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Performance guarantee
I need a performance guarantee document that ensures the contractor will fulfill their obligations under the contract, with a guarantee amount of 10% of the contract value. The guarantee should be valid for the duration of the project plus an additional 6 months, and it must be issued by a reputable bank or financial institution.
What is a Performance guarantee?
A Performance guarantee is a binding promise where a bank or insurance company agrees to pay a set amount if someone fails to fulfill their obligations. In Germany, these guarantees (Leistungsgarantie) play a crucial role in construction projects, service contracts, and major business deals.
Under German banking law, these guarantees work like an independent security, meaning the guarantor must pay immediately when asked - without questioning the underlying contract. This makes them a powerful tool for managing business risk, especially since German courts strictly enforce their "on-demand" nature. Companies often require them from contractors to ensure project completion or quality standards.
When should you use a Performance guarantee?
Performance guarantees become essential when working on major construction projects or service contracts in Germany. Companies typically need them when hiring contractors for large-scale building works, complex installations, or long-term service agreements where project failure would cause significant financial damage.
German businesses commonly require these guarantees for projects worth over €100,000, or when working with new contractors without an established track record. They're particularly valuable in scenarios involving advance payments, specialized equipment installations, or multi-year maintenance contracts. The guarantee protects against contractor insolvency, work quality issues, or project abandonment - common risks in the German construction and service sectors.
What are the different types of Performance guarantee?
- Performance Guarantee Bond: Classic bank-issued guarantee for construction projects, typically covering 5-10% of contract value
- Corporate Performance Guarantee: Parent company guarantee common in group structures, backing subsidiary obligations
- Financial Performance Guarantee: Specialized guarantee for financial obligations, often used in investment or trading contexts
- Payment And Performance Guarantee: Comprehensive guarantee covering both payment and performance obligations, popular in large commercial contracts
Who should typically use a Performance guarantee?
- Banks and Insurance Companies: Act as guarantors, issuing Performance guarantees after evaluating financial risks and creditworthiness
- Construction Companies: Often required to provide these guarantees when bidding on major building projects or public tenders
- Project Developers: Request guarantees from contractors to secure project completion and quality standards
- Legal Departments: Draft and review guarantee terms, ensuring compliance with German banking regulations
- Municipal Authorities: Require Performance guarantees for public construction projects and infrastructure developments
- Corporate Treasury Teams: Manage guarantee portfolios and maintain relationships with issuing banks
How do you write a Performance guarantee?
- Project Details: Gather exact scope, timeline, and value of the guaranteed work or service
- Party Information: Collect legal names, registration numbers, and addresses of all involved parties
- Guarantee Amount: Calculate the guarantee sum (typically 5-10% of contract value in German practice)
- Duration Terms: Define the exact start and end dates, including any automatic extension conditions
- Payment Triggers: Specify clear conditions that activate the guarantee payment obligation
- Document Generation: Use our platform to create a legally-sound Performance guarantee that meets German banking regulations
- Internal Review: Have treasury and legal teams verify all terms before submission to the bank
What should be included in a Performance guarantee?
- Identification Details: Full legal names and addresses of guarantor, beneficiary, and principal party
- Guarantee Amount: Precise sum in euros, written in both numbers and words
- Validity Period: Clear start and end dates, with specific expiry conditions
- Payment Terms: Explicit "on-demand" payment clause meeting German banking standards
- Scope Definition: Detailed description of guaranteed obligations or performance
- Governing Law: Express statement of German law application and jurisdiction
- Force Majeure: Standard German law exceptions and limitations
- Signature Requirements: Authorized signatory provisions conforming to BGB requirements
What's the difference between a Performance guarantee and a Guarantee Agreement?
Performance guarantees differ significantly from a Guarantee Agreement in German law, though they're often confused. While both provide financial security, their mechanics and applications vary considerably.
- Legal Nature: Performance guarantees are independent obligations under German banking law, payable on first demand without examining underlying contracts. Guarantee agreements are accessory obligations tied to the main contract's validity
- Payment Terms: Performance guarantees require immediate payment upon demand, while guarantee agreements allow the guarantor to raise defenses from the underlying contract
- Issuer Requirements: Performance guarantees must come from banks or insurance companies in Germany, whereas guarantee agreements can be issued by any legally capable party
- Common Usage: Performance guarantees typically secure construction and large commercial projects, while guarantee agreements are more common in general business transactions and loans
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