Demand Guarantee to Secure Payment Clause
(General Contract)

Summary

This clause is an example of a standard payment provision for inclusion in a general contract for the sale of goods or services that requires the buyer to secure its payment obligations using a demand guarantee. This clause includes practical guidance, drafting notes, and alternate and optional clauses. A demand guarantee is an irrevocable written undertaking issued by a guarantor (typically a bank or financial institution) pursuant to the instructions of an applicant to pay money up to a specified amount upon presentation of a demand complying with the terms and conditions set forth in the guarantee. While there are different types of demand guarantees, a payment guarantee is typically the type used to secured payment under a contract for the sale of goods or services. Demand guarantees are considered the legal equivalent of a standby letter of credit providing credit support under a contract, particularly when the buyer and seller are unfamiliar to each other. Guarantees may be direct or indirect. For a direct demand guarantee, the buyer applies to the guarantor bank or financial institution to issue the guarantee directly in favor of the seller as the beneficiary. Direct guarantees often involve parties all located within the same country. For an indirect guarantee, the buyer applies to its local bank to issue a counter-guarantee to the seller's local bank, and the seller's local bank issues the guarantee to the seller as beneficiary. Counter-guarantees are often used in international transactions so the parties may transact with their own local banks. The capitalized terms in this clause must be conformed to the defined terms in the agreement that will include the clause. Number the clause in accordance with the section of the agreement that will include the clause. This clause should be read in conjunction with Credit Support in Sale of Goods Transactions. For a detailed discussion of demand guarantees, see Demand Guarantees. For a template of a demand guarantee, see Demand Guarantee. For general contract payment clauses, see Payment and Collection Clauses.