Guarantees are a significant feature in almost all transactions involving international trade. They may be given by banks, parent companies or other third parties. Whether these instruments should be “see-to-it” or “on-demand” guarantees ought to be given careful consideration when negotiating a transaction. This is particularly important where a business depends upon good cash flow, where a party is taking on sizeable credit exposure and/or contracting with a special purpose company. As set out below, while these considerations are especially relevant in a shipbuilding context, they also apply to many other businesses.
On-demand guarantees arguably provide more effective security for taking on risk, as access to the funds guaranteed is, in theory, relatively straightforward. The reason for this is that on-demand guarantees are autonomous of the underlying contract and impose a primary liability upon the guarantor to make payment when a demand is made that complies with the formalities under the guarantee. By contrast, see-to-it guarantees impose only a secondary liability contingent upon the extent to which the principal is liable under the underlying contract.