Bank guarantee and guarantee period

It is commonly known that, in cases provided by the legislation on public procurement, a supplier upon signing a contract on public procurement stands security for the performance of the contract as a guarantee that he will fulfill his obligations under the contract fully, properly and in timely manner.

The most common way of security in practice is bank guarantee. Second-tier banks provide a bank guarantee to a supplier for a fee. The original document of a guarantee is sent to the customer by the supplier.

The bank guarantee says that it is valid until complete fulfillment of the supplier’s obligations under the contract on public procurement. It would seem that everything is clear. If the supplier performs his works, the guarantee is valid until the parties sign a certificate of completion. Or, for example, if the supplier sells goods, the guarantee period expires at the date of signing an act of acceptance. After that the customer must return the guarantee to the provider.

At the same time, the customer often refuses to return the guarantee, explaining that he will return it after the guarantee period specified in a contract of public procurement expires. Of course, this situation does not suit the supplier very well because that means the amount of 3% of the contract frozen by the bank will be unobtained for a long period of time.

The question arises: whether the guarantee of quality of goods, works or services is the supplier’s obligation under the contract? If yes, the bank guarantee the validity of which is specified as “until the complete fulfillment of obligations specified in the contract on public procurement” will be valid until the guarantee period expires or the supplier removes defects presented by the customer.

In our opinion, the guaranty of quality is more related to responsibility for breach of an obligation rather than to the obligation. Thus, according to Article 349 of the Civil Code of the Republic of Kazakhstan, breach of an obligation means its non-fulfillment or improper fulfillment (untimely, with shortage of goods or services, with violation of other conditions, specified by the obligation). Bringing a debtor to responsibility for breach of obligations is made at the request of a lender…

Considering the above, we believe the customer is obliged to return the bank guarantee if the works have been performed or the goods have been delivered. If during the guarantee period any defects are detected the customer has the right to hold the supplier civilly liable under conditions of the contract on public procurements or in accordance with the legislation (free removal of defects and other measures).

Despite this, in order to avoid disputes with the customer we recommend suppliers to make arrangements with them (preferably by including a corresponding provision in the contract on public procurements) that the validity of the bank guarantee will be determined by a clear date, i.e. will be directly related to the period of performance of works or delivery of goods . The supplier can explain this position by the fact that in accordance with paragraph 1 of Art. 172 of the Civil Code of the Republic of Kazakhstan, the period set by a transaction is determined by the calendar date or with the reference to an event which must inevitably occur.

Therefore, an indication of the validity of the bank guarantee as “until complete fulfilment of obligations under the contract on public procurement” can be qualified by the customer as absence of validity. In this case, the bank guarantee will be valid for one year from the date of maturity of the obligation secured by the guarantee. (Paragraph 4 of Art. 336 of the Civil Code of the Republic of Kazakhstan).

Nurlan Makenov

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