About the Nuances between Performance Bond and Performance Guarantee
A Performance Bond (PB) is a guarantee that follows the goods to the destination port in where if the goods can be rejected for good reason, then applying on the collection of PB supported by a Bank Guarantee (BG). Both the Performance Guarantee and the Performance bond are “based” on performance yet both are different types of performance assurance.
A Performance Bond is for a deal that works for the supplier in possession of goods and an end buyer taking possession of goods. The delivery of title documents cannot be secured so an intermediary is not to enter in such deals. As to Performance Guarantee, it is a guarantee given by the seller’s bank to the buyers bank in the form of an unconditional Stand-By letter of Credit.
If the delivery fails and the delivery documents are not presented to the bank on the date specified in the contract, the bank just automatically pays buyer bank the Performance Guarantee unconditionally, No questions asked. So the Intermediary must ask the seller to issue a Performance Guarantee (PG) of 2% (Not a Performance Bond) of the total cost as defined in contract, issued as unconditional as per Stand-by Letter of Credit procedures defined under UCP600 banking rules, issued within 3 days of buyers L/C being transferred.
Special Note: A Performance Guarantee does not activate the L/C. Same applies to activation of the L/C does not mean money. A Bank Performance Guarantee is issued in the form of a Stand by Letter of Credit defined by and subject to the rules of ISP98 (International Standby Practice) by the suppliers bank as a guarantee of delivery to the buyers bank. This is a complete separate entity to the Pre Advised Documentary Letter of Credit. The Pre Advised Transferable Documentary Letter of Credit is issued by a prime Top World Bank Per UCP600 banking laws by the buyer for purchase of goods and is activated only when the Pre Advise conditions are met.
The conditions in the Pre Advise L/C is not the Performance Guarantee. Activation of a letter of credit is not money in the suppliers bank account. Activation of the L/C means the buyer who issued the L/C cannot change his mind and void the Letter of Credit unless fraud is proven. The active Letter of Credit turns into money only when the delivery documents are presented to the bank and the end buyer.
The L/C is always issued first by the buyer and the Bank Performance Guarantee is issued by the supplier second. Sometimes instead of a Bank Guarantee the supplier offers a “LDD” (Late Delivery Discount) applied as a credit of XX% to favor of the end buyer on the Sellers invoice if delivery fails to be made on time. The buyer sometimes sees the “LDD” as the favorable choice of delivery guarantee as the % value offered on the LDD is higher than the % value of the SLC.