A bank guarantee may be defined as an irrevocable undertaking of a bank to pay a sum of money, in the event of non-performance of a contract by a third party. Bank guarantees are issued at the request or on the instructions and under the liability of a party (Principal) or at the request or on the instructions and under the liability of a bank acting on the instructions of a principal, to another party (Beneficiary). Guarantees, by nature are separate transactions from the contract(s) on which the guarantee may be based.

Guarantees are payable against presentation of a written demand for payment and other documents specified in the guarantee.

To be valid within the Kingdom of Saudi Arabia, Tender Bonds, Performance Bonds and Advance Payment Guarantees have to be issued in the format prescribed by the Saudi Arabian Monetary Agency (SAMA).

Tender Bonds are designed to deter companies from making a tender and then rejecting the contract when it is awarded to them. Tender/Bid Bonds are usually called for, to protect the beneficiary against frivolous bidding.

Performance bonds are guarantees issued to cover the 'non-performance' of one party under a contract. The terms are simple and usually stipulate that a sum “will be paid to the beneficiary upon demand in the event that the beneficiary submits a signed statement stating default or non-performance by the applicant”. Performance bonds are designed to ensure that goods are delivered or services rendered in accordance with the terms of the contract and at the agreed time.

The basic purpose of an advance payment guarantee is to ensure that an advance payment is used in accordance with the intentions of the contract concluded between the buyer and seller. Under an advance payment guarantee, the advance payment has to be refunded if the seller fails to meet his commitments. Thus the guarantee helps to deter default.