Bank Guarantee in Nepal : Legal Framework under Public Procurement Law

Bank guarantees are an established feature of public procurement transactions and play an important role in allocating financial risk between procuring entities, bidders, contractors and banks. They are particularly significant in public construction projects, where contracts are often high value, long term and susceptible to disputes concerning delay, performance, payment, variations, extension of time and termination.

 

The principal purpose of a bank guarantee in public procurement is to provide the procuring entity with a degree of financial protection against specified risks. Depending on the stage of procurement, the relevant security may take the form of a bid security, performance security, advance payment security or, in the case of guarantees issued by foreign banks, a counter guarantee through a Nepalese commercial bank.

 

This article examines the principal forms of security used in public procurement in Nepal and considers the legal relationship between bank guarantees and disputes arising from public construction contracts.

 

 

The principal legal framework governing bank guarantees in public procurement in Nepal comprises, 

 

• Public Procurement Act, 2063 (“PPA”);and

• Public Procurement Regulations, 2064 (“PPR”)

 

The PPA broadly defines "security" as retention money or earnest money furnished as security pending the completion of any obligation or work. The term also includes bid security, performance security, or any amount furnished as security required to be so furnished for any other reason. 

 

In addition to the statutory framework, the relevant bank guarantee is governed by the applicable bidding documents, Letter of Bid, procurement contract and Special Conditions of Contract, as applicable.

 

 

The principal securities relevant to public procurement include bid security, performance security and advance bank guarantee. Each serves a different purpose and operates at a different stage of the procurement and contractual process. Their legal basis is primarily found in PPA and the PPR, together with the applicable bidding documents and procurement contract. The procurement contract itself is required to specify, among other matters, the security required under the contract.

 

3.1. Bid Startegy

Bid security operates primarily at the bidding stage and is intended to protect the public entity against specified conduct by bidders that may prejudice the procurement process. The principal provisions governing bid security are contained in the Public Procurement Act, 2063 ("PPA") and the Public Procurement Regulations, 2064 ("PPR"), together with the applicable bidding documents.

 

(i). Amount of Bid Security 

Rule 53(1) of the PPR provides that the public entity shall, in accordance with the nature of the procurement, specify a fixed amount in the notice inviting bids, within the limit of two to three percent of the approved cost estimate, to be uniformly applicable to all bidders. Such amount may be furnished in cash or in the form of a bid security of equivalent amount issued by a commercial bank or financial institution.

 

However, in cases where the cost estimate is not disclosed or where bids are invited only on the basis of unit rates, the public entity may specify a lump sum amount for the bid security in the bidding documents, prequalification documents, and the notice inviting bids.

 

(ii.) Validity Period of Bid Security 

Rule 53(2) of the PPR requires that the validity period of the bid security shall be at least thirty days longer than the bid validity period. This ensures that the bid security remains enforceable throughout the bid validity period and for a sufficient additional period to cover any procedural delays or post bid processes. The bid security must therefore remain valid for the period prescribed under the PPR and the applicable bidding documents. 

 

(iii.) Acceptability of Bank Guarantee

Rule 53(3) of the PPR provides that if a bidder requests the public entity to clarify whether a bid security issued by a particular commercial bank or financial institution is acceptable or not, the public entity shall respond to such request immediately. This provision promotes transparency and ensures that bidders have clarity regarding acceptable financial institutions before they incur the cost of obtaining a bank guarantee.

 

(iv.) Counter Guarantee for Foreign Bank Guarantees

Rule 53(4) of the PPR requires that a bid security issued by a foreign bank must be counter guaranteed by a commercial bank within Nepal. This ensures that the public entity can enforce the guarantee locally and mitigates the risk associated with foreign financial institutions that may not be subject to Nepalese jurisdiction.

 

(v.) Requirement and Extension of Bid Validity Period

 Rule 53(5) of the PPR requires the public entity to conclude the procurement contract within the bid validity period. If, for any reason, the contract cannot be concluded within such period, the public entity shall send a letter to all eligible bidders requesting extension of the bid validity period.\

 

Rule 53(5a) of the PPR further provides that the public entity may send a letter to extend the bid validity period pursuant to Rule 53(5) only after analysing the reasons requiring such extension and where there are sufficient grounds to substantiate the same. Where the bid validity period is extended merely because the bid evaluation or decision making process was not completed within the required period, without such grounds and reasons, and if any loss or damage occurs as a result thereof, the responsibility for such loss or damage shall lie with the employees involved in such work and the officials of the evaluation committee.

 

Rule 53(6) of the PPR provides that, in response to the letter pursuant to Rule 53(5), the bidder may decide whether to extend the validity period of the bid or not. The bid security of a bidder who does not extend the bid validity period shall not be forfeited. A bidder who extends the bid validity period shall submit the bid security with the validity period extended accordingly from the concerned bank. If the bidder fails to submit the bid security with the extended period in this manner, the bid validity period shall not be deemed to have been extended.

 

Rule 53(6a) of the PPR provides that a bidder who extends the bid validity period pursuant to Rule 53(6) shall not be allowed to specify any additional conditions that are contrary to the provisions mentioned in the bid documents.

 

These provisions are significant because they distinguish between voluntary extension of bid validity and circumstances giving rise to forfeiture of bid security. A bidder cannot be penalized merely for declining a request to extend its bid validity, whereas a bidder that elects to extend its bid must maintain corresponding security for the extended period.

 

(vi.) Forfeiture of Bid Security  

Section 21(2) of the PPA specifies the circumstances in which the bid security furnished under subsection (1) shall be forfeited. These are as follows,

 

• where the bidder requests modification or withdrawal of its bid during the period specified in Section 19(1) of the PPA;

• where the bidder refuses to accept the correction of an arithmetic error appearing in the bid;

• where the selected bidder fails to execute the procurement contract in accordance with the conditions specified in the bidding documents;

• where the bidder fails to furnish the required performance security within the period prescribed for execution of the procurement contract;

• where, in responding to any information requested by the public entity during the bid evaluation process pursuant to Section 23(4) of the PPA, the bidder changes the price or any material aspect of its bid; or

• where the bidder acts in contravention of the code of conduct under Section 62 of the PPA.

 

 The statutory framework therefore treats bid security as security for specified obligations arising during the bidding and contract award stage. It is not a general security for all obligations that may subsequently arise under the procurement contract.

 

(vi). Enforcement of Bid Security Against the Bank

Rule 53(7) of the PPR provides that where the bid security of a bidder has been forfeited, the concerned public entity shall, within the validity period of such guarantee, claim the guaranteed amount from the bank that issued the guarantee for payment to itself. The timing of such claim is therefore material, the public entity must act within the validity period of the relevant bank guarantee.

 

Accordingly, the legal framework distinguishes between forfeiture of the bid security as a consequence under procurement law and the public entity's subsequent claim against the issuing bank under the bank guarantee. The latter must be made in accordance with the validity and other terms of the particular guarantee.

 

(vii.) Return and Release of Bid Security 

Section 21(3) of the PPA governs the return of bid security. It provides that, after the procurement contract under Section 52 of the PPA has been concluded, the public entity shall return the bid security of the bidder with whom the contract is concluded, as well as the bid security of any bidder whose security has not been forfeited under subsection (2).

 

Rule 53(8) of the PPR further provides that the public entity shall, within three days of the conclusion of the procurement contract, return to the concerned bidders all bid securities other than those that are required to be forfeited under the PPA or the PPR.

 

In practice, bid security is released to unsuccessful bidders after the relevant stage of the procurement process has been completed. In the case of the successful bidder, the bid security is dealt with in connection with the furnishing of the required performance security and conclusion of the procurement contract.

 

Accordingly, bid security performs a limited and stage specific function, it protects the public entity during the bidding and award process against specified bidder conduct, while performance security subsequently assumes the role of securing contractual performance.

 

Summary of Key Provisions of Bid Security 

 

Aspects	Provisions	Key Requirement
Amount	PPR Rule 53 (1)	2% to 3% of approved cost estimate; lump sum for nitrate bids
Form	PPR Rule 53 (1)	Cash or bank guarantee from commercial bank/financial institution
Validity	PPR Rule 53 (2)	At least 30 days beyond bid validity period
Foreign Bank Guarantee	PPR Rule 53 (4)	Must be counter guaranteed by a Nepalese commercial bank
Extension	PPR Rules 53 (5), (5A), (6), (6A)	Voluntary for bidder; no forfeiture for declining; must extend security if agreeing
Forfeiture	PPA Section 21 (2)	Specified grounds including bid modification, refusal to correct errors, failure to contract
Enforcement	PPR Rule 53 (7)	Claim against issuing bank within guarantee validity period
Return	PPA Section 21 (2), PPR Rule 53 (8)	Within 3 days of contract conclusion; forfeited securities excepted

 

3.2. Performance Security / Performance Guarantee

 

Performance security operates after the award of the procurement contract and is intended to protect the procuring entity against the risk that the successful bidder fails to perform its contractual obligations. Unlike bid security, which secures the conduct of bidders during the bidding and award process, performance security secures the substantive performance of the works, goods or services under the procurement contract itself, and continues to operate throughout the life of the contract, including the defects liability period in the case of construction works. The principal provisions governing performance security are contained in Section 27 of the PPA and Rule 110 of the PPR, together with the applicable bidding documents and procurement contract.

 

(i) Requirement to Furnish Performance Security

Section 27(3) of the PPA provides that, where no bidder has, within seven days of the notice of intention to accept a bid, filed a review application under Section 47 of the PPA, the public entity shall accept the bid of the selected bidder and give that bidder notice, within fifteen days, to furnish performance security for the purpose of concluding the procurement contract under Section 52.

 

Rule 110(1) of the PPR requires that, in furnishing performance security pursuant to Section 27(4) of the PPA, the successful bidder shall furnish a performance guarantee issued by a commercial bank, in the format set out in the tender documents, within the time limit specified under Section 27(3).

 

(ii) Amount of Performance Security

Rule 110(2) of the PPR provides that the baseline amount of performance security shall be five percent of the price of the procurement contract. Where the procurement contract does not indicate a contract price, Rule 110(3) provides that the performance guarantee specified by the public entity in the tender documents shall instead be furnished.

 

(iii) Additional Performance Security for Low Bids

In addition to the performance security referred to above, Rule 65(3) of the PPR provides for an additional performance security where the evaluation committee considers the tender price quoted by a bidder to be abnormally low. In such circumstances, the evaluation committee is required to obtain an explanation, including a rate analysis, from the concerned bidder before making its recommendation. Where the committee is satisfied with the explanation, it may recommend acceptance of the tender subject to the bidder furnishing additional performance security equivalent to eight percent of the tender price. If the explanation is not considered satisfactory, the committee may recommend rejection of the tender

 

(iv) Consequences of Failure to Furnish Performance Security

If the selected bidder fails to furnish the required performance security and conclude the procurement contract within the fifteen-day period referred to in Section 27(3), Section 27(5) of the PPA provides that the bidder's bid security shall be forfeited and the public entity shall instead accept the bid of the next lowest evaluated, substantially responsive bidder, requiring that bidder to conclude the contract. Section 27(6) provides for this process to continue sequentially where successive bidders also fail to furnish performance security. Bid security and performance security therefore operate as sequential, complementary securities, failure to furnish performance security within the prescribed period is itself one of the specified grounds for forfeiture of bid security under Section 21(2) (d) of the PPA, discussed in Section 3.1 above.

 

(v) Validity Period

Rule 110(4) of the PPR provides that, except as otherwise stated in the procurement contract, the validity period of the performance guarantee shall extend at least one month beyond the latest of, the time of delivery or handing over of goods; the warranty period; or the defects liability period, as applicable. This ensures that performance security remains available to the public entity throughout the period during which contractual defects or nonperformance might reasonably come to light.

 

(vi) Foreign Bank Guarantees

As with bid security, Rule 110(5) of the PPR provides that a performance guarantee issued by a foreign bank is valid only where it is counter guaranteed by a commercial bank established in Nepal. 

 

(vii)     Release of Performance Security

Performance security is not released simply upon physical completion of the works, goods or services. Rule 124(2) of the PPR provides that, in making final payment, the performance guarantee and fifty percent of the retention money deducted from running bills under Rule 123(4) are returned only after the expiry of the defects liability period, in the case of a construction work. The remaining fifty percent of the retention money is returned only upon the contractor submitting evidence, issued by the concerned Inland Revenue Office, that its income returns have been submitted.

 

Where the construction entrepreneur fails to rectify defects within the defects liability period, the proviso to Rule 124(2) permits the public entity to use the retention money or the amount of the guarantee to rectify the defects itself. Performance security therefore continues to serve a protective function throughout the defect’s liability period, and not merely up to physical completion of the works.

 

(viii) Forfeiture on Termination for Contractor Default

Performance security may also be forfeited in connection with termination of the procurement contract for the contractor's default. Where a construction entrepreneur, supplier, service provider or consultant fails to commence work, abandons work partway through, or otherwise fails to progress the work in accordance with the contract, Section 59(7) of the PPA entitles the public entity to terminate the contract at any time, and Section 59(8) provides that the entire security held in respect of that work shall thereupon be forfeited.

 

As with the forfeiture of bid security, however, a decision to forfeit performance security or to terminate a contract must be supported by a clearly disclosed factual and legal basis capable of withstanding judicial review.

 

Performance security therefore performs a function distinct from, but complementary to, bid security, it secures actual contractual performance across the life of the contract including the defects liability period rather than merely the conduct of bidders during the bidding and award process.

 

Summary of Key Provisions of Performance Security

 

Aspect	Provision	Requirements
Baseline amount	PPR Rule 110(2)	5% of the procurement contract price
Additional security	PPR Rule 65(3)–(4)	An additional performance security equal to eight percent of the tender price which is returned after the payment of the final bill.
Form	PPR Rule 110(1)	A performance guarantee issued by a commercial bank in the form set forth in the tender documents.
Time to furnish	PPA Section 27(3)	Public entity must notify within fifteen days to furnish performance security for concluding the procurement contract.
Validity	PPR Rule 110(4)	Validity shall extend at least one month beyond the delivery/handing-over time, the warranty period, or the defects liability period.
Foreign bank guarantee	PPR Rule 110(5)	It is valid only where it is counter guaranteed by any commercial bank established in Nepal.
Consequence of default	PPA Section 27(5)–(6); Section 21(2)(d)	Bid security forfeited, contract offered to the next lowest evaluated substantially responsive bidder, sequentially. Forfeiture where the bidder fails to furnish the required performance security within the period prescribed.
Release	PPR Rule 124(2)	A performance guarantee and fifty percent of the retention money shall be returned after the expiry of the defects liability period.
Forfeiture on termination	PPA Section 59(7), 59(8)	Entity may terminate for failure to commence, abandonment, or non-progress of work. The entire security held in respect of that work shall be forfeited.

 

3.3. Advance Bank Guarantee

Advance bank guarantee serves a different purpose from bid and performance security. Where a public entity provides an advance payment to a supplier, construction entrepreneur or service provider, the advance bank guarantee secures the advance against the risk of its misuse or failure to apply it to the relevant work.

 

Section 52A of the PPA specifically provides for advance payment against an advance bank guarantee, and also provides for forfeiture of the advance bank guarantee where the advance is not used for the relevant work. Rule 113 of the PPR supplements this, advance payment may not exceed twenty percent of the procurement contract price, must be secured by a bank guarantee from a commercial bank promising payment on demand if the recipient does not perform in accordance with the contract, and the guarantee's validity must extend at least one month beyond the period fixed for settlement of the advance. Where the advance is not settled because the recipient fails to perform the relevant work within the period fixed by the contract, the public entity is entitled to obtain payment of the guaranteed amount from the bank and to recover interest at ten percent on the advance.

 

The amount, validity and other conditions applicable to the advance bank guarantee are further subject to the applicable procurement contract and procurement documents.

 

3.4 Counter Guarantees

Where a bid security or performance security is issued by a foreign bank, the PPR requires the guarantee to be counter guaranteed by a commercial bank established in Nepal. Specifically, Rule 53(4) requires a foreign bank-issued bid security to be counter guaranteed by a commercial bank in Nepal, while Rule 110(5) imposes the same requirement for performance guarantees. The purpose of this requirement is to ensure that the public entity has recourse through a Nepal-based commercial bank in the event of enforcement or forfeiture, thereby facilitating enforcement within Nepal and reducing the legal and practical difficulties associated with pursuing a foreign bank.

 

 

 

Nepalese courts have generally distinguished the bank guarantee from the underlying procurement contract, while also recognizing that the public entity's decision to invoke or forfeit security remains subject to the applicable law and contract.

 

Nepal Orind Magnesite Pvt. Ltd. v. Debt Recovery Appellate Tribunal, Kathmandu and Others (Decision No. 8605)

 

The Supreme Court recognized that once a bank guarantee is issued in favour of the beneficiary, it operates as a separate and independent contractual undertaking from the underlying contract. A dispute concerning performance of the underlying contract does not, by itself, discharge the bank from its obligations under the guarantee. The case therefore supports the principle that the bank's obligation under an independently issued guarantee must generally be determined by the terms of the guarantee itself.

 

Krishi Samagri Company Ltd. v. Soniga Services Pvt. Ltd. (Decision No. 9557)

 

The Supreme Court recognised that forfeiture of performance security by a public body remains subject to examination as to whether the decision is supported by the applicable contractual terms and lawful grounds. The existence of a performance guarantee does not, therefore, give the public entity an unrestricted right to forfeit it without reference to the procurement contract and applicable law.

 

Lumbini Bank Ltd. v. Sangita Tripathi (Decision No. 9646)

 

The Supreme Court, in considering the liability of a guarantor, recognized that such liability is determined by the terms and extent of the guarantee and is not unlimited. The decision is relevant to the scope of a guarantor's liability, although it concerns a guarantee relationship and should be distinguished from an independently payable commercial bank guarantee.

 

 

Bank guarantees provide a structured system of financial security throughout the public procurement process in Nepal. Bid security protects the procurement and award process, performance security protects against contractual non-performance, and advance payment security protects amounts paid in advance. The PPA and PPR prescribe the circumstances in which these securities must be furnished, maintained, enforced and released, while the procurement documents and contract determine their specific terms.

 

Date of Publication : 1st October 2026 

 

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