INTERNATIONAL BANKING - LAW AND PRACTICE Coursework

INTERNATIONAL BANKING - LAW AND PRACTICE - Coursework Example The underlying aspects of suretyship guarantees are that they are effective upon certain conditions, whereas demand guarantees are simply effective upon demand. The underlying reason as to why issuers need instruments to be suretyships is that in a deal of guarantee, the surety accepts a secondary liability to responds for the debtor, who rests primarily responsible. In a contract of indemnity the surety assumes a primary liability, either alone or jointly with the principal debtor. The cases mentioned above will be looked at as to what the courts decide in determining demand and suretyship guarantees, and all information has been extracted directly from the case reports. Demand Guarantees Demand guarantees are written agreements made by a guarantor to assure a beneficiary, subject to the conditions in the agreement. The guarantee is an agreement between the guarantor and the beneficiary. Thus, if an employer is specified a demand guarantee by a bank in respect of the responsibilitie s of a contractor, the contractor is not a party to the agreement. Therefore, the beneficiary is in a strong situation should there be a default. Demand guarantees are contracts and can be generated by either a simple contract or executed as a deed (Birchal & Ramus, 2012). Banks generally set demand guarantees. There are two basic types: on demand guarantees (often referred to as on demand bonds) and documentary demand guarantees. On demand guarantees essentially necessitate a guarantor to make payment to a beneficiary upon request to do so. In the case of documentary demand guarantees, payment will only be made on the securing, by the beneficiary, of the papers required by the terms of the guarantee. These, for example, may be documents proving a court judgment (Birchal & Ramus, 2012). Banks support demand guarantees since they do not need to get tangled in legal opinions and disputes following a default; their view is generally direct. However, their situation is not so reasonable for those necessary to provide demand guarantees. Take, for example, a contractor required to provide a 20% demand guarantee with regards of a $100,000 contract. The guarantee will be the amount of $20,000. The contractor’s bank supplying the guarantee will handle the price of the guarantee as contractors credit and will, therefore, reduce any credit amenities offered to the contractor by this amount. In addition, the bank will undoubtedly require security from the contractor to backup the credit. Both these activities will disturb a contractor’s cash flow and make it more challenging for him to execute contracts. Indeed, the functional competence of a construction firm can be decreased by the obligation to deliver demand guarantees. A contractor in this situation may also sense insecurity, especially where on demand guarantees are delivered. The contractor has insignificant entitlements to avoid a bank paying against an on demand guarantee. Banks will pay on demand a nd leave the contractor to settle any dispute directly with the beneficiary (Birchal & Ramus, 2012). Suretyship Guarantee Companies frequently require working capital to function and grow. The owners of small businesses regularly need to cater a guarantee of suretyshi