The importance of bank guarantees in modern business 

The importance of bank guarantees in modern business 

The importance of bank guarantees in modern business

In contemporary international payment transactions, there takes place frequent use of bank guarantees as collateral payment in commercial transactions. The bank guarantee is usually required when it comes to specific business agreements that require stronger commitment and assurance that all contractual obligations will be implemented exactly as indicated. Knowledge of the use of bank guarantees allows better negotiating position in making business, quicker response to the demands of public calls for tenders and the provision of their own claims. Because of its rapid and efficient implementation, the bank guarantee is one of the most commonly used collateral in international business. 
Introduction”In the modern business environment, characterized by the spatial distance and the inability of the parties to perform a realistic assessment of the creditworthiness of a business partner, when it comes to commercial transactions, there is often a need for the use of instruments that secure payments.
The reason for this is the fact that, in carrying out trade transactions, participants in international payments want for the security in the fulfillment of mutual contractual obligations to be as big as possible. In such circumstances, it is important to choose instruments of payment and security, which largely provide safety and minimize the effects of risk factors, whereby one of the most important instruments is the bank guarantee.
Due to its lack of accessory, its abstractness and the fact that a quick and simple realization procedure allows coverage of a large number of risks, the subject of this paper will be legal regulation of bank guarantees and analysis of their use in Serbia.
Through the presentation of the business environment in Serbia, we aim to provide a credible picture of how the use of bank guarantees represents an important instrument to ensure the enforcement of contractual obligations and payments.
The authors believe that the existing legislation in this area is harmonized, but also give a recommendation that, in this regard, legal theory must follow the ways and needs of modern industrial practices.
Therefore, legal activity in the coming period should be focused on the adoption of new or amendment of existing legislation in the field of regulation of the bank guarantee which, in comparison to other security instruments, represent the most effective mean of protection against financial risks.
The importance of bank guarantees in international businessThe bank guarantee represents a unilateral legal transaction by which a bank guarantor undertakes an obligation to guarantee to pay the beneficiary a certain amount of money specified in the guarantee if certain conditions are fulfilled, or if the debtor from the original contract does not fulfill or fulfills his contractual obligations improperly (Pavicevic, 1999, p. 129). The bank guarantee is one of the most commonly used means of security that provides significant benefits to the participants in international business. By issuing guarantees, the interests of the seller are protected since the bank guarantee provides the collection of sold and exported goods. 
 In international business, sellers are usually not aware of the financial situation of the customer and the results of his operations and, therefore, the sales contract with the unknown business partner contains certain risks, especially when it comes to the shipment of good without securing its payment. By opening a bank guarantee, this risk disappears, because aside from the buyer from the sales contract, the guarantor bank which issued the guarantee is also directly responsible towards the seller, and the seller will trust the guarantor bank and he is sure that the bank will pay him the amount from the guarantee if he fulfills the conditions specified in the contract (Ariana & Damirchiyeva, 2013, p. 436). As an independent legal transaction, banking guarantee gained great importance in matters of international trade in recent decades, so today we can hardly imagine and conclude any serious contract with a foreign partner without its fulfillment being provided through a bank guarantee.
Compared to other means of personal security, bank guarantee proves to be more suitable, since due to its abstractness and lack of accessory it provides a broader protection of economic interests of the creditors. Thus, in addition to the risk of insolvency of the debtor and voluntary refusal of fulfilling the obligations, the bank guarantee may cover other types of risk such as: the risks of force majeure, administrative restrictions and risks of invalidity of the main business. These comparative advantages arising from the lack of accessory and from the abstractness of the bank guarantee, are accompanied by a relatively simple procedure of its realization that allows fast and uncomplicated payment claims (Bertrans, 2004, p. 47) Due to such characteristics, bank guarantee occurs as an institution that significantly influences the improvement of international economic relations. In modern conditions of ignorance and growing distrust among the participants on the global market, when it comes to all major auction and other business deals, contracts should be entered into primarily with well-known and reliable business entities from developed countries, even if their offers are not the best. 
 With bank guarantees, companies from the less developed countries get a great deal on the competitiveness of their offerings in international affairs, because with their acceptance contractual partners are not placed in a less advantageous position in terms of risk of realization of their claims. Bank guarantees are, thus, creating a higher level of security of creditors and significantly affecting the stabilization of relations in the international market.
The importance of bank guarantees in modern business

The importance of bank guarantees in modern business

The bank guarantee as an instrument to secure payments in Serbia Bank guarantees are one of the most important instruments of security in international business and, consequently, in Serbia. Granting of guarantees is one of the most important banking activities, in which banks must thoroughly examine transaction and the risk rating of their clients. At the end of 2015, Serbian banking sector consisted of 30 banks, with an organizational network of 1.730 business units, which employed 24.257 persons.
Total net balance sheet assets of the banking sector in Serbia at the end of December 2015 amounted to 3047.8 billion dinars, and the total balance sheet capital of 619.1 billion dinars. Dominant participation in Serbia’s banking sector belongs to the banks with foreign origin, and those are to the greatest extent banks originating from Italy, Austria, Greece and France, and their cumulative amount account for over 64% of the Serbian banking sector. At the end of the fourth quarter of 2015, total off-balance sheet items of the banking sector in Serbia amounted to 7134.4 billion dinars, with most of the off-balance sheet items (90.8%) referring to the risk-free position, which largely comprises of received tangible means of security and received guarantees and sureties for the settlement of obligations of bank’s debtor.
Off-balance sheet positions are the most concentrated segment of business banks in Serbia. Part of the off-balance sheet items which are classified, or which are considered risky, at the end of 2015 amounted to 655.2 billion dinars. During this period, the assumed future commitments which included guarantees and other sureties, commitments for undisbursed loans and advances and other irrevocable commitments amounted to 452.7 billion dinars.
The legal framework of bank guarantees Banking operations are separate economic activities whose main object of business is the turnover. Banking operations are legal transactions concluded between banking organizations concerning the legal turnover of money and performing business services. They are carried out according to the rules of the banking profession and other authorized entities instead of banks can participate in them, but the rules of banking operations (business) still apply to them (Micovic, 2010, p. 485). 
Until the adoption of the Law on Obligatory Relations (Official Gazette of SFRJ, no. 29/78, 39/85, 45/89 – decision USJ and 57/89, Official Gazette of SRJ, no. 31/93 and Official Gazette of SCG, no. 1/2003 – Constitutional Charter), the legal system in Serbia has not adequately been regulating the affairs of the bank guarantee (bank guarantee operations/business). Legal issues of bank guarantees were resolved by using an analogous application of certain existing solutions in comparative law, as well as by insufficiently shaped domestic rules of customary law. With the adoption of the Law on Obligatory Relations, law in Serbia entered the order of the few legal systems in the world, which have been regulating the matter of bank guarantees by using substantial and legal norms. 
The law defines the obligations of the bank towards the holder of a guarantee, whereas if the third party fails to fulfill the obligation at maturity date, the bank would settle the obligation if the conditions specified in the guarantee are fulfilled. The law prescribes the written form of a bank guarantee as a condition of validity and its cash character. There is a possibility of ceding the rights from guarantees, along with the transfer of receivables provided by the guarantee. The law stipulates a special type of bank guarantee which contains the clause “without protest”, “first-call” or other words with the same meaning, which specifies that when it comes to this type of bank guarantee, the bank cannot point out those kinds of objections to the creditor from the main business, which the principal, as a debtor, has towards the guarantee beneficiary (Law on Obligatory Relations, Art. 1087). Substantive legal provisions regulate the obligation of recourse of cash amount of the bank guarantee by the principal towards the guarantor bank that carried out the payment of the guarantee. 
The law provides an exceptional possibility of recourse by the principal from the beneficiary of the bank guarantee only in case when the beneficiary unjustifiably collects the guarantee from the bank, due to justified complaints from the principal towards him. In the context of the above said statement, it follows that the business regarding the bank guarantee must be seen as an independent and non-accessory legal transaction, especially in the case of doing business in international trade. In the domestic law, sources of law governing bank guarantees, in addition to the Law on Obligatory Relations, also include other regulations which are mainly imperative. Banking Law (Official Gazette of RS, nr. 107/2005, 91/2010 and 14/2015) regulates the issues of establishment, operations, organization and management of the bank, as well as the termination of work of the bank as a joint stock company. 
The banking operations are classified: deposit transactions (accepting and placing deposits), credit operations (lending and borrowing), foreign-currency and exchange operations, payment transactions (Knezevic, 2013, pp. 267-281), issuance of payment cards, transactions with bonds, broker-dealer operations, issuance of guarantees, avals and other forms of guarantees, buying, selling and collecting payments, insurance agency and other tasks which are essentially similar or associated with such operations (Banking Law, Official Gazette of RS, nr. 107/2005, 91/2010 and 14/2015, art. 4). Special kind of banking services through which the bank performs certain services to third parties upon client’s order include opening letters of credit and issuing bank guarantees (Knight, 2011, p. 57) Foreign Exchange Law (Official Gazette of RS, nr. 62/2006, 31/2011, 119/2012 and 139/2014) and the Law on foreign credit business, regulate the issues of bank guarantees in dealings with foreign elements (Spalevic, 2013, p. 297). 
According to the Foreign Exchange Law, the bank may, in accordance with the regulations of the Banking Law and this Law, issue guarantees, sureties and other forms of securities under current and capital transactions between residents and non-residents and obtain guarantees from foreign banks and guarantees and sureties of non-residents in these transactions. The Bank may, in accordance with the regulations on banks, obtain guarantees from foreign banks and guarantees, warranties and other means of security of non-residents from claims of residents (Foreign Exchange Law, art. 26). Certain provisions of the Law on Credit Relations with Foreign Countries are important for banks, because they determine the conditions under which banks can engage in deposit, credit and other banking services with foreign countries, within which they may give sureties, guarantees and avals. Along with laws as sources of law in domestic turnover, there are also bylaws. One of them is the Rule on compulsory elements of tender documentation in public procurement procedures, stipulating the mandatory elements of tender documentation in the public procurement process.
Among the above-mentioned elements there are types of financial security provided, with special attention paid to the bank guarantee as a mean of security in public procurement (Tomic, 2009, p. 28). In addition to this Rule, there is a large number of other by-laws, first of all, the decisions of the National Bank of Serbia and the regulations of the Government of the Republic of Serbia, specifying certain issues of bank guarantees. It should be noted that the Association of Serbian Banks accepted the sources of the autonomous commercial law, namely: Uniform Rules for Contract Guarantees from 1978 and the Uniform Rules for Demand Guarantees from 2010. 
Within domestic traffic, these rules can be applied as contractual rules, if the contracting parties expressly agree upon their application. For quite some time, now Serbia has been working on the codification of civil rights law through the adoption of the Civil Code of the Republic of Serbia (Official Gazette of RS, nr. 104/06, 110/06 and 85/09), which is not limited to a simple reception of existing special laws in this area and their technical shaping in terms of the Code, but should include an analysis of existing legislation, their modernization and expansion and, in particular, their compliance with the achievements of modern civilization, law, legal theory and practice. Codification of existing legislation requires their harmonization with solutions ratified by international conventions, and other international standards, in particular, with the European Union law.

What is a Bank Guarantee?

A bank guarantee is an assurance from a bank promising to meet their debtor’s financial obligations if he defaults payment at the end of a business transaction. Unlike a documentary letter of credit that protects sellers ‘interest, BG protects both parties in any given business transaction. In other words, Bank Guarantee protects both parties against breach of contract by either of the two parties.

Also, a bank guarantee helps in securing both parties’ financial interest. In the case of default by a buyer, a bank guarantee helps in ensuring that sellers receive payment after delivery.

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