COMMISSION ON AUDIT CIRCULAR NO.

81-101-E October 20, 1981

TO : All Heads of Ministries, Bureaus and Offices; Managing Heads of government-

owned or controlled corporations; all heads of local government units; COA
Regional Directors; All Unit Auditors/Heads of Auditing Units and all others
concerned.

SUBJECT : A clarification relative to the issuance of bank guarantee as performance bond

pursuant to Presidential Decree No. 1594 on Infrastructure Contracts.

For the information and guidance of all concerned, quoted hereunder is the full text of
the letter of the Governor of Central Bank dated August 11, 1981 addressed to the Acting
Chairman of this Commission, viz:

"Central Bank of the Philippines

Manila

August 11, 1981

Mr. Francisco S. Tantuico, Jr.

Acting Chairman
Commission on Audit
Don Mariano Marcos Avenue,
Quezon City

Dear Mr. Tantuico:

This refers to your letter dated June 24, 1981 requesting clarification
relative to the issuance of bank guarantee as performance bond, pursuant to
Presidential Decree No. 1594.

Section 74 of Republic Act No. 377, as amended, provides that "no bank
or banking institution shall enter directly, or indirectly, into any contract of
guaranty or suretyship, or shall guarantee the interest or principal of any
obligation of any person, copartnership, association, corporation or other entity".
The provisions of said section shall, however, not apply to those transactions
enumerated therein, among which, are letters of credit, including stand-by
arrangements.

Based on the xerox copies of bank guarantee certificates submitted to

this Bank by your representative ( a certain Atty. Diokno), we are presenting the
following clarifications on bank guarantees:

a) A bank certificate evidencing that the bank holds deposits in the name
of the contractor concerned as security for the contract is considered
not a bank guarantee as contemplated in the above-mentioned
Section 74 of R.A. 337, as amended. Such deposits are only held by
the banks concerned to serve as performance bond of the contractor
 such that the issuing banks will not shoulder any loss in the event that
the contractor fails to meet his obligation.

b) However, a bank credit line for the account of the contractor

concerned, the amount of which is set aside to answer for the
obligation under the contract is considered a bank guarantee
prohibited under Sec. 74 of RA. 337, as amended. The bank is
contingently liable under the guarantee and will eventually assume
losses which may arise in case the contractor failed to comply with his
obligation under the contract.

As regards a bank guarantee in the form of domestic standby letters of

credit, such form of guarantee is acceptable to the Ministry of Public Works under
the Memorandum Circular No. 81-9 dated May 11, 1981 of the Ministry of Public
Works, and may be issued by banks provided the following conditions provided
under Memorandum to All Commercial Banks dated March 25, 1976, as
amended, are met.

a) The party who opened the stand-by L/C or the ultimate borrower shall
not have any past due obligations with the issuing bank for the 90-day
period preceding the date of issuance of the L/C; and

b) The stand-by L/C shall be fully secured and such security shall be
limited to real estate mortgages and/or bonds/securities either
guaranteed or issued by the Central Bank or the National
Government, except those in favor of the Philippine Government
against advances made by the Government to guarantee the
performance/completion of vital government projects.

We hope you will find the above clarifications relative to the issuance of
bank guarantee as performance bond satisfactory.

Very truly yours,

(SGD.) JAIME C. LAYA

Governor

Please be guided accordingly.

(SGD.) FRANCISCO S. TANTUICO, JR., Acting Chairman