The Performance Guarantee Bond is a crucial financial security instrument commonly used in Malaysian business transactions, particularly in construction, infrastructure, and large-scale commercial projects. It provides financial protection to the beneficiary by ensuring that a bank or insurance company will pay a specified sum if the principal fails to perform their contractual obligations. This document is essential when there's a need for performance security in major contracts, typically ranging from 5% to 10% of the contract value. The bond must comply with Malaysian law, including the Contracts Act 1950 and Financial Services Act 2013, and requires proper stamping under the Stamp Act 1949. It can be called upon through a written demand when specified default events occur, making it an effective tool for risk management in commercial transactions.
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1. Parties: Identifies the three key parties: (1) the Guarantor (bank/insurance company), (2) the Principal (party whose performance is guaranteed), and (3) the Beneficiary
2. Background: References the underlying contract or agreement that this bond guarantees and explains the context for the guarantee
3. Definitions: Defines key terms used throughout the bond, including 'Guaranteed Sum', 'Guaranteed Obligations', and 'Expiry Date'
4. Guarantee and Indemnity: Core section stating the guarantee commitment, including the guaranteed sum and conditions
5. Demand Requirements: Specifies the process and requirements for making a valid demand under the guarantee
6. Payment Terms: Details the timing and method of payment upon receipt of a valid demand
7. Duration and Expiry: Specifies the effective period of the bond and conditions for expiry
8. Governing Law and Jurisdiction: Confirms Malaysian law as governing law and specifies jurisdiction for disputes
9. Execution: Formal execution block for signing by authorized representatives
1. Step-in Rights: Optional section giving the Guarantor rights to take over the Principal's obligations - typically used in large construction or infrastructure projects
2. Assignment: Include when the bond needs to be transferable or when assignment needs to be specifically prohibited
3. Counter-Indemnity: Include when the Principal needs to indemnify the Guarantor for any payments made under the bond
4. Reduction Clause: Include when the guaranteed sum should reduce progressively based on project milestones
5. Islamic Finance Compliance: Include when the bond needs to be Shariah-compliant
6. Multiple Beneficiaries: Include when there are multiple beneficiaries to specify how they can make demands
7. Force Majeure: Include when specific force majeure events should affect the guarantee obligations
1. Schedule 1 - Form of Demand: Template for making a valid demand under the guarantee
2. Schedule 2 - Underlying Contract Details: Key details of the contract being guaranteed, including contract date, reference number, and key obligations
3. Schedule 3 - Authorized Signatories: List of persons authorized to make demands under the bond
4. Schedule 4 - Payment Details: Bank account and payment details for processing demands
5. Appendix A - Project Milestones: If using a reduction clause, details of project milestones and corresponding reduction amounts
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