VARIOUS TYPES OF GUARANTEE/BONDS IN INTERNATIONAL TRADE

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Q4.) (b) What are the various types of guarantees/bonds in international trade? How do they benefit the importer?

Ans: Bonds and Guarantees are an important part of international trade. If an exporter fails to complete a contract on time or according to specification, the importer will suffer various losses as a result. Seeking compensation directly from the exporter could be a lengthy and costly exercise with an uncertain outcome. To avoid such losses the importer, as a condition of the contract, could require the exporter to provide a bond or guarantee for an agreed amount through an acceptable bank or other financial institution.

A guarantee or bond is a written instrument issued to an overseas buyer by a bank or financial institution guaranteeing that the exporter or contractor will comply with his obligations under the contract. If he fails to do so, the overseas buyer will be indemnified for a specific amount.

Various types of guarantees in the international trade scenario:

1.) Tender (Bid) Guarantee: It assures the buyer that he will not be wasting time and effort in evaluating tenders from potential suppliers who will not follow through. In the event of default, i.e., the client declines to sign the contract or does not do so within the time stipulated, the bank agrees to pay a fixed amount stated in the guarantee.

2.) Performance Bonds: Given in support of a client's obligation to fulfill a contractual commitment. It is normally issued before the cancellation of a tender guarantee.

3.) Advance Payment Bonds: This is a safeguard whereby the seller arranges for his bank to give the beneficiary, the buyer, its undertaking to refund any advance payment or progress payment if the goods are not shipped or the contract not compiled with.

4.) Retention Bonds: When a contract calls for, say, 10% of each payment to be withheld until the project is completed and accepted, a guarantee may be issued which enables the contractor to receive the full amount while assuring the buyer that the issuing bank will refund the retention percentage if necessary.

5.) Customs Guarantee: These are issued where goods are imported temporarily. If the goods are not re-exported, the guarantee will be implemented and duty paid to the customs authorities.

6.) Bill of Landing Indemnities: Given to shipping companies in the absence of negotiable bills of lading, so that the importer can clear the goods without delay. When the bills of lading are received and delivered to the shipping company, the indemnity is canceled. If on the strength of the indemnity, the shipping company delivers to the wrong party, the issuing bank must make good any loss.