Most guarantees issued in international trade protect the buyer against a supplier's failure. Only one protects money the supplier has already received: the advance payment guarantee. The buyer pays ten, fifteen or thirty percent of the price on order, to fund procurement and the first hours of production, and requires in return a bank's undertaking to return that sum if the goods do not arrive. This guarantee has a feature making it more dangerous than the others for the exporter: it bears on a sum it has collected and spent, and a call therefore deprives it both of the price and of the cash that funded the manufacture.
The first characteristic to know is when it takes effect. An advance payment guarantee should take effect only on actual receipt of the advance, and the clause saying so is essential: without it, the exporter is bound before having received anything, which happens when the guarantee is issued to enable the transfer and that transfer is lost in a banking circuit. The conditional effectiveness clause is the first line to check, and it is frequently absent from templates imposed by public buyers.
The second characteristic is heavier and concerns reduction. An advance payment guarantee is meant to decrease as goods are delivered, since the advance is applied against successive deliveries: having shipped half the contract, the exporter should have to return only half the advance. That reduction mechanism must still exist and be workable. Many wordings make reduction conditional on presenting a document only the buyer issues, a partial acceptance certificate for instance, and a buyer that does not issue it keeps the exporter exposed for the whole to the end, although it has delivered. The right mechanism is automatic and attached to a document the exporter holds, a bill of lading or a shipping record.
The third concerns the ground for calling, and this is where the advance payment guarantee really differs from the others. A performance guarantee is called on non-performance, a notion open to argument. An advance payment guarantee is called on non-delivery, and the buyer calling it often has nothing to prove since it is payable on first demand. The result is that an ordinary commercial dispute, a technical reservation, a delay attributable to the buyer itself, turns into immediate restitution of a sum already spent. The exporter ends up funding a contract it has performed to eighty percent, with cash it no longer has.
This guarantee must then be articulated with manufacturing risk, dealt with elsewhere in this certification, because the two meet at the same moment and contradict each other. If the destination country closes its imports during manufacture, the exporter suffers a loss on its committed cost, which pre-shipment cover may reimburse; but it simultaneously suffers the call of the advance payment guarantee, since the goods will not arrive. Two mechanisms therefore operate in opposite directions on the same event: one indemnifies a cost, the other demands a repayment, and the net balance depends on wordings that were not drafted together. It is the kind of situation one discovers only by living it, and that is prevented by reading the two texts side by side before signature.
Abusive-call insurance applies here as to other guarantees, with a difficulty of its own: proof. On a performance guarantee, showing the call is unjustified means proving one performed, which is documented. On an advance payment guarantee, one must prove having delivered what corresponds to the share called, or that non-delivery is attributable to the buyer or to a covered event. The file therefore rests entirely on the traceability of shipments and on correspondence dating the causes of delay, and that material is assembled through the contract, never after the call.
The practical discipline comes to four lines to check before issue. Is effectiveness conditioned on actual receipt of the advance. Is reduction automatic and attached to a document the exporter holds. Is the expiry date tied to an event it can bring about, a final delivery, rather than to an act only the buyer issues. And does the commercial contract oblige the buyer to return the original guarantee on its lapse, failing which it goes on existing in a drawer and is extended at each expiry. Those four lines cost an hour of reading and are worth the amount of the advance.
A French rolling stock manufacturer signs a 14 million euro contract with an Eastern European public buyer. A 20 percent advance, that is 2.8 million, is paid in February against an advance payment guarantee issued by the manufacturer's bank. The template imposed by the buyer provides for the guarantee to reduce pro rata to deliveries, on presentation of a partial acceptance certificate signed by the buyer. At November 15, 60 percent of the equipment has been shipped and received on site, but no certificate has been signed, the buyer citing a commission that has not met. On November 20, it calls the guarantee for the whole 2.8 million, citing delivery delay. What happens?
The guarantee is payable on first demand and the bank will pay: arguing the delivery delay with it is pointless, it does not examine the commercial contract. The manufacturer will therefore be debited 2.8 million within days, on an advance received in February and long since spent on procurement and production hours, although it has delivered sixty percent of the contract. That is this guarantee's distinctive feature: it bears on money already spent, so a call deprives one of both the price and the cash that funded the manufacture. The drafting fault is identifiable and it is a single one: pro rata reduction was conditioned on a certificate only the buyer issues, and it needed only to keep its commission from meeting to maintain full exposure while receiving the goods. Attached to a bill of lading or a shipping record, documents the manufacturer holds, the guarantee would have reduced to 1.12 million and the call would have borne on that sum. What remains to be done is bounded. Pay, since nothing prevents it. Assemble the abusive-call file at once, whose proof rests entirely on the traceability of the sixty percent shipped and received, and on correspondence dating the refusal to convene the commission. And check whether the policy covers abusive calls, knowing it reimburses afterwards and on proof. The lesson for the next contract fits in one line: a reduction attached to a document only the buyer issues is not a reduction.
- 01The advance payment guarantee bears on money already collected and spent: a call takes both the price and the cash that funded the manufacture.
- 02Its effectiveness must be conditioned on actual receipt of the advance, a clause frequently absent from imposed templates.
- 03A reduction attached to a document only the buyer issues is not a reduction: attach it to a bill of lading, which the exporter holds.
- 04It is called on non-delivery, easier to invoke than non-performance: an ordinary dispute turns into immediate restitution.
- 05It runs against pre-shipment cover on the same event, and the net balance depends on texts that were not drafted together.