Demand guarantee,

Definition of Demand guarantee:

1. A demand guarantee is 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.

2. A demand guarantee is usually issued in lieu of a cash deposit. This may be done to preserve the liquidity of the companies involved, particularly if there isn't enough free cash on hand. While this situation can be seen as a solvency issue leading to counterparty risk, the demand guarantee can help a company with limited cash reserves continue to operate without tying up more capital while also reducing the risk for the party receiving the guarantee.

3. Performance bond or other type of guarantee payable to the obligee on demand, often without the presentation of other documents and without the need to show the demand is in compliance with the terms of the underlying contract. In effect, it is a substitute for a cash deposit. Under UK law, a demand guarantee is independent of the underlying contract and is separate from the counter-guarantee (if any) given by the obligees bank to the obligors bank. Under US law also a demand guarantee enjoys similar protection and is called a standby letter of credit. Also called independent guarantee.