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What is a Demand Guarantee?

Daphne Mallory
Daphne Mallory

A demand guarantee obligates an individual who is not a party to a contract to perform the terms of the contract for one of the parties to that contract. The guarantor is the person or entity that agrees to pay for the party who is unable or unwilling to make a payment and who was required to obtain the guarantee. In some cases, parties are willing to enter into an agreement only because the demand guarantee exists. Otherwise, the contractual relationship would seem too risky without one. Some banks provide a demand bank guarantee; the party who insisted on the guarantee can obtain payment from the bank, and the second party to the agreement would have to repay the bank.

Many business and personal transactions require demand guarantees, such as buyers and sellers in real estate transactions and creditors and debtors when signing promissory notes. The party who is protected by a demand guarantee can often call it in at any time during the contractual relationship without proof of non-performance, although it is often used to protect against non-performance or defective performance. For example, if a landlord is not confident that she will receive rent payment, she may make a demand to the guarantor for payment. The tenant would then have to repay the guarantor, but the landlord would benefit from the protection provided by a demand guarantee. A demand guarantee is often made in writing and signed by the guarantor.

Woman with hand on her hip
Woman with hand on her hip

A financial institution may require a waiting period prior to fulfilling the obligations of a demand guarantee. The waiting period is often used to contact the person for whom they are making payment to either obtain payment or notify the person that a claim for payment has been made. Whether or not the guarantor can obtain payment first is not relevant to the guarantor’s obligation to make payment in accordance with the guarantee that was given.

Letters of credit are not the same as demand guarantees. A bank can issue a letter of credit that states that the bank will pay the specified amount once the recipient of the letter performs his terms of the agreement. For example, in a real estate transaction, the buyer might obtain a letter of credit from the bank that promises to pay the purchase price of a home once the seller delivers good title and the sale is completed. A demand guarantee protection is broader than what a letter of credit can provide, because the seller would not have to wait until the sale was completed or for the buyer to breach the contract. Anyone with a demand guarantee can write a letter asking for the performance of the demand and is often entitled to it.

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