Demand Guarantee

DEFINITION of 'Demand Guarantee'

A type of protection that one party in a transaction can impose on another party in the event that the second party does not perform according to predefined specifications. In the event that the second party does not perform as promised, the first party will receive a predefined amount of compensation by the guarantor, which the second party will be required to repay.

BREAKING DOWN 'Demand Guarantee'

For example, an importer of cars in the U.S. can ask a Japanese exporter for a demand guarantee. The exporter goes to a bank to purchase a guarantee and sends its to the American importer. If, for example, the exporter does not fulfill its end of the agreement, the importer can go to the bank and present the demand guarantee. The bank will then give the importer the predefined amount of money specified, which the exporter will be required to repay to the bank.

A demand guarantee is very similar to a letter of credit except that the demand guarantee provides much more protection. For instance, the letter of credit only provides protection against non-payment, whereas a demand guarantee can provide protection against non-performance, late performance and even defective performance.

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