A performance bank
guarantee provides a secure promise of compensation amount by the bank to the customer in the event that a supplier
or sub contractor does not meet delivery
terms or other provisions in the contract.
As per the agreement
between the supplier and the customer, the supplier submit the performance guarantee to the customer as
a security for the proper performance of the contract.
If any breach of
provisions of performance of contract or subcontract, then the customer can
submit this performance guarantee to the bank and can claim for the compensation
amount mentioned in the Performance Guarantee from the bank.
Normally the customer will return the
performance bank guarantee to the sub -contractor or supplier only after
completing the defect liability period (DLP)
of that particular contract and after
particular agreed period after completing
the delivery of goods respectively.
Performance bank
guarantee amount normally equal to 10% or 5% of total contract amount or LPO
amount of the subcontract or supplier
respectively. It also depend on the negotiation and agreement between the
parties concerned in the contract.
Example. A Ltd ordered 100 TV from
B Ltd for AED 100,000/- and A Ltd asked
for a performance bank guarantee for AED 10,000/- ( as 10% of LPO amount) for a period of 1year after the delivery of
T.V.
BLtd submit the performance bank guarantee to
A Ltd. And out of the 100 TVs 5 Tvs are not working and A Ltd asked to B Ltd to
replace it. And B Ltd not willing to replace it. Then A Ltd submit this performance
guarantee to the Bank and can claimed for compensation amount of that 5 TVs.
Based on A Ltd’s claim
for compensation and documents verified,
bank will award the compensation to A Ltd and bank will recover this amount from B Ltd. This is the working aspect
of performance Bank Guarntee.
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