Bank Guarantee and Letter of Credit — the Legal Basis
The bank guarantee and the letter of credit belong to the instruments that appear directly in the statutory list of banking activities: commercial banks are permitted to issue guarantees, letters of credit and acceptances, including forfeiting. This matters for two reasons. First, a guarantee or a letter of credit is issued only by a licensed commercial bank. Second, the bank renders this service within a strictly regulated framework: the management and operational activity of a commercial bank is carried out in accordance with the legislation, under established administrative and accounting procedures, under the conditions attached to the banking licence and under the resolutions, rules and instructions of the National Bank of Georgia.
The practical consequence for the client: the request for a guarantee or a letter of credit rests not on the bank’s goodwill but on a common legal framework, and that framework includes the bank’s obligations to maintain an appropriate level of capital and liquid resources — one of the reasons banks are conservative about these instruments.
The Terms Are Defined by Contract
The terms of the relationship between client and bank regarding banking services are regulated on the basis of a contract. The law sets neither a minimum nor a maximum amount of a guarantee, nor the required collateral, nor the commission: these terms — the amount and currency of the guarantee, its validity period, the form of counter-security, tariff fees and application review timelines — are defined by each bank’s policy and by the contract you conclude. That is why the specific terms must be confirmed with the bank at the preparation stage.
This is exactly the step where the difference between a prepared and an unprepared application emerges: the bank assesses your financial history, your experience of account servicing and the collateral available, and each of these elements is reflected in the terms of the contract.
The Sanction for Breach — Deadlines in Money Transfers
The law establishes one significant sanction for a bank’s breach of obligations: where the deadlines stipulated in a money-transfer agreement are breached, the bank is obliged to pay the client no less than 0.5 percent of the overdue amount for each overdue banking day. The intended scope of this rule must be kept precise: it concerns breaches of money-transfer deadlines and not the terms of a guarantee or a letter of credit — claims arising from the guarantee relationship follow a different route.
However, money transfers connected with guarantee or letter-of-credit operations (for example, transferring funds from the account to secure the guarantee) are protected by exactly this rule: if the agreed deadline was breached and the bank had the amount to execute it, no less than 0.5 percent of the amount for each overdue banking day accrues in your favour.
Electronic Signature and Document Flow
When working with the bank, note the legal regime of the electronic signature as well: a commercial bank has the right to submit to the National Bank for agreement a security policy for the use of electronic signatures when providing a particular banking service, and an electronic signature used on the basis of such an agreed policy has legal force equal to a personal signature on a material document. This means that electronic submission of applications and other documents is fully valid where the bank’s relevant policy operates — the concrete format and workflow are defined by the bank’s policy, so confirm them with the bank.
Our Service — Preparation and Submission
We run the full cycle of obtaining a bank guarantee or letter of credit: we structure the request — which type of guarantee or letter of credit your counterparty needs and on what terms; we prepare the documentary package to the bank’s requirements; we verify the commission and collateral terms and assist in the negotiation; and we submit the application to the bank with accompaniment so that the process moves forward without suspensions.
Frequently Asked Questions
Below we answer the most frequently asked questions about obtaining a bank guarantee or letter of credit.
Does the law fix the terms of a guarantee?
No. The terms of banking services are regulated on a contractual basis: the amount, the period, the collateral and the commission are defined by each bank’s policy. The law sets the framework of the activity and its supervision, while the specific terms are a matter of negotiation — confirm them with the bank.
What happens if the bank executes a transfer later than agreed?
Where deadlines stipulated in a money-transfer agreement are breached, the bank must pay the client no less than 0.5 percent of the overdue amount for each overdue banking day. Note: this sanction concerns transfer deadlines, not the terms of a guarantee or a letter of credit.
Can documents be submitted electronically?
Where the bank has a security policy for electronic-signature use agreed with the National Bank, such a signature has legal force equal to a personal signature on a material document. The concrete format of use is defined by the bank’s policy.
Why are banks strict about guarantees?
The bank must maintain an appropriate level of capital and liquid resources and diversify its assets with the risk of losses in mind. A guarantee is a direct obligation of the bank, which is why its issuance, in terms of the amount and the collateral, is examined with comparatively close attention.
How We Help You on Legal.ge
If a counterparty requires a bank guarantee or a letter of credit and you want the application to pass on the first attempt — contact us. We will assess the type of instrument required, prepare the documentary package, compare the banks’ terms and represent your interests in the negotiation on Legal.ge.