It is mandatory that, all payments in terms of direct loan funding, joint venture participation, and every other outgoing payments through al Alhayaa Investment Limited must henceforth, be covered with a surety insurance bond as security towards collateral in line with our flight to safety transaction process and coverage ahead of the amounts being paid out respectively.
WHAT IS A SURETY BOND?
Surety Bond Definition - a Surety Bond is a third party guarantee that an individual or a company will fulfill their obligations. The surety bond is a three party agreement between the principal (the person or company requesting the fund), the obligee (the beneficiary on the fund), and the surety bond company (the third party guarantor that the Principal will perform their obligations).
For example, a fidelity surety bond guarantees the principal will handle the obligee’s finances or property with honesty. If the principal does not, the surety bond company must reimburse the obligee up to the full amount of the bond. The surety bond company must then seek indemnification from the principal.
Almost all surety bonds are in some way designed to protect public monies or to help protect the public against fraud, unethical business practices or business failures. For example, with a mortgage broker surety bond, the mortgage broker or mortgage broker company is the Principal on the bond and the state in which they operate is the Obligee. This license and permit bond helps protect the public against anyone operating outside the established laws and regulations governing mortgage brokers in that state.
Overview.
A surety bond is a contract among at least 3 parties:
- The obligee - the party who is the recipient of an obligation,
- The principal - the primary party who will be performing the contractual obligation,
- The surety - who assures the obligee that the principal can perform the task
European surety bonds are issued by banks and are called "Bank Guarantees" in English and "Caution" in French. They pay out cash to the limit of guarantee in the event of the default of the Principal to uphold his obligations to the Obligee, without reference by the Obligee to the Principal and against the Obligee's sole verified statement of claim to the bank.
Through a surety bond, the surety agrees to uphold — for the benefit of the obligee — the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the obligee. The contract is formed so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal and guarantee performance and completion per the terms of the agreement.
The principal will pay a premium (usually annually) in exchange for the bonding company's financial strength to extend surety credit. In the event of a claim, the surety will investigate it. If it turns out to be a valid claim, the surety will pay it and then turn to the principal for reimbursement of the amount paid on the claim and any legal fees incurred.
If the principal defaults and the surety turns out to be insolvent, the purpose of the bond is rendered nugatory. Thus, the surety on a bond is usually an insurance company.
A key term in nearly every surety bond is the penal sum. This is a specified amount of money which is the maximum amount that the surety will be required to pay in the event of the principal's default. This allows the surety to assess the risk involved in giving the bond; the premium charged is determined accordingly.
Surety bonds are also used in other situations, for example, to secure the proper performance of fiduciary duties by persons in positions of private or public trust.
History.
Individual Surety Bonds are the original form of surety ship. The earliest known record of a contract of surety ship is a Mesopotamian tablet written around 2750 BC. There is evidence of Individual Surety Bonds in the Code of Hammurabi and in Babylon, Persia, Assyria, Rome, Carthage, the ancient Hebrews and later England.
The Code of Hammurabi, written around 1790 BC, was the first time suretyship was addressed in a written legal code.
It wasn't until 1840 that the first Corporate Surety was organized, The Guarantee Society of London.
In 1865, the Fidelity Insurance Company became the first US Corporate Surety company, but the venture soon failed.
Contract surety bonds.
Included in this category are: bid bonds (guarantee that a contractor will enter into a contract if awarded the bid), performance bonds (guarantee that a contractor will perform the work as specified by the contract), payment bonds (guarantee that a contractor will pay for services, particularly subcontractors and materials and particularly for federal projects where a mechanic's lien is not available and maintenance bonds (guarantee that a contractor will provide facility repair and upkeep for a specified period of time). There are also miscellaneous contract bonds that do not fall within the categories above, the most common of which are subdivision and supply bonds. Bonds are typically required for federal government projects by the Miller Act and state projects under "little Miller Acts". In federal government, the contract language is determined by the government. In private contracts the parties may freely contract the language and requirements. Standard form contracts provided by American Institute of Architects (AIA) and the Associated General Contractors of America (AGC) make bonding optional. If the parties agree to require bonding, additional forms such as the performance bond contract AIA Document 311 provide common terms.
Losses arise when obligee do not complete their obligations, which often arises when the obligee goes out of business. obligees often go out of business; for example, a study by BizMiner found that of 853,372 contracts in the United States in 2002, 28.5% had exited business by 2004. The average failure rate of obligees in the United States from 1989 to 2002 was 14 percent versus 12 for other industries
Prices are as a percent of the penal sum (the maximum that the surety is liable for) ranging from around one percent to five percent, with the most credit-worthy contracts paying the least. The bond typically includes an indemnity agreement whereby the principal obligee or others agree to indemnify the surety if there is a loss. In the United States, the Small Business Administration may guarantee surety bonds; in 2013 the eligible contract tripled to $6.5 million.
Commercial surety bonds.
Commercial bonds represent the broad range of bond types that do not fit the classification of contract. They are generally divided into four sub-types: license and permit, court, public official, and miscellaneous.
License and permit bonds
License and permit bonds are required by certain federal, state, or municipal governments as prerequisites to receiving a license or permit to engage in certain business activities. These bonds function as a guarantee from a Surety to a government and its constituents (Obligee) that a company (Principal) will comply with an underlying statute, state law, municipal ordinance, or regulation.
Specific examples include:
- Monetary bonds, which assure that an obligee complies with laws relating to his field. In the United States, bonding requirements may be at local or state level.
- Customs bonds, including importer entry bonds, which assure compliance with all relevant laws, as well as payment of import duties and taxes.
- Tax bonds, which assure that a business owner will comply with laws relating to the remittance of sales or other taxes.
- Reclamation and environmental protection bonds
- Broker’s bonds, including Insurance, Mortgage, and Title Agency bonds
- ERISA (Employee Retirement Income Security Act) bonds
- Motor vehicle dealer bonds
- Money transmitter bonds
- Health spa bonds, which assure that a health spa will comply with local laws relating to their field, as well as refund dues for any prepaid services in the event the spa closes.
Court bonds
Court bonds are those bonds prescribed by statute and relate to the courts. They are further broken down into judicial bonds and fiduciary bonds. Judicial bonds arise out of litigation and are posted by parties seeking court remedies or defending against legal actions seeking court remedies. Fiduciary, or probate, bonds are filed in probate courts and courts that exercise equitable jurisdiction; they guarantee that persons whom such courts have entrusted with the care of others’ property will perform their specified duties faithfully.
Examples of judicial bonds include appeal bonds, supersedeas bonds, attachment bonds, replevin bonds, injunction bonds, Mechanic's lien bonds, and bail bonds. Examples of fiduciary bonds include administrator, guardian, and trustee bonds.
Public official bonds
Public official bonds guarantee the honesty and faithful performance of those people who are elected or appointed to positions of public trust. Examples of officials sometimes requiring bonds include: notaries public, treasurers, commissioners, judges, town clerks, law enforcement officers, and Credit Union volunteers.
Miscellaneous bonds
Miscellaneous bonds are those that do not fit well under the other commercial surety bond classifications. They often support private relationships and unique business needs. Examples of significant miscellaneous bonds include: lost securities bonds, hazardous waste removal bonds, credit enhancement financial guarantee bonds, self–insured workers compensation guarantee bonds, and wage and welfare/fringe benefit (Union) bonds.
Fidelity bonds.
Fidelity bonds, also known as employee dishonesty coverage, cover theft of an employer's property by its own employees. Though referred to as bonds, fidelity coverage functions as a traditional insurance policy rather than a surety bond.
Other types of bonds include;
- Surety
- Co-signing
- Demand guarantee
- Fidelity Bonds
- Fiduciary
- Indemnity
- Insurance
- Performance Bond
- Submittals (construction)
- Shop drawing
- Testator
The Insurance Bonds Guarantee company, is to be approved by the bank first, and to be conducted literally by an Insurance officer as the Insurance broker that works also closely with the bank, Insurance bonds are often misunderstood and improperly defined. This is understandable, considering the general nature of the term, and the fact that it may refer to different things in different industries, or even in different areas. In some places, however “insurance bonds” are also referred to as surety bonds, in terms of what insurance bond does just to educate you a little bit, Insurance bonds are defined as a type of assurance that protects parties entering into a contract from financial loss. Specifically, an insurance bond gives a person buying goods or services (called the obligee) the guarantee that the service or goods he or she has paid to receive will be delivered to the specifications of the contract. If they are not, the insurance bond steps in to investigate the situation and, if deemed valid and necessary, make financial restitution to the payee.
It’s easiest to understand Insurance bonds in the context of contract work or money being borrowed towards collateral as security on the funds, such as when a homeowner hires a laborer to perform work on a house or building, most people have heard of “bonded” contractors, and most people also have been advised that hiring a bonded contractor is an essential part of making a wise hiring decision, this type of “bonding” of contractors or borrowing money from a company without physical collateral in terms of validated properties is a typical example of an insurance bond.
Through this agreement or clear understanding by both parties, the surety agrees to uphold - for the benefit of the obligee - the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the oblige, the contract formed so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the borrower.
Insurance bonds have been functioning in the service industry for hundreds of years, providing security to both borrowers and lenders. Lenders are given peace of mind and a guarantee on their money being extended to borrowers, since the bond ensures that they will get what they lend or what borrower paid for, the lenders are given the security of bond backing that helps them market themselves to customers.
In some cases, a borrower or other businesses, like an auto dealer, are mandatorily required to purchase an insurance bond or surety bond before funds are to be disbursed to them, bonds, therefore, are an important part of doing business, in doing so, the insurance bond must be paid in advance and receipt given to you, while few days will be allowed to prepare the insurance policy certificate and its policy document through the Insurance broker working directly with us as owners of the funds and to be submitted to the bank towards perfection of the funds in terms of the Insurance Bond as collateral, meaning that, borrower and lender will fully be covered comprehensively in case of any default or unexpected eventualities from the borrower.
Performance bond.
A performance bond is a surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor.
A job requiring a payment & performance bond will usually require a bid bond, to bid the job. When the job is awarded to the winning bid, a payment and performance bond will then be required as a security to the job completion.
For example, a contractor may cause a performance bond to be issued in favor of a client for whom the contractor is constructing a building. If the contractor fails to construct the building according to the specifications laid out by the contract (most often due to the bankruptcy of the contractor), the client is guaranteed compensation for any monetary loss up to the amount of the performance bond.
Performance bonds are commonly used in the construction and development of real property, where an owner or investor may require the developer to assure that contractors or project managers procure such bonds in order to guarantee that the value of the work will not be lost in the case of an unfortunate event (such as insolvency of the contractor). In other cases, a performance bond may be requested to be issued in other large contracts besides civil construction projects.
The term is also used to denote a collateral deposit of "good faith money" intended to secure a futures contract, commonly known as margin.
Performance bonds are generally issued as part of a 'Performance and Payment Bond' where a Payment Bond guarantees that the lender will pay the labor and material costs they are obliged to.
In the United States, under the Miller Act of 1932, all Construction Contracts issued by the Federal Government must be backed by Performance and Payment Bonds. States have enacted what is referred to as “Little Miller Act” statutes requiring Performance and Payment bonds on State Funded projects as well.
Performance bonds have been around since 2,750 BC and the Romans developed laws of surety around 150 AD, the principles of which still exist.
Often required by government, private and institutional organizations, Contract Surety bonds provide a guarantee that projects will be completed successfully and on-time. They are commonly used in the construction industry to ensure contractors fulfill their obligations to project owners.
Our Contract Surety bonds include:
- Bid/Tender Bond: pre-qualifies borrower and provides security to the project owner that the borrower will enter into a contract if their bid is chosen.
- Surety’s Consent/Agreement to Bond: often used with a Bid Bond, an Agreement to Bond promises that The Guarantee will issue the final bonds to the borrower if their bid wins.
- Performance Bond: provides assurance that the contract will be fulfilled according to all terms and conditions.
- Labour and Material Payment Bond: ensures that sub-contractors and suppliers will receive full payment for their goods and services.
- Maintenance Bond: provides for the maintenance and repair of a completed project over a contractually defined period of time.
- Lien Bond/Release of Lien Bond: guarantees that the borrower will pay all court-ordered claims to lender.
Why choose The Guarantee for Contract Surety?
Our name reflects our commitment to surety – it’s our guarantee. We have longstanding expertise in the surety business and can help you succeed in the bidding process by backing you with our trusted name. We’ve bonded some of the largest infrastructure projects in Canada, and have earned a reputation that project owners have come to respect.
Time is money, which is why we offer a quick turn around on pre-qualifications and issuing bonds. We provide expertise and guidance along the way in partnership with your independent insurance broker.
Bond Insurance
Insurance Bond is a pledge or understanding by a party (the guarantor) to stand as a surety for another person or a group of persons if they fail to meet a given obligation i.e. Contract. They are guarantees by insurance companies attesting to the credibility of an individual or a company.
Insurance Bond is made up of three parties:
i. Contractor - Debtor
ii. The Guarantor - Surety
iii. The Beneficiary - Principal
We underwrite basically the following types of Bonds:
- Advance Payment Bond: this is issued by an insurer and guarantees that in the event that any advance payment to a contractor in executing a contract is made away with or utilized contrary to the requirements of the principal, such a default will be met by the company.
- Performance Bond: this is a guarantee from an insurance company that in the event that a contract is not executed as demanded by the principal, any shortfall will be met by the company who wrote the bond on behalf of the contractor.
- Counter Indemnity Bond
Bid Bond
SURETY BOND BENEFITS:
To provide some reassurance that contractual obligations will be honored.
Provided, often as options, by some forms of contract (e.g. FIDIC and NEC3).
May apply to the main contract, to sub-contracts or to service contracts e.g. consultancy appointments.
Understanding what protection is available.
What should be used when?
Issues with drafting of the documents.
Common pitfalls.
Definitions.
Guarantee:
An undertaking of: “if he does not do X, then I will”
Warranty:
An assurance that specific facts or conditions are true or will happen, the other party may rely on that assurance and seek a remedy if it is not true.
Bond:
An arrangement where the performance of a contractual duty by one party (the principal) to another (the beneficiary) is backed up by a third party (the bondsman, surety or guarantor).
A bond is therefore a form of indemnity.
So what might we want a bond for?
Usually either:
-to provide security for the contractor’s performance;
-to secure payment eg retention or advance payment bonds;
-to cover specific obligations eg bid bonds.
-contractor, or consultant) pays the surety (the bondsman) a fee in order to guarantee his obligation to the beneficiary (usually the client).
-If the obligation is not performed, then the surety compensates the beneficiary for the loss.
The surety will then attempt to recover his losses from the principal under a counter-indemnity.
What if the contractor fails to provide a bond required by a contract?
Where contracts specifically require contractors to obtain bonds, failure is a breach sufficient to allow termination of the contract.
It was the view of the court in that the employer would be justified in withholding the value of the bond from payments due to the contractor.
Surety bonds.
Surety guarantees.
Parent company guarantees.
If there is a dispute what matters is what they are, not what they are called.
The court will decide on the basis of the wording of the document.
Government of Spanish Ministry of Finance guaranteed the obligations of a company.
Issued a letter stating that it “...unconditionally pledges to pay to you upon demand all amounts payable if not paid when they become due [and] pledges the full and timely performance by the buyer of all terms and conditions of the agreement”
European Court decided this was not an on-demand bond because the reference to monies “not paid when they become due” would require proof that payment had not been made.
The document was therefore a default bond.
Guarantee said that obligee “undertakes...that if
obligee fails to pay any secured obligations when [they] are expressed to be due then
obligee shall forthwith on demand pay...”
OUR INSURANCE COMPANIES EMANATES FROM.
- Hong Kong.
- China.
- Malaysia.
- Czechs Republic.
- Europe.
