What is a counter guarantee and when is it obtained?

The bank while issuing a guarantee has to obtain counter guarantee from its customer and if necessary additional security and collateral to protect the bank in case it is required to pay under the guarantee. Though a bank guarantee is a contingent liability it is always prudent for a banker to secure this contingent liability in case it is enforced. This can be done by obtaining a counter guarantee cum indemnity executed by the customer in favour of the bank. The counter guarantee cum indemnity should be carefully drafted to ensure that in case the bank is to make payment on behalf of the customer, then the customer in turn should not only make good the amounts paid by the bank to the creditor but also any expenses connected therewith including costs of attorney, any interest on delayed payment, taxes and other levies. It is to take care of all the payments. The counter guarantee also includes an indemnity aspect. The counter guarantee should also include a clause that it would remain in force till the guarantee given by the bank subsists viz., till the bank is duly discharged by the beneficiary or a certificate to this effect is issued by the beneficiary.