What is the difference between a demand guarantee and a suretyship guarantee?

Demand guarantee and suretyship guarantee are two distinct categories of guarantees that serve different purposes and have different conditions.

A demand guarantee is a type of guarantee that is independent from the underlying relationship between the beneficiary and the applicant. In this case, the beneficiary does not need to prove that the applicant has breached the underlying relationship in order to receive payment. The issuer of the demand guarantee is obligated to pay upon presentation of the stipulated documents and compliance with the terms and conditions of the instrument, regardless of whether there has been actual performance or breach of the underlying relationship. This means that as long as all requirements are met, payment will be made without considering any other factors.

On the other hand, a suretyship guarantee, also known as an accessory guarantee, is an undertaking by the guarantor to pay sums due from the applicant as a debtor to the beneficiary as a creditor. Unlike a demand guarantee, a suretyship guarantee is a secondary obligation that arises only if the applicant has a legal liability to pay the beneficiary. In this case, if there is no legal liability on part of the applicant, then there is no obligation for payment by the guarantor. The guarantor's obligation is limited to being no greater than that of the applicant.

Understanding these distinctions between demand guarantees and suretyship guarantees is crucial for handling them properly. It helps ensure good practice in dealing with these types of guarantees and prevents any misunderstandings or misinterpretations. By knowing whether you are dealing with a demand guarantee or a suretyship guarantee, you can determine what conditions need to be met for payment and what liabilities exist for both parties involved.

In conclusion, demand guarantees are independent from underlying relationships and require compliance with stipulated terms for payment, while suretyship guarantees are secondary obligations that arise only if there is legal liability on part of the applicant. Knowing these differences allows for effective handling and management of these types of guarantees in various financial transactions.

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