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What Is a Contract Guarantee?

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  • Written By: Osmand Vitez
  • Edited By: Kristen Osborne
  • Last Modified Date: 19 August 2014
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    Conjecture Corporation
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A contract guarantee is an alternative term for ancillary guarantee, which is a basic co-signing agreement between one of two parties in a contract. Though common in the United Kingdom and other countries, an ancillary guarantee is not legal in the United States. The purpose of the agreement is to allow an outside guarantor the ability to acquire rights in a contract and execute agreements or clauses in the contract on behalf of the guarantee in order to fulfill the contract.

Although a contract guarantee is illegal in the United States, banks and financial institutions may allow a demand guarantee. Under a demand agreement, an individual or business will enter into a line of credit agreement with a financial institution. The financial institution can then demand payment without going through significant paperwork or showing how or why an individual or business needs to repay the loan.

The purpose of a contract guarantee is to ensure the payment of a performance bond. A performance bond is an agreement that ensures the payment of a fixed sum of money for a stated purpose. Performance bonds are common in industries where agreements are necessary to ensure that a certain party completes tasks as required. For example, the construction industry often uses bonds to ensure that any damages or problems encountered in various construction projects. The bond is often underwritten by a bank or insurance company. This letter or statement from the third-party guarantor is often necessary prior to the acceptance of a contract guarantee.

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Under the contract or ancillary guarantee, the third-part guarantor — the bank or insurance company underwriting the policy — can dispute the payout of the funds listed in the agreement. This is very common in agreements underwritten by an insurance company. In the insurance business, companies bet against having to pay money per contract guidelines. In order to avoid payouts, they may need to have strict rules that must be met in order for a beneficiary to receive payment.

Like most guarantees and contracts entered into by two or more parties, a contract guarantee is often enforceable in a court of law. Although court costs can be quite expensive, it may be necessary to ensure proper payment according to the contractual terms. Some agreements may include arbitration clauses, meaning that the parties in the contract will go before an arbiter to solve disputes. This reduces the costs associated with enforcing the contract and result in an amicable result for both parties.

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