Any action in the financial sector implies the presence of two or more parties. And a bank guarantee (BG) in the field of risk insurance is no exception. There is a financial and credit organization with an executor (principal) on the one hand, and on the other - the customer (beneficiary).
Who are the beneficiary and principal in a bank guarantee, and who has what responsibilities? Let's try to figure it out.
Bank guarantee
BG is a way to guarantee the fulfillment of obligations of one party to the other. The document signed by the parties gives guarantees for the payment of the agreed amount to the customer, if the terms of the contract are not fully or improperly implemented.
Such a document protects each of the participants in the transaction, but first of all - the customer of services or works. It may also be a supplier, borrower or lender.
What is a warranty?
In order to understand who the guarantor, principal and beneficiary are, it is necessary to understand the characteristics of a bank guarantee. The main features of this product are as follows:
- The debt obligation provided by the bank must be independent and exist independently.
- Irrevocability. That is, the guarantor has the right to withdraw BG ahead of schedule only in the event of a corresponding entry in the contract.
- Inability to transfer rights. The beneficiary will be able to transfer his rights only with a certain agreement prescribed in the document.
- Retribution. Guarantee services are paid in full by the financial institution.
Independence among legal features is considered the main. From it, one can derive the main distinguishing features of the BG from other types of support. They are:
- The end of the period of validity of the guarantee certificate does not occur in the event of termination of the primary obligation.
- A change in the underlying obligation does not lead to a change in it under the guarantee.
- Objections of the bank when submitting claims by the beneficiary are unlawful.
- When re-applying for the payment of the amount to the creditor, it must be carried out implicitly.
- The obligations guaranteed to the beneficiary by the financial and credit institution do not depend on the position of the debtor under the agreement secured by the guarantee.
Transaction participants
An agreement of this type requires three parties:
- Guarantor.
- Beneficiary
- Principal.
Official definitions
So, who are the principal and beneficiary? The first is a person who applies to a financial and credit institution for a guarantee and at the same time assumes all obligations to fulfill the concluded agreement.
The second is a creditor for the obligations assumed, specified in the bank guarantee document. That is, it is the beneficiary who provides the principal specified in the contract of work (service).
The guarantor is the bank. He is the party providing the payment of monetary compensation in the event of a warranty case.
How it works?
The initiator of applying for a bank guarantee is the principal. Most often this does not happen “from a good life”. Sometimes such a document is the only way to get a long-term and profitable order from the state.
The principal in this case acts as the applicant, incurs the costs of paying the commission to the bank and becomes the debtor until the obligations are fully fulfilled. Like the beneficiary, he must meet the criteria put forward by the bank, which, in turn, before signing the document analyzes the declared status of the company, history, accounting and other documentation.
The beneficiary is the main beneficiary of the guarantee issued by the bank. He has the right to request payment of the full amount in case of failure to fulfill or improper fulfillment of the terms of the contract. In this case, the bank, having studied the submitted documents, satisfies (or does not satisfy) the submitted requirements.
The Bank, as the guarantor of the transaction, receives remuneration in the form of a commission paid by the principal. If the financial institution had to pay the guarantee amount (or its share), then it is entitled to recover this amount from the principal.
Two years ago, the requirements for issuing guarantees by banks to enforce the terms of contracts were tightened (especially with regard to government contracts). The list of institutions that have received the right to issue guarantees has been reduced and significantly. The Central Bank annually updates the register of such banks. In addition, each guarantee obligation is registered in the Federal Register of Registers (this confirms authenticity).
Rights and obligations of the guarantor, principal and beneficiary
From general concepts, it may seem that it is difficult to bear the burden of guarantee only to the principal, but the customer, in fact, has its own difficult responsibilities.
There are three situations in which the collection by the principal from the beneficiary of the penalty paid by the guarantor will be lawful. They are listed below:
1. Unreliability of documents submitted by the beneficiary. If this fact is proved, then the principal must be compensated for the losses that he incurred in the process of providing a bank guarantee or in the execution of the order.
2. The requirements for payment of a certain amount are not justified. In the event that the beneficiary's requirements for the guarantor regarding the payment of funds are unfounded, and this is documented, the money must be returned.
An example is the principal, who faithfully and fully complied with the requirements, and the customer submitted documents to the bank that said otherwise. In this case, the beneficiary has the right not only to compensation, but also to submit a statement of claim to the court.
3. Failure to comply with the terms of the contract. The contractor, that is, the beneficiary, as the principal creditor under the bank guarantee, is obliged to comply with the conditions specified in the contract. If they are not fulfilled, and the principal suffers losses because of this, then they will have to be reimbursed in full.
All subjects of the transaction are liable to each other.
How to become a principal?
Making warranty today is not an easy task. Legislation requirements are very stringent. Step to the left, step to the right - the agreement between the principal and the beneficiary becomes invalid. And all parties suffer losses.
Specialists advise contacting lawyers to avoid various incidents. Especially for those who are trying to get a guarantee for the first time. If there is no possibility, try this.
Step one
Determined with the guarantor. That is, we evaluate our prospects. The slightest discrepancy with the basic conditions of the bank guarantees a refusal. In general, the guarantor's requirements are as follows:
- The specifics of the order and the field of activity of the organization must match.
- By the time the application is submitted, the organization must be registered as a legal entity for at least six months (in some banks - more than a year).
- The required guarantee amount should correspond to the capabilities of the organization (with a small authorized capital, you should not ask for millions of guarantees).
- Not necessarily, but it is better that the organization already has experience of guarantee contracts.
Under these conditions, it is easy to choose a guarantor. The probability of failure will be less if the organization has accounts in this bank. Before contacting the selected bank, you need to check whether it is in the register of the Ministry of Finance (if not, the document will be invalid).
At this, as at the other stages, it is easier to conclude a beneficiary and principal agreement through a broker. Its services are not free, but worth it. With an intermediary, documents are processed many times faster, and the probability of failure is almost zero. Here we must caution the potential principal. Today there are more frequent cases when an intermediary in a day (or even less) offers to issue a guarantee for a couple of documents. With almost one hundred percent probability, we can say that this document is “gray” (that is, not registered in the Federal Registration Service) and will not have legal force.
Second step
Collection of documents and providing them to the future guarantor. We start by confirming the official status of the organization. This is a document on the incorporation of the company in the register. Still need:
- Application (filled in by the bank).
- Copies and originals of constituent documents.
- Financial statements.
- Documents confirming the authority of the management team.
- Copies of signed contracts with the customer.
This is the main package of documents. The Bank, at its discretion, may request any other information.
Sometimes for issuing a guarantee the beneficiary offers his banks to the principal, with whom he has been working for a long time and has established contacts. The principal has to agree, there is simply no choice.
Step three
The bank makes a decision. This is a lengthy process. The managers of the financial organization check the candidate’s credit standing, his financial capabilities, experience and duration in the specified field of activity. And also - solvency.
The check of regular participants in government procurements and tenders is quickly passing. Inspectors usually do not go into details. It’s harder for beginners. Therefore, before applying, experts recommend first of all to tidy up financial and accounting matters.
Fourth step
Approval of draft guarantee. Before signing the document, it must be carefully read, it is better for the lawyer of the candidate organization. All doubtful items must be removed before the conclusion of the contract. After affixed seals and signatures it is much more difficult to do.
Fifth step
Payment of invoices. There are two options:
- Once in the form of 1-3% of the amount of the issued guarantee.
- Monthly pay the amount prescribed in the contract.
At this stage, you need to pay the work of an intermediary.
Sixth step
The conclusion of the contract and the issuance of documents on hand. This is the result of the work done. Each participant of the guarantee has one copy of the document. The principal also has an extract from the register of bank guarantees (to confirm authenticity).