A bank guarantee may be defined as the 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 the instructions under the liability of a party (Principal) or at the request or the instructions under the liability of a bank acting on the instructions of a principal, to another party (Beneficiary). Guarantees, by nature are separate transactions to 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).