Bank Guarantees in Cyprus: Supporting Contracts, Tenders and Business Growth

Winning a contract is only the beginning. A supplier may be asked to guarantee performance, a contractor may need to secure an advance payment, a bidder may need tender security, or an international customer may require a recognised bank undertaking before signing. A Bank Guarantee, also commonly called a Letter of Guarantee, can provide that commercial security.

What is a Bank Guarantee?

In broad terms, a bank issues an undertaking in favour of a beneficiary in support of an obligation of its customer. The legal effect depends on the wording, the governing law and any incorporated rules. International demand guarantees are frequently made subject to the ICC Uniform Rules for Demand Guarantees, URDG 758.

Where URDG 758 applies, a demand guarantee is independent of the underlying contractual relationship. That independence is commercially important and makes careful drafting essential.

Common types of guarantees

• Tender or bid guarantees

• Performance guarantees

• Advance-payment guarantees

• Payment guarantees

• Import and export guarantees

• Subcontracting guarantees

• Guarantees supporting instalment obligations

• Counter-guarantee and indirect guarantee structures in international transactions

Cyprus banks presently offer Letters of Guarantee for a range of commercial purposes, including imports and exports, contractual performance, advances, instalments, subcontracting and bidding, subject to the bank's own credit and compliance approval.

How a guarantee can support business growth

A guarantee does not automatically provide cash to the business. Its value is that it may enable the business to provide bank-backed security to a counterparty instead of depositing the full secured amount directly with that counterparty. This can help preserve liquidity for stock, payroll, transport, production and expansion.

The bank is itself taking risk and may therefore require a credit limit, cash cover, collateral, guarantees or other security. The commercial benefit must always be assessed together with the cost and security package.

The guarantee should match the underlying contract

The guarantee and the underlying contract are distinct instruments, but they should be coordinated carefully. A poorly drafted guarantee can expose the applicant to a call on terms wider or longer than the commercial deal requires.

• Correct applicant and beneficiary

• Guaranteed amount and currency

• Commencement and expiry

• Reduction as milestones are achieved

• Documents required for a demand

• Whether partial or multiple demands are possible

• Presentation method and place

• Extension or extend-or-pay mechanisms

• Transfer or assignment issues

• Governing rules, law and jurisdiction

• Sanctions and illegality provisions where relevant

International and triangular trading structures

A Cyprus trading company may have one obligation to its customer and a separate obligation from its supplier. If the end-buyer demands a performance or advance-payment guarantee, the Cyprus intermediary should ensure that its upstream supplier contract gives it appropriate protection and that the timing of both contracts is aligned.

In some international structures, an indirect guarantee may be issued through a local bank against a counter-guarantee. This can be useful where the beneficiary requires a guarantee from a bank in its own jurisdiction, but it also creates an additional layer of wording, cost and banking risk that must be reviewed.

Can guarantees help startups?

Potentially. A young company may have a strong opportunity but limited trading history. A guarantee facility can help bridge a credibility gap with a project owner, supplier, landlord or customer. The bank will nevertheless assess the shareholders, management experience, transaction, expected cash flows, jurisdictions, security and compliance profile.

How Cyprus Law Chambers can assist

• Review the underlying commercial contract

• Negotiate guarantee clauses before the contract is signed

• Review draft guarantee wording before issuance

• Compare the guarantee exposure with the underlying obligation

• Review tender, performance and advance-payment guarantees

• Review import and export guarantees

• Coordinate upstream and downstream security in triangular trade

• Assist with amendments, reductions and extensions

• Organise supporting corporate and transaction documents

• Coordinate with the bank and the client's other advisers

• Advise on contractual disputes or demands connected with the underlying transaction

The issuing bank independently determines whether it will issue a guarantee, the credit limit, commissions, collateral and compliance requirements. Legal review helps the business understand exactly what is being guaranteed and whether the proposed instrument matches the transaction it is meant to support.

This article is for general information only and does not constitute legal, banking, investment or financial advice. Bank guarantees and related facilities remain subject to the bank's independent approval and the specific wording of each instrument.