What is a bank guarantee? A guide for Spanish firms

In short.

• A bank guarantee (aval bancario) is a suretyship: the institution (the guarantor) undertakes to pay or perform for your company (the principal) towards a third party (the beneficiary) if your company does not (Spanish Civil Code, art. 1822). Where it secures a commercial contract, it is a commercial suretyship and must be in writing (Spanish Commercial Code, arts. 439-440).
• Its strength lies in the wording: a guarantee that is joint and several, waives the benefit of excussion and is payable on first demand —the model required by Spanish public authorities (RGLCAP, art. 56)— is paid without the beneficiary first having to pursue you. The bank then claims back from you what it paid, plus interest and costs (Civil Code, art. 1838).
• It has two costs: the fees and the risk it takes up. Guarantees given by credit institutions are reported to the Bank of Spain's CIRBE in the name of the guaranteed company (Circular 1/2013, rule 3) and use up its risk line for as long as they are outstanding, even if they are never called.

A bank guarantee does not cost you only the fee: for as long as it remains outstanding, it appears as your company's risk in the CIRBE (the Bank of Spain's Central Credit Register) and takes up the same line you use to fund working capital. It is the effect that appears neither in the tender documents nor in the bank's tariff, and the one that weighs most heavily when a company accumulates guarantees for works, supply contracts or advance payments.

In this guide we explain what a bank guarantee is in legal terms, how it works between the three parties, which types exist, what it costs, how it affects your bank risk, how it is cancelled and which alternatives Spanish law accepts. It is the foundation for understanding the other guarantees and bonds that a medium-sized or large company handles every day.

What is a bank guarantee?

A bank guarantee is a suretyship given by a credit institution: the bank undertakes to pay or perform towards a third party (the beneficiary) should your company fail to do so. It is a personal guarantee, documented in writing and normally given for a fee, that secures a money debt or the performance of a contract.

The starting point is article 1822 of the Spanish Civil Code: "by suretyship, a person undertakes to pay or perform for a third party should the latter fail to do so". Article 1823 allows a suretyship to be gratuitous or for consideration, and the latter is the bank guarantee: the institution charges for providing it.

Where the guarantee secures a commercial contract —the usual case for a company— the Spanish Commercial Code (Código de Comercio) applies. Its article 439 treats as commercial any suretyship securing a commercial contract, even if the guarantor is not a trader. Article 440 requires it to be in writing, failing which it shall have no validity or effect. And article 441 declares it gratuitous unless otherwise agreed: the bank's fee exists because it is expressly agreed.

Two limits in the Civil Code frame any guarantee:

• The guarantor cannot undertake more than the principal debtor (art. 1826). The guarantee does not enlarge your company's debt; it secures it.
• A suretyship may be given for future debts whose amount is not yet known, although the guarantor cannot be called upon until the debt is liquidated (art. 1825). Guarantee facilities rest on that possibility.

How does a bank guarantee work? The three parties

Every bank guarantee brings together three parties:

• Applicant or principal: your company, which is the primary obligor and requests the guarantee.
• Guarantor: the institution that provides the guarantee.
• Beneficiary: whoever receives the document and may call it. A contracting public authority, a private client, a landlord, the customs authorities or the tax authorities.

The usual sequence is as follows: your company applies for the guarantee; the institution assesses the risk; a suretyship agreement or a guarantee facility agreement is signed, which usually includes counter-security; the institution issues the document in favour of the beneficiary; the guarantee remains in force for the agreed period; and it ends in one of two ways, cancelled or called.

If the beneficiary calls it, the bank pays and then seeks recourse against your company. Article 1838 of the Civil Code sets out what it may claim: the total amount of the debt, statutory interest from the date it notifies you of the payment, the costs incurred and, where applicable, damages. In addition, the bank is subrogated to the rights the creditor held against your company (art. 1839). On top of all this comes whatever the facility agreement provides. With a surety bond the mechanics are different, and we explain them in calling a surety bond.

Illustrative example (invented figures, solely to show the mechanics): an industrial company signs a supply contract and the client advances it €300,000 to purchase materials. As a condition, the client requires a guarantee for that amount, which the bank issues under the company's guarantee facility. If the company delivers, the client returns the original and the guarantee is cancelled. If it does not deliver and the client calls the guarantee, the bank pays the €300,000 and charges the company that amount, plus interest and costs. Throughout the term, that €300,000 appears as the company's risk, whether or not the guarantee is called.

Types of bank guarantee

There is no closed legal classification. In practice, guarantees are distinguished by three criteria: the strength of the wording, what they secure and to whom they are given.

Joint and several guarantees and the benefit of excussion

The general rule of the Civil Code protects the guarantor: it cannot be compelled to pay until excussion (excusión) of all the debtor's assets has taken place (art. 1830). In other words, the creditor must first try to recover from your company.

That protection falls away in two situations that are the norm for bank guarantees: where the guarantor expressly waives it and where it binds itself jointly and severally with the debtor (art. 1831). Under a joint and several guarantee, the creditor may proceed against any of the obligors, or against all of them at once (arts. 1822 and 1144). In practice, the beneficiary can claim directly from the bank.

The guarantee required by Spanish public authorities goes one step further: as well as being joint and several and waiving excussion, it is payable on first demand of the Caja General de Depósitos (the State General Deposit Fund) or the equivalent public body, under article 56.1.a) of the General Regulation of the Public Administration Contracts Act (RGLCAP). In practice, the institution pays when called upon, without first disputing the merits of the default. What a guarantee on first demand means at the moment it is called is something we cover separately.

Financial guarantees and performance (technical) guarantees

This is the distinction most used in banking practice, and it is worth knowing that it is market terminology, not a legal category:

• A financial guarantee (aval económico or financiero) secures a money debt: a deferred payment, a loan granted by another institution, payment to a supplier.
• A performance or technical guarantee (aval técnico) secures the performance of an obligation to do something: taking part in a tender, carrying out a contract, applying an advance payment correctly, answering for the proper functioning of what has been delivered.

Bank of Spain rules draw a parallel distinction: for reporting purposes, Circular 1/2013 separates financial guarantees from non-financial guarantees and sureties. For your company, both are reported as risk.

By beneficiary

• Before public authorities: the definitive guarantee in public contracts (art. 108.1.b of Law 9/2017 on Public Sector Contracts) and, where exceptionally required, the provisional guarantee (art. 106.2, which refers to the forms in art. 108.1).
• Before private clients: repayment of advance payments, proper completion of works or supplies, replacement of retentions on the price.
• Before landlords of business premises, offices and industrial units, as security for the lease.
• Before customs or tax authorities, in procedures where the tax or customs administration requires security.

The guarantees most commonly required by activity are set out in mandatory guarantees by sector.

Who can issue a guarantee that a public authority will accept?

Not every guarantee is valid in public procurement. Article 108.1.b) of Law 9/2017 on Public Sector Contracts (LCSP) accepts guarantees given by banks, savings banks, credit cooperatives, specialised lending institutions and mutual guarantee companies (sociedades de garantía recíproca, SGR) authorised to operate in Spain and, in the case of the definitive guarantee, requires it to be deposited with the Caja General de Depósitos or the equivalent public body of the contracting autonomous community or local authority. A guarantee for a provisional guarantee is lodged with the contracting body (art. 106.3.b).

The RGLCAP sets out the model in its article 56.1:

• Joint and several with the principal obligor.
• With an express waiver of the benefit of excussion.
• Payable on first demand.
• Of indefinite duration: it remains in force until the body in whose favour it was given declares the secured obligation extinguished and cancels the guarantee.

Article 56.2 further requires that the guarantor institution not be in default towards the contracting authority: the authority may refuse guarantees from institutions that still have called guarantees unpaid thirty calendar days after the first demand for payment. It also requires that the institution not be in suspension of payments or bankruptcy and that its authorisation be in force.

A surety bond is not a type of bank guarantee: it is a different form of security, provided for in article 108.1.c) of the same law.

How much does a bank guarantee cost?

There is no public tariff: the cost of a guarantee is agreed with each institution (remember that a commercial suretyship is gratuitous unless otherwise agreed, art. 441 of the Commercial Code) and depends on its solvency assessment. The usual structure combines:

• An arrangement or opening fee, when the guarantee or the facility is granted.
• A periodic risk fee on the outstanding amount, at intervals set by the agreement.
• Documentation costs for the guarantee agreement or the facility agreement.
• In some cases, counter-security: pledged deposits or personal guarantees from the shareholders or the group.

Two further costs do not appear in the tariff. The first is the use of the line, which we cover in the next section. The second is the actual duration: a guarantee of indefinite duration, such as one given to a public authority, continues to accrue fees until the original is returned or the beneficiary authorises its cancellation, even if the contract it secured ended months ago.

Guarantee facilities, bank risk and the CIRBE

Companies that give guarantees frequently do not request each one separately: they work with a guarantee facility (línea de avales) or a multi-purpose risk facility, which sets a maximum limit of outstanding guarantees. Each issue reduces the amount available; each cancellation releases it.

That facility is visible from outside. The Central Credit Register (CIRBE) is a public service run by the Bank of Spain that collects data on credit risks from reporting institutions (Law 44/2002, art. 59). Reporting institutions include credit institutions, specialised lending institutions, mutual guarantee and counter-guarantee companies, SAECA, Sareb and real estate lenders (Law 44/2002, art. 60.1; Circular 1/2013, rule 1). Insurance companies are not among the reporting institutions.

Bank of Spain Circular 1/2013 specifies what is reported:

• Guarantees given are reportable risk. Those securing a money debt are reported as financial guarantees, and other guarantees and sureties as other commitments with credit risk, which also includes the undrawn amount of guarantee facilities (rule 2.1, letters c and e).
• The holder of the direct risk is the person for whom the institution is answerable, that is, your company (rule 3.4.h).

The practical consequence is direct: when another institution assesses a loan for your company, it will see those guarantees as risk assumed, even if none has ever been called. Your company has the right to access the data the CIRBE holds in its name (Law 44/2002, art. 65; Circular 1/2013, rule 19).

A guarantee from a mutual guarantee company also counts, because SGRs are reporting institutions: it does not free up CIRBE capacity. How this effect changes when the security is provided through insurance is analysed in bank guarantee vs surety bond.

Are your outstanding guarantees taking up the line you need for working capital? We review your guarantee programme.

Expiry and cancellation of a guarantee

A guarantee may have a fixed expiry date or be of indefinite duration, like the one required by public authorities (RGLCAP, art. 56.1). That difference determines how it is cancelled.

In practice, cancellation requires the return of the original document to the institution or a declaration by the beneficiary releasing the bank. In public contracts, it follows the decision to return the guarantee under article 111 of the LCSP; we set out the timeframes and procedure in the article on the definitive guarantee.

The common risk is forgotten guarantees: completed contracts whose guarantee was never recovered and which remain in the CIRBE and continue to accrue fees. The most cost-effective operational measure is to keep an inventory of outstanding guarantees recording amount, beneficiary, expiry and return status, and to chase every cancellation.

Other forms of security the law accepts

The LCSP itself lists the ways of providing security in public procurement, and several have an equivalent in private contracting:

• Cash or public debt securities on deposit (art. 108.1.a).
• Retention on the price, where the tender specifications provide for it (art. 108.2).
• A guarantee from a mutual guarantee company (art. 108.1.b).
• Surety bond (seguro de caución, art. 108.1.c), the contract under which the insurer indemnifies the insured by way of compensation or penalty if the policyholder fails to meet its obligations (Law 50/1980 on Insurance Contracts, art. 68).

When each one makes sense, compared on cost, CIRBE and processing, is explained in bank guarantee vs surety bond.

We help you decide which guarantees to keep with the bank and which to move to the insurance market. Talk to us.

The role of an independent broker

New Brokers does not issue bank guarantees: it is an insurance brokerage. What we do is work on your company's guarantee programme as a whole. We inventory the outstanding guarantees, analyse which part of the volume makes sense to keep with the bank and which to move to a surety facility, review the guarantee wording required by the beneficiary before your company signs it and follow up on cancellations. As an independent brokerage, we represent your company, not the institution issuing the guarantee. It is routine work in insurance for construction companies, where guarantees run into the dozens.

Inventory of outstanding guarantees, sizing of the surety facility and follow-up of cancellations, with no obligation. Contact us.

Frequently asked questions

What security does a bank require to grant a guarantee facility? It depends on each institution and on the risk it sees in your company. It commonly requires counter-security, such as pledged balances or personal guarantees from the shareholders or the group, and the facility uses up bank risk limit. The specific terms are set by the agreement with the institution.

What is the difference between a financial guarantee and a performance guarantee? A financial guarantee secures a money debt, such as a deferred payment, a loan or payment to a supplier. A performance (technical) guarantee secures the performance of an obligation to do something: a tender, carrying out a contract or the proper application of an advance payment. It is market terminology, not a legal classification.

Does a bank guarantee appear in the CIRBE even if it is never called? Yes. It is reported as risk of the company for which the institution is answerable from the moment it is given (Bank of Spain Circular 1/2013, rules 2 and 3.4.h) and stops counting once it is cancelled.

What happens if the bank pays out under the guarantee? It claims from your company the amount paid, statutory interest from the date it notifies you of the payment, costs and, where applicable, damages (Spanish Civil Code, art. 1838), in addition to whatever the guarantee facility agreement provides.

Can a guarantee be of indefinite duration? Yes. One given to a public authority is indefinite until the body in whose favour it was given declares the obligation extinguished and cancels the guarantee (RGLCAP, art. 56.1). For as long as it remains outstanding, it continues to take up the line and accrue fees.

Sources and legislation

• Spanish Civil Code (Código Civil), articles 1144, 1822, 1823, 1825, 1826, 1830, 1831, 1838 and 1839 (suretyship and joint and several liability). Consolidated text.
• Spanish Commercial Code (Código de Comercio), articles 439 to 441 (commercial suretyship). Consolidated text.
• Law 44/2002 on Measures to Reform the Financial System, articles 59, 60 and 65 (Central Credit Register).
• Order ECO/708/2004, which adds SAECA as a reporting institution to the CIRBE.
• Bank of Spain Circular 1/2013 on the Central Credit Register, rules 1, 2, 3 and 19. Consolidated text.
• Law 9/2017 on Public Sector Contracts (Ley de Contratos del Sector Público, LCSP), articles 106 (provisional guarantee), 108 (acceptable definitive guarantees) and 111 (return). Consolidated text.
• Royal Decree 1098/2001, General Regulation of the Public Administration Contracts Act (RGLCAP), article 56 (requirements for the guarantee and the guarantor institution).
• Law 50/1980 on Insurance Contracts (Ley de Contrato de Seguro), article 68 (surety insurance).

The terms of each guarantee —fees, counter-security, duration— are set by the agreement with the institution; and the required model, by the beneficiary (in public contracts, the tender specifications and the RGLCAP). This guide describes the general framework; the numerical example is illustrative and the issue of any guarantee depends on the issuer's solvency assessment. This information is for guidance only and does not constitute legal or financial advice. New Brokers Correduría de Seguros, S.L., registered with the DGSFP under reference J0140.