Surety is a highly specialist area. This short guide, whilst not exhaustive, is intended to cut through the complex and technical jargon to provide a practical overview of the Surety world.
A: Access: To the Surety Market, not always easy with the Surety Market. Each Surety has different criteria, appetite and preferred type of sector.
Additional Premium: This is due when the job is overrunning and the client needs to pay the additional premium to the Surety for the extended duration that the bond is needed. This applies to clients with a per annum rate as the additional premium is pro-rata to the overrun period.
Adjudication: When the Surety is bound by the findings of an Adjudicator, they are required to pay even if they have not had an opportunity to fully investigate a claim. This typically attracts a 50% uplift in the base rate.
Advance Payment Bond: This type of bond protects the beneficiary by guaranteeing upfront payments for goods or services needed under the contract following, either insolvency or, the miss use of funds.
Aged Debtor List: This highlights:
Assignment: Sureties may readily accept an unconsented assignment of the bond to a party taking an assignment of the contract or to a funder. Ideally the bond should not be freely assignable although this is not a “deal breaker”. Change to Assignment Clause would not attract a premium hike. If referred to a Surety Assignment, clauses are not unreasonably withheld.
B: Basel III: Or, the Third Basel Accord, is a global, regulatory standard which strengthens bank capital adequacy requirements and imposes new regulatory requirements on bank liquidity and bank leverage.
Beneficiary: Also known as the Employer. This entity benefits from the bonds i.e. receives the payment made by the Surety in the event of a successful claim/call on the bond.
Bid Bond: These Contract Guarantee Bonds are often submitted with a tender to demonstrate to the Employer that the tendering party has the ability to commence the contract if it is awarded to them. Rarely seen in the UK but also confirms ability to procure the final Bonds.
Bond: Also referred to as contract guarantees, a bond is a legally executed agreement from the Surety, not a stand-alone legal document unless supporting an underlying Contract.Three parties are typically involved with a bond; the Surety, The Employer and the Contractor.
Bond Working Check: This is a service offered to clients whereby bond wording for jobs they are tendering for is reviewed. The bond wording is sent to the Surety for review and a bond wording check quotation is issued to the client.
C: Call: A call on the bond by the Employer. (see Beneficiary)
Cash Collateral: The Surety Markets main selling point is that it will start from a zero collateral position. A bank will typically take 100% cash security or remove the equivalent from your banking facility.
Cash Collateral Deed: In the event of a Surety requiring Cash Collateral this will be the Deed you will be asked to sign.
Conditional Wordings: The ABI standard form of wording was produced in 1995, though Individual employers still have their own preferred forms of bond wording. Whilst we can consider specific forms of bond wordings, each will need reviewing to make sure that the following key points are included:
Construction: A sector that regularly uses the Surety Market. All of the main Contractors use the Surety Market.
Construction Guarantee Bond: These are bonds geared specifically to the construction sector and act as performance guarantees.
Contingent Liability: All bonds are contingent liabilities on a company’s balance sheet.
Contract Guarantee Bond: All bonds are contract guarantees and follow the contract.
Counter Indemnity: A legal agreement which entitles the Surety, as guarantor of a contractor’s bond, to be reimbursed in the event of having to pay any claims under the bond that has been issued on a subsidiary’s behalf and confirms the Surety’s Common Law Right.
D: Deed of Accession: A legally binding document between the Surety and the client. A Deed of Accession must be completed when a new company needs to be added to the existing executed indemnity.
Default: In the ‘Event of Default’ the Employer may at any time before Expiry give notice to the Surety specifying the nature of the Default.Once the default has been established and ascertained the Surety should then pay the Employer Damages. The Employer is entitled to go against the Contractor, the Surety or, both simultaneously.
DRS Process: All bonds require about 80 check points, our unique process ensures that the bond your Employer receives is correct first time. If there are any errors we ensure priority turn around. Our error factor this year is at zero.
Duty Deferment Bond: These bonds guarantee payment of a contractor’s deferred VAT or duty liabilities to HMRC.
E: Environmental Agency Bond: To fulfil legal obligations, a contractor may be required to place a bond in favour of the Environment Agency; these are commonly used in the operation of landfill sites, recycling plants and quarries.
Event of Insolvency: This means the appointment of a trustee in bankruptcy or a liquidator or administrative receiver of the Contractor or the appointment of a receiver under the Law of Property Act 1925.
Executive Summary: We always provide an Executive Summary for the following:
Expiry: The event that triggers the release of the bond by the Employer. We ensure at the beginning of the bond that this is achievable. Our experience allows us to ensure the correct expiry event is selected. The elements we check are:
F: FCA: Formerly the FSA (Financial Services Authority), the Financial Conduct Authority is the regulatory body for the financial services industry in the UK. It is responsible for preserving the integrity of the UK’s financial markets and upholding the rights of consumers who use financial products and services.UK Surety providers are governed by the FCA.
Fees: Our fees are all set out clearly and discussed with you regularly.
Fixed Date: An expiry event and always the most preferred method. This is the easiest way to keep control of the expiry event.
Funding Performance Bond: A hybrid between a Conditional and On Demand Bond. Used following a breach of contract/event of default, the bond contains a provision for interim payment(s) up to the full bond value prior to damages being established. Once damages are established, an adjustment is made by means of a further payment by the Surety or the return of excess payment by the Employer.
G: Governing Law: In the UK market, this will always be England & Wales, Scotland or Northern Ireland.
H: Highways Bond: This is a bond used to guarantee to local authorities or utility companies that work carried out by contractors will be delivered and completed to an adoptable standard. Covers the financial area of the Highways Act.
I: Indemnity: A legally binding document between the Surety and its client; it provides the Surety with a means to recover any liability incurred if the bond has to pay out. (see Counter Indemnity)
J: Joint & Several: Each party bears 100% for its own liabilities and those of its partners. Usually relevant in joint-ventures, applies to the contract and Indemnity.
K: Knowledge: We have extensive knowledge and are happy to share this with our clients on a regular and structured basis.
L: Letter of Credit Replacement Guarantee: This provides a guarantee to the Beneficiary in lieu of a Bank Guarantee for a specific instance. Letters of Credit (also known as Bank Guarantees) are commonplace in Banking. Letter of Credit Replacement Guarantees are typically provided by insurance companies for companies that self-insure elements of their insurance programme i.e. Road Traffic Act/Employers Liability Insurances.
Limitation: This is the maximum aggregate liability of the Surety and cannot exceed the bond sum.
M: MGD: Making Good Defects. This is a formal Certificate confirming that the Making Good Defects period has been achieved and if expiry event is MGD the bond may be released.
N: Non-binding Indication: Sometimes when clients require an indication of price but are unable to provide all the relevant details required we will provide an indication of price.
NEC Contracts: These contain a provision whereby the Project Manager can estimate the level of damages upon breach/termination of contract, which is then binding on the Surety i.e. making the bond on demand.
NEC rider clause required
Can consider without the rider only under exceptional circumstances subject to 100% rate increase
NHBC Bond: The National House Building Council Bond is a financial guarantee issued to the NHBC, against the failure of the contractor/developer to maintain properties within the 10 year post-construction period covered by the NHBC’s Building Warranty. Sometimes the NHBC require a guarantee from a bank, we can supply this type of bond, usually required for 5 years.
O: Off Balance Sheet Lending: Sometimes bonding is referred to as off balance sheet lending.
On Demand Performance Bond: These bonds require the Surety to pay up to the full bond amount to the Employer. Wording will generally be in short form and expressed to become payable ‘on demand’ or ‘on first written demand’ – they amount to a no quibble bond – the only defence for non-payment is proven fraud.
P: Performance Bond:These are Contract Guarantee Bonds, in which the guarantor undertakes to pay damages to a third party if there is a breach by his contractor.Performance Bonds issued by Surety companies are used to reassure Employers that the contractor will ‘perform’ in accordance with the Contract.
Personal Guarantees: Some facilities are supported by Personal Guarantees. This is usually down to company size and structure. They are usually:
Premium: This is the amount you will pay for your bond. Premiums are paid at the beginning of the bond period and are charged either annually or per annum depending on the circumstances.
If your bond overruns you will be charged an additional premium.
Primary Obligor: The bond should be seen as a secondary instrument to be called upon once all other contractual avenues between Contractor and Employer have been exhausted and damages remain outstanding. This must never be accepted whereby the Surety is exposed to events beyond the scope of the Contract.
Priority of Claims: Restricts the ability of a Surety to enforce counter Indemnities or other security - particularly onerous where cash has been taken. It cannot be counteracted by rate increases.
Q: Quotation: You will receive a full quotation for all your bonds and will include:
R: Rate: your rate is your base rate, based on, but not entirely on:
There are other factors but the 3 above are the main drivers.
Restoration Bond: These bonds guarantee to the beneficiary that land will be returned to its original condition, upon the expiry of the relevant operating license. Returning land to its original condition once permissions have expired is mandatory i.e. Quarries.
Retention Bond: A type of bond which ensures the contractor receives the full amount of their agreed payment certificate, without deductions.It alleviates the need for the deduction of retention and guarantees the contractors’ obligation to undertake completion works (or “snagging”) during the defects liability period of the Contract.
Risk Weighted Assets: A measure of the amount of a bank’s assets, adjusted for risk. Typically, almost all of a bank's assets consist of loans to customers. Comparing the amount of capital a bank has with the amount of its assets gives a measure of how able the bank is to absorb losses. If its capital is 10% of its assets, then it can lose 10% of its assets without becoming insolvent.
Rural Payments Agency Bond: This is a mandatory requirement of the Rural Payments Agency (RPA), pertaining to the importation of food stuffs from outside the European Union (EU).An RPA Bond guarantees that the importer has the means to conclude the relevant financial transactions, and acts as a penalty if the importer cannot conclude the transaction.
S: Schedule of Bank Facilities Form: Collects details of facilities, maximum/minimum balances, review dates and security. It should be supported by a formal facility renewal letter and loan documentation. It should include:
Sectors: We welcome all sectors that require guarantees. We do not work on a sector basis. We generally segment our clients on turnover.
Specialist: We only do bonds. We are 100% committed to providing the best terms, knowledge and consistency to our clients.
Subjectivities: When you receive terms they are sometimes ‘subject to’ certain additional information or documentation to be completed.
Surety: The guarantee of the debts of one party by another.The Surety is the organisation that assumes responsibility for the debt if the debtor defaults or is unable to make the payments.
Surety Input into Loss Calculation: A Surety will always want an input into ascertaining the level of damages and avoid damages being agreed solely between Employer and Contractor. Being bound by the outcome of an Adjudicators Award takes away the Surety’s negotiating position, this is usually acceptable subject to 50% rate increase.
T: Tender Bond:The same as Bid Bonds; used at the point of tendering to demonstrate a contractor’s ability to commence work should a contract be awarded to them.
Terms of Business: A comprehensive document provided for new clients so that they understand what they would be committing to.
U: Unsecured: Bonding facilities are usually unsecured i.e. no physical or liquid asset.
Uncommitted: All Surety facilities are similar to an overdraft and can be removed at any time.
V: Volume: We take a large amount of volume to the Surety Market. This is important to you because the more volume you have the better the terms we can provide.
W: Waste Resources Action Programme (WRAP) Bond: This bond ensures the safe and responsible use or disposal of waste.