Counter Guarantee

A counter guarantee refers to a guarantee provided by a counter guarantor (usually the importer or its bank) to a guarantor (usually the exporter's bank or a third party), undertaking to reimburse the guarantor after the guarantor has performed its guarantee obligations. Its core function is to protect the guarantor's right of recourse and reduce guarantee risk. It is commonly used in international engineering contracting, large equipment export, performance bonds, and advance payment bonds. When a beneficiary requires a foreign bank to issue a guarantee, the foreign bank often requires the applicant to provide a counter guarantee. Points to note include: the counter guarantee is independent of the main contract but usually strictly corresponds to the terms of the guarantee; the counter guarantor must clearly define its scope of liability, validity period, and claim conditions; the difference between a counter guarantee and an ordinary guarantee is that a counter guarantee is provided to the guarantor, not directly to the beneficiary. Unlike a standby letter of credit, a counter guarantee is not an independent payment undertaking but is dependent on the guarantee relationship. In practice, attention should be paid to the applicable law and jurisdiction of the counter guarantee to avoid difficulties in recourse caused by conflicting clauses.