The Legal Regulation of Letters of Guarantee in the Field of Public Tenders: A Comparative Study
Dr. Bader Saad Al-Otaibi
Attorney at the Court of Cassation and the Constitutional Court Member of the Kuwaiti Bar Association – Kuwait
The topic of the study deals with the issue of legal regulation of bank guarantee letters, especially in the field of public tenders. The letter of guarantee is an undertaking issued by a bank upon the request of a client (the client) to pay a specific or assignable amount to another person (the beneficiary) without restriction or condition if requested to do so within the period specified in the letter. The purpose for which it was issued is indicated in the letter of guarantee.
This means that the letter of guarantee is a personal and final undertaking, creating an original, abstract and direct commitment in the bank to pay its value to the beneficiary whenever it is requested during the period indicated therein. It is an independent obligation within the relationship between the bank and the customer, and the latter and the beneficiary. The issuance of a letter of guarantee at the request of the client does not create a right to the client with its value; because the bank did not undertake to pay it to him, but to guarantee it within its limits. It also does not represent the client’s right to the beneficiary in that the sums represented by the letter are considered money owned by the bank until it is disbursed to the beneficiary. Therefore, the customer cannot claim it, and it is not permissible for his creditors (the client’s creditors) to seize it at the bank or at the beneficiary. It also does not fall within the financial responsibility of the latter unless he personally requests it, within the limits of the bank’s commitment and the conditions for drafting the letter which must be clear.
Contracts of tenders and auctions, especially those announced by the Kuwaiti government, always require the client to submit a bank guarantee letter for the benefit of the beneficiary. The new Kuwaiti Tender Law No. 49 of 2016 in Article (45) required that the bid be accompanied by the initial insurance in the name of the bidder and for the benefit of the agency (the Central Agency for Public Tenders) and is not associated with any restriction or condition. This aims to ensure the seriousness of the bid. The relevant administrative authority also requests the tenderer to submit final insurance in the form of a letter of guarantee according to Article (65) of the Public Tenders Law of 2016. It also aims to ensure the implementation of the contract in the agreed manner, set as a percentage in an amount not less than 10% of the total value of the contract in accordance with Article (42) of the executive regulations of the Tender Law No. 30 of 2017. The commitment of the winning bidder to submit a final bank guarantee letter is mandatory by law. Otherwise, he will be considered withdrawn from the implementation of the contract with the relevant administrative authority.
Finally, the administrative body provides an “advance” or “down payment” to the contractor, and in this case he is obligated to submit a letter of guarantee acceptable to the employer (the administrative body) issued by an approved bank to guarantee the return of the advance payment.
Keywords: bank letter of guarantee, independent guarantees, bid guarantees, guarantee upon request.