantees.

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421 views14 pages

Understanding Bank Guarantees in EPC Contracts

Bank guarantees play a significant role in EPC contracts by mitigating risks for both customers and contractors. A bank guarantee is a written promise issued by a bank to compensate the beneficiary, either the customer or contractor, for a guaranteed sum if the obligor does not fulfill its contractual obligations. Key parties in a bank guarantee are the principal debtor, beneficiary, and guarantor bank. Bank guarantees come in various types and have important clauses regarding invocation, validity periods, and governing laws. Companies have internal procedures to carefully review bank guarantees.

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smg26thmay
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Bank Guarantees

The stakes and risks involved in EPC business both for the
Customer and Contractor are extremely high. These risks are
mitigated to a great extent by Bank guarantees. Hence these play
a very significant role in our kind of business and are vital part of
commercial aspects of EPC contracts.

Bank Guarantee (BG)


What is a BG?
A Written Promise issued by the Bank
To compensate the beneficiary
For a Guaranteed Sum & period
On Non-fulfillment of obligations by the obligor
As per the terms of the guarantee or agreement or contract

Bank Guarantee (BG)-Customer


What is a BG?
A Written Promise issued by the Bank
To compensate the beneficiary (Customer)
For a Guaranteed Sum & period
On Non-fulfillment of obligations by the obligor (L&T)
As per the terms of the guarantee or agreement or contract

Bank Guarantee (BG)-Vendor


What is a BG?
A Written Promise issued by the Bank
To compensate the beneficiary (L&T)
For a Guaranteed Sum & period
On Non-fulfillment of obligations by the obligor (Vendor)
As per the terms of the guarantee or agreement or contract

Parties to Bank Guarantee


Principal debtor

the person who has to


perform or discharge the
liability and for whose
default the guarantee is
given

Beneficiary

is the person to whom the


guarantee is given for due
fulfilment of contract by
principal debtor.

Guarantor ( bank )

is the person who gives the


guarantee.

Types of BGs

Bid Bond
Advance BG
Performance BG
Security BG
Retention BG
LD BG
Warranty BG
Special BG
To release additional Payment
Related to some issue not envisaged at the time of contract

Structure of BG

Parties to the Guarantee

Undertaking

Mode of Invocation

Validity of the BG

Change in constitution of the parties

Principal Debtor clause

Extension and amendment clause

Notwithstanding clause

Conditions for assignment

Law governing the BG

Sample BG
Format

Important Aspects - BG
Irrevocable and unconditional undertaking
Reference of contract / Tender to be given in BG
Principal Debtor Clause
Place of Payment of the Claim

Laws governing the BG


Claim Period

Clauses to be avoided
Midnight Clause
Fax Intimation
Auto Renewal Clause
BG governed by foreign laws
Conditional Invocation clause
Validity without the claim period
Conditional assignment of the BG

Counter Bank Guarantee


What is a Counter Guarantee ?
A commitment given by one bank (Instructing Bank) to another
bank (Issuing Bank) in support of the former's request to issue a
Guarantee. The Counter-Guarantee will act as the Instructing
Bank's Counter-Indemnity in favour of the Issuing Bank.

Internal Procedure
New BG (Post award)
Documents
Standard BG request form duly signed by Project manager
and SBU Head.
Copy of Contract-relevant extract related to BG.
BG format both PDF and soft copy duly filled up.
List of approved Bankers by Customer.
Clearly indicating the validity period and claim Period.
In case of Bid Bond, where the Contract Value is above $100
mn/500 crore , apart from the above documents Pre- Bid
approval form duly signed by directors part of Risk Mgmt
committee for the project also need to approve.

Internal Procedure
Role of F&A
Domestic Contract
Forwarding Formats to Banks for their Comments
Negotiating rates..
Vetting of the clauses of the BG
Avoid open clauses
Assignable/transferable BGs
Governing Law
Clauses detrimental to Company etc.

Internal Procedure
International Contract
Over and above what is stated above, Post award approval
need to be taken as stated below:
Less than $100 mn- Authorised Dealer Approval would be
required
$100 mn & above - Working Group approval required
comprising of
EXIM Bank
RBI
Authorised Dealer
Export Credit Guarantee Corp. ( ECGC)

Thank You !!

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