We have experienced problems in cancelling a performance bond issued through our bank to an overseas client, even though we have fulfilled all our obligations and the bond expired 3 months ago. Why won’t our bank release us from liability?

In international trade, it is very common for overseas buyers to insist on the issuance of a bond or guarantee in their favour as a means of securing the terms of a contract and / or covering the obligations assumed by the seller. The Bond or Guarantee provides the buyer with an element of financial security in the event of failure of the seller to meet their obligations under the contract, thus effectively financially compensating the buyer. Common types of bond or guarantee include:

  • Tender Guarantees (or ‘Bid Bonds)
  • Advance Payment Guarantees
  • Performance Bonds
  • Warranty or Maintenance Guarantees

It is more beneficial to the seller if they arrange for the bond or guarantee to be issued directly to the beneficiary by the UK bank subject to English or Scottish Law. The wording will thus include a clear expiry date following which any claims received will be considered ‘null and void’ and / or the bond / guarantee will have no further effect. It is often the case however, that the national law of certain countries determine that bonds or guarantees must be issued by a local bank and be subject to the law of the country concerned. In this case, the seller’s bank will provide a counter-indemnity to the local bank (which may be the beneficiary’s own bank), instructing them to issue the bond or guarantee in the form required. In some countries, the provision of local law may override a specified date of termination referred to within the bond or guarantee, in which case beneficiaries may be able to claim long after expiry. For this reason, UK banks are very cautious in releasing sellers from liability until they have received a firm confirmation from the overseas bank that the beneficiary has either returned the guarantee for cancellation or has indicated that the seller has fulfilled all obligations and may therefore be released from their liability. Until such a confirmation has been received, the bank will continue to record the value of a bond or guarantee within the seller’s facilities and will also continue to levy the periodic charge (usually quarterly). Sellers are therefore advised to track the status of all bonds and guarantees issued subject to overseas law and press the beneficiary for return or confirmation to the bank as soon as possible after expiry. They should also refer to

 

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