What is a surety bond / guarantee?
A guarantee is a statement by an insurer (the surety company) to a party (the creditor) that another party (the principal) will meet its obligations. If the principal is in default, the insurer guarantees the fulfilment of the obligations, for example the fulfilment of the conditions of a contract. The guarantee is, therefore, an additional guarantee for the creditor.
The guarantee protects the creditor against losses resulting from the failure of the principal fulfilling their obligation(s). In other words: the guarantee guarantees that the obligated company or person will fulfil its obligations in good faith. Failure to do so could result in the surety company holding the guarantee taking the place of the obligated party. In that case, the surety company is obliged to find another party to complete the contract or to compensate the creditor for the financial loss.
Types of surety bonds/guarantees
Bid bond (tender guarantee)
The bid bond ensures that the bidder of the contract actually enters into the contract and that the required payment and performance guarantees are provided when the contract is concluded.
Payment bond (down payment and prepayment guarantee)
The payment bond ensures that suppliers and subcontractors are paid for work performed, as stated in the contract.
Performance Bond (performance guarantee)
The Performance Bond guarantees that the contract will be completed in accordance with the terms and conditions of the contract.
Ancillary Bonds (additional guarantees)
These guarantees provide guarantee that requirements that form an integral part of the contract, but are not directly related to performance, are implemented. Examples are decommissioning bonds (decommissioning guarantees) and interconnection bonds (interconnection guarantees).
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Read more: Extensive information about different types of surety bonds / guarantees