b) issuance process :

A demand guarantee might also be called a bank guarantee, a performance

bond, or an on-demand bond depending on the usage. For example,
a performance bond can be issued by an insurer or a bank to guarantee that a
party fulfills its obligations in a contract. 1 This type of guarantee is commonly
used in international trade and business transactions to provide assurance to the
seller that they will receive payment when certain conditions are met. The key
feature of an on-demand guarantee is that the beneficiary can request payment
without having to prove a default or breach of contract, making it a powerful
form of financial security.
The issuance process of an on-demand guarantee typically begins when the
applicant (often the buyer or importer) submits a request to their bank, known as
the issuing bank, for the issuance of an on-demand guarantee. In other words,
The Applicant/Instructing Party sends its bank an application for the issue of a
Guarantee. This should be based on the agreement with the Applicant/Instructing
Party’s counterpart, i.e. the Beneficiary of the Guarantee. The agreement,
outlined in a contract, proforma invoice and so on, should preferably include
information about the Guarantee(s) to be issued, this being the information that
will be included in the final Guarantee: it is therefore essential that it reflects the
agreement made and that it be clear and precise.2 Once the contract is finalized,
the following step is to apply for issuance of the Guarantee. Most banks have
dedicated application forms. The Applicant/Instructing Party fills in all relevant
facts that should be included in the Guarantee, such as the beneficiary, the
guaranteed amount, the terms and conditions, and any supporting documents
such as the contract or agreement between the parties. Names and addresses of
the Applicant/Instructing Party and the Beneficiary must be complete and
correct. Moreover, it should be clear which obligation the Guarantee covers and
who is entitled to make a demand under the Guarantee. This is particularly
important for companies operating under several names and with independent
units that may be separate legal entities.
If the Guarantee is to cover interest or expenses in addition to the principal
amount, these must be explicitly stated. In addition, the parties should consider
which bank should issue the Guarantee. When receiving the Guarantee, the
Beneficiary ‘transfers’ a defined risk, e.g. of non-performance or non-payment,
from the Applicant/Instructing Party to a Guarantor, which is often a bank. It is
therefore important to indicate which bank will do the issuance.

1
Investopedia.com
2
Tradefinanceglobal.com
The issuing bank conducts due diligence on the applicant's creditworthiness and
financial capacity to meet the guarantee's obligations. They also review the
terms and conditions of the guarantee to ensure they comply with applicable
laws and regulations. If the issuing bank is satisfied with the application and due
diligence, they issue the on-demand guarantee. The guarantee document specifies
the terms and conditions under which the beneficiary can make a demand for
payment, which typically involves a simple written statement from the beneficiary
requesting payment without the need for detailed justification.

The issuance of the Guarantee by the Guarantor is based on the application

received from the Applicant/Instructing Party. The Guarantor will only issue the
Guarantee after having checked and accepted the application form. This process
may take place in a number of ways, for example through SWIFT via an
advising party, but it may also be issued in paper format and handed over to the
Instructing Party for further delivery to the Beneficiary or sent directly to the
Beneficiary. According to the instructions received an amendment is either
requested by a signed letter from the Applicant/Instructing Party or a bank’s
amendment request application.
When the Guarantee leaves the control of the Guarantor, it is issued (article 4(a))
and is irrevocable (article 4(b)), meaning that an amendment made without the
Beneficiary’s agreement is not binding on the Beneficiary (article 11(b)).

An amendment should be routed through the same parties as the original

Guarantee (article 10(f)). In case this is made without the Beneficiary’s
agreement, it is not binding on the Beneficiary (article 11(b)) before it has
accepted all aspects of the amendment. Partial acceptance of an amendment will
result in refusal of the whole amendment (article 11 (e)).3
On receipt of the Guarantee, the Beneficiary should immediately examine it to
make sure that it is in accordance with the contract or any other agreement, and
that it will be possible to comply with all of its terms and conditions if a demand
for payment is to be made.
When the beneficiary believes that they are entitled to payment under the terms
and conditions of the guarantee, they can submit a formal demand for payment
to the advising bank. The demand should be made according to the specified
requirements in the guarantee document.

The advising bank examines the beneficiary's demand to ensure it complies with
the terms of the guarantee. If the demand is in order and meets the conditions

3
Tradefinanceglobal.com
specified in the guarantee, the advising bank forwards the demand to the issuing
bank.

The issuing bank is obligated to make payment to the beneficiary as soon as they
receive a proper demand. The payment is typically made promptly, and the on-
demand nature of the guarantee means that the beneficiary can receive payment
without having to prove a breach of contract or default by the applicant.
Payment can be made through a wire transfer or another agreed-upon method.

After making the payment to the beneficiary, the issuing bank seeks
reimbursement from the applicant, who initially requested the guarantee. The
terms for reimbursement are usually outlined in the underlying agreement
between the issuing bank and the applicant.

It's essential to understand that the specific steps and requirements for the
issuance of on-demand guarantees can vary depending on the terms of the
guarantee, the laws and regulations of the relevant jurisdictions, and the policies
of the banks involved. Additionally, international trade transactions often use
standardized guarantee forms, such as those published by the International
Chamber of Commerce (ICC), to provide a widely accepted framework for these
transactions.