Four Essential Points to Cover in Every Parent Guarantee for a Commercial Contract

Contracts are all about risk management. Requiring a parent guarantee is one way to reduce your risk when your counterparty does not have a strong balance sheet. 

 With a guarantee, the counterparty's parent company (guarantor) promises to the other party (beneficiary) to pay or perform any of the obligations of the subsidiary (obligor).

Here are four core concepts to address in a parent guarantee:

1. Creditworthiness

Does the guarantor have enough financial strength to assure the beneficiary? If not, the beneficiary may be better off with a standby letter of credit.

2. Pay or perform

Is the guarantor agreeing just to pay or both to pay and perform in the place of the obligor? Check if the payment covers just the fees or all payment obligations under the contract. If the guarantor promises performance too, evaluate if that is even an option for this kind of deal.

3. Payment or collection

Evaluate whether the beneficiary has to pursue the obligor first or if it can demand payment right away from the guarantor.

4. Limits

Check if there are limits on the guarantor’s obligations. Some guarantees restrict the type of obligations for which the guarantor will step in, cap the guarantee to a maximum value, or allow the guarantor to terminate or revoke its guarantee.