The Contract Performance Guarantee is a critical financial security instrument commonly used in Indian business transactions where one party seeks assurance of another party's performance under a contract. This document is typically required in situations involving substantial contract values, long-term commitments, or significant performance risks. It provides a mechanism for the beneficiary to claim financial compensation directly from a bank if the principal fails to fulfill their contractual obligations. The guarantee must comply with Indian contract law, banking regulations, and Reserve Bank of India guidelines, making it a legally enforceable instrument in Indian courts. Common scenarios for its use include construction projects, supply contracts, service agreements, and government tenders, where the guarantee typically ranges from 5% to 10% of the contract value.
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1. Parties: Identifies the Guarantor (typically a bank), the Beneficiary (party receiving the guarantee), and the Principal (party whose performance is being guaranteed)
2. Background: Brief context about the underlying contract and the requirement for the guarantee
3. Definitions: Key terms used in the guarantee document including 'Guaranteed Amount', 'Underlying Contract', 'Expiry Date'
4. Guarantee and Its Scope: The core guarantee commitment, including the maximum guaranteed amount and the specific obligations covered
5. Duration and Validity: The effective period of the guarantee, including start date, expiry date, and any extension conditions
6. Demand and Payment Terms: Procedure for making a demand under the guarantee, including format, timing, and payment obligations
7. Reduction and Release: Conditions under which the guarantee amount may be reduced and when the guarantee will be released
8. Governing Law and Jurisdiction: Specification of Indian law as governing law and jurisdiction for disputes
9. Notices: Communication procedures and contact details for all parties
10. Execution: Signature blocks and execution formalities
1. Assignment and Transfer: Include when the guarantee needs to be transferable or when assignment rights need to be restricted
2. Multiple/Joint Guarantors: Required when more than one bank/institution is providing the guarantee
3. Partial Claims: Include when allowing for multiple partial claims up to the guaranteed amount
4. Force Majeure: Include for long-term guarantees where force majeure events might affect the guarantee obligations
5. Counter-Indemnity: Include when the Principal needs to provide indemnity to the Guarantor
6. Amendment Procedures: Include for complex projects where guarantee terms might need modification during validity
1. Form of Demand: Template format for making a claim under the guarantee
2. Underlying Contract Details: Key details of the contract being guaranteed including contract reference, date, and parties
3. Authorized Signatories: List of persons authorized to make demands under the guarantee
4. Bank Details: Banking information for payment processing
5. Performance Standards: Specific performance criteria that trigger the guarantee, if applicable
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