Tips on the restrictive use of independent letters of guarantee

Different from the traditional subordinated guarantee, although the independent guarantee is based on the underlying contract, the guarantee becomes independent once issued and the payment under the guarantee would only depend on the guarantee itself, and has nothing to do with the underlying contract. The guarantor would pay the amount available under the undertaking once it receives the claim from the beneficiary.

Independent guarantees are becoming the mainstream trend internationally, because guarantors are not willing to be involved in underlying transactions, while beneficiaries wish to have a more appropriate guarantee. In contrast, under the subordinated guarantee, once the claim is paid, the guarantee bank may be involved in litigation due to the underlying contractual relationship, which may jeopardise its interests and reputation.