A bank guarantee is a commercial instrument in the nature of a contract, intended between two parties, to secure compliance with the contract. It is an off-shoot of the main contract between two parties.

In simple terms, a bank guarantee is defined as an accessory contract, whereby the promisor undertakes to be answerable to the promisee for the debt, default or miscarriage of another person, whose primary liability to the promisee must exist or be contemplated.

The instances when a bank guarantee may be given are as follows:

1. A bank guarantee may be given by a buyer to a seller as a guarantee for the future payment.
2. A bank guarantee may be given by the contractor as a guarantee for any amount advanced.
3. A bank guarantee (letter of credit), given by an importer to safeguard against governmental policy changes and as a guarantee of due payment.

Since this guarantees is called a bank guarantee as it is provided by a bank or a financial institution.

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