Demand guarantee (bank guarantee)
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A bank promises to pay the other side of your contract when it makes a demand that meets the guarantee's terms.
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01 · In plain words
A bank promises to pay the other side of your contract if a demand is made under the guarantee
A , also called a bank guarantee, is a promise from a bank. The bank promises to pay the other side of a contract when that side presents a demand that meets the guarantee's terms. Once issued, the bank cannot take it back unless the guarantee says it can (ICC Academy).
The guarantee is separate from the sales or works contract (ICC Academy). The bank checks the demand and any documents the guarantee asks for. It does not decide who is right under the contract.
A guarantee can back any type of promise in a contract, to perform or to pay. It can cover a bid in a tender, the work itself, an advance payment, money held back until the end of a job, or a warranty (ICC, Guide to URDG 758). A guarantee that backs the work is a . One that backs an advance is an .
Who is involved
- The applicant is the party that must perform the contract. It asks its bank for the guarantee (ICC Academy).
- The beneficiary is the party the guarantee is made out to. It can make a demand.
- The , typically a bank, issues the guarantee and pays on a valid demand.
- Sometimes the applicant's own bank asks a second bank, which can be in the beneficiary's country, to issue the guarantee. The first bank acts on the applicant's instructions and backs the guarantee with a . The party that asks the first bank to do this is the (ICC, Guide to URDG 758).
- The guarantor can name an advising party to pass the guarantee on to the beneficiary.
02 · How it works
Seven steps take a guarantee from the contract to payment or expiry
Figure 1 · Interactive
A demand guarantee, step by step
Read down the steps. The beneficiary makes a demand if it says the applicant failed to perform.
Sources: ICC, Guide to URDG 758 (2011), Chapter 2; ICC Academy, Understanding demand guarantees; UN Convention on Independent Guarantees and Stand-by Letters of Credit (1995).
03 · What it means for you
The beneficiary gets a bank's promise to pay on demand, and the applicant carries the risk of a demand it disputes
Figure 2 · Interactive
What a demand guarantee means for each side
Choose your side of the contract.
04 · Worked example
A 10% performance guarantee on a $10 million contract costs $15,000 in illustrative fees over 540 days
This example uses round, made-up numbers. A seller gives its buyer a performance guarantee for 10% of a $10,000,000 contract. The bank charges 1.00% a year, on a 360-day year, for 540 days. UK Export Finance (UKEF), the UK government's , can guarantee up to 80% of a bond's value to the exporter's bank (UKEF). Real fees vary by bank, country and deal.
Figure 3 · Illustrative
A $1,000,000 performance guarantee open for 540 days
Illustrative inputs. The fee is highlighted.
Made-up rates, worked out by our checking script. Only the 80% UKEF maximum comes from a source. Your bank's fees will differ.
05 · When to use it
A demand guarantee suits contracts where the other side wants a bank's promise to pay on demand
Good fit when
- Your contract asks for a bid, performance, advance payment, retention or warranty guarantee (ICC).
- You are the beneficiary and want payment from a bank on demand, without first proving the default under the contract.
- Your bank's room for guarantees is limited, or it asks for cash as security. A partial guarantee from an export credit agency can help, such as UKEF's Bond Support Scheme (UKEF). See ECA-backed finance.
Another tool may suit better when
- Both sides want the bank to pay only once a default is proven under the contract. In a 2017 English case, the court did not accept that advance payment guarantees issued by companies, rather than banks, had to be paid on demand (Autoridad del Canal de Panama v Sacyr).
- As the applicant, you cannot carry a payment on a demand you dispute.
- Your counterparty works with standby practice under . A standby letter of credit is very similar to a demand guarantee; the main differences are the terms used and practice (ICC Academy).
06 · Rules and a real case
A guarantee follows the ICC rules it names, and a court has shown how a bank's promise is read
When a guarantee says it follows , those ICC rules apply. They took effect on July 1, 2010 (ICC). The first version was adopted in 1991. The UN Commission on International Trade Law (UNCITRAL) endorsed URDG 758 in 2011 (ICC). The rules have 35 articles and set fixed time limits for checking a demand. The UN Convention on Independent Guarantees and Stand-by Letters of Credit of 1995 also covers these guarantees. can be used for them too (IIBLP).
A real case. In Wuhan Guoyu Logistics v Emporiki Bank of Greece, decided on December 7, 2012, the Court of Appeal of England and Wales looked at a guarantee a bank issued on December 14, 2007. It secured a buyer's second payment of $10,312,500 under a contract to build a ship. The bank had to pay on the seller's first written demand stating the buyer was 20 days late. The court applied the . A bank's cross-border promise to pay on demand, with no clauses letting the bank argue the facts, will almost always be read as a demand guarantee. It held the document was an on demand guarantee (Court of Appeal judgment).
Summary
A demand guarantee gives the beneficiary a bank's promise to pay on a demand that meets its terms
The bank pays a complying demand without looking into the contract dispute. The beneficiary gets a bank's promise. The applicant gets the contract, but carries the risk of a demand it disputes. Read the demand terms and the expiry date before you sign.
Related guides: Standby letters of credit vs bank guarantees; Buyer, country and performance risk. Related cards: Standby letter of credit; ECA-backed finance (buyer and supplier credit). Every term is in the Trade Finance Glossary.
Sources
- ICC Academy, Understanding demand guarantees: URDG 758 guide, June 3, 2026. Supports: definition, the parties, independence from the contract
- International Chamber of Commerce, Guide to ICC Uniform Rules for Demand Guarantees URDG 758, Chapter 2, 2011. Supports: types of guarantee, supporting statement, five business day check, expiry, the four-party structure
- International Chamber of Commerce, New rules for demand guarantees effective 1 July, June 30, 2010. Supports: URDG 758 start date
- International Chamber of Commerce, Uniform Rules for Demand Guarantees URDG, 2010 revision, 2010. Supports: first adoption in 1991, UNCITRAL endorsement, 35 articles, fixed time limits
- UNCITRAL (United Nations), United Nations Convention on Independent Guarantees and Stand-by Letters of Credit, December 11, 1995. Supports: independence, irrevocable on issue, grounds to hold back payment
- Institute of International Banking Law and Practice, ISP98, undated. Supports: ISP98 use for demand guarantees
- ICC Academy, Types of documentary credit: a comprehensive guide, October 21, 2024. Supports: standby credits compared with demand guarantees
- UK Export Finance, Bond Support Scheme, February 23, 2026. Supports: 80% maximum cover, bond types, less cash held as security
- Court of Appeal of England and Wales, Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2012] EWCA Civ 1629, December 7, 2012. Supports: the real case, the Paget presumption
- High Court of England and Wales, Commercial Court, Autoridad del Canal de Panama v Sacyr SA [2017] EWHC 2228 (Comm), September 5, 2017. Supports: guarantees from companies read as not payable on demand
- Alternative Reference Rates Committee, SOFR In Arrears Conventions for Syndicated Business Loans, July 22, 2020. Supports: 360-day year in the worked example
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