Surety Glossary

Surety is a specialist area. This glossary provides explanations of many of the most commonly used terms. 

Access: To access a surety solution, companies must fulfil different criteria and appetites, match the surety’s preferred type of sector.

Additional Premium: When a job is overrunning, the client needs to pay an additional premium to the surety for the extra time it needs the bond. 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 an adjudicator’s findings, the surety must pay even if it has 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 misuse of funds.

Aged Debtor List: This highlights:

Assignment: Sureties may 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 essential. A ‘Change to Assignment Clause’ would not attract a premium hike. If referred to a Surety Assignment, clauses are not unreasonably withheld.

Basel III (Third Basel Accord): A global regulatory standard that strengthens bank capital adequacy requirements, and imposes new regulatory requirements on bank liquidity and bank leverage.

Bid Bond: These are often submitted with tenders to demonstrate that the tendering party can commence the contract if it is awarded to them and that it can procure the final bonds. They are rarely seen in the UK.

Bond: Also referred to as ‘contract guarantees’, a bond is a legally executed agreement from the surety. It is not a standalone legal document unless it supports 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 for clients where the surety reviews bond wording for tenders. The surety will also issue a bond wording check quotation to clients.

Call: A call on the bond by the employer. (See Employer)

Cash Collateral: The surety market’s 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: If the surety requires cash collateral, you will be asked to sign this deed.

Conditional Wordings: The Association of British Insurers’ (ABI) produced its standard form of wordings in 1995. However, individual employers can still have their preferred forms of bond wording. While we can consider specific bond wordings, each will need reviewing to make sure they include these points:

Construction: A sector that regularly uses the surety market.

Construction Guarantee Bond: These bonds are geared 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 that entitles the surety, as guarantor of a contractor’s bond, is reimbursed if it has to pay any claims under the bond that have been issued on a subsidiary’s behalf and confirms the surety’s common law right.

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 around eighty checks. Our unique process ensures the bond your employer receives is right first time. If there are any errors, we ensure priority turn around.

Duty Deferment Bond: These bonds guarantee payment of a contractor’s deferred VAT or duty liabilities to HMRC.

Employer: Also known as the beneficiary. This entity benefits from the bonds. It receives the surety’s payment following a successful claim/call on the bond.

Environmental Agency Bond: To fulfil legal obligations, a contractor may need to place a bond in favour of the Environment Agency. These are commonly used in operating landfill sites, recycling plants and quarries.

Event of Insolvency: This refers to 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:

Expiry: The event that triggers the release of the bond by the employer. Our experience allows us to ensure the most appropriate expiry event is used for each case.

Financial Conduct Authority (“FCA”): Formerly the Financial Services Authority (“FSA”), the FCA 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 set out clearly and discussed with you regularly.

Fixed Date: An expiry event and always the 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 before damages are 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.

Governing Law: In the UK market, this will always be England and Wales, Scotland or Northern Ireland.

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. It covers the financial area of the Highways Act 1980.

Indemnity: This is 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 above)

Joint and Several: Each party bears 100% for its own liabilities and those of its partners. It is usually relevant in joint ventures and applies to the contract and indemnity.

Letter of Credit (“LOC”) 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. Insurance companies typically provide LOC replacement guarantees 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.

Making Good Defects (“MGD”): This is a formal certificate confirming that the defects period has been achieved and, if expiry event is MGD, the bond may be released.

Non-Binding Indication: Sometimes when clients require an indication of price, but cannot 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. This 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.

National House Building Council (“NHBC”) Bond: The NHBC 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. The NHBC sometimes requires a guarantee from a bank. DRS can supply this type of bond, which is usually required for five and a half years.

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  amount of the bond to the employer. The wording will generally be in short form and expressed to become payable ‘on demand’ or ‘on first written demand’. The only defence for non-payment is proven fraud.

Performance Bond: These are contract guarantees, in which the surety undertakes to pay damages to a third party if there is a breach the contractor. Performance bonds issued by surety companies 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:

Practical Completion (“PC”): This is a formal certificate confirming that the contract period has been achieved and, if the expiry event is PC, the bond may be released.

Premium: This is the amount you will pay for your bond. Premiums are charged at a rate subject to balance sheet strength  and paid at the beginning of the bond period. 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 the contractor and employer have been exhausted and damages remain outstanding.

Priority of Claims: Restricts the ability of a surety to enforce counter indemnities or other security and is particularly onerous where cash has been taken.

Quotation: You will receive a full quotation for all your bonds, including:

Rate: Your base rate is subject to balance sheet strength. The rate applied to each bond is subject but not limited to:

Restoration Bond: These bonds guarantee to the employer 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, for example, in quarries.

Retention Bond: A type of bond that 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 contractor’s obligation to undertake completion works (or ‘snagging’) during the contract’s defects liability period.

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 the bank’s capital is 10% of its assets, it can lose 10% of its assets without becoming insolvent.

Rural Payments Agency Bond (“RPA”) Bond: This is a mandatory requirement of the RPA, pertaining to the importation of foodstuffs from outside the European Union. RPA bonds guarantee that the importer has the means to conclude the relevant financial transactions and acts as a penalty if the importer cannot conclude the transaction.

Schedule of Bank Facilities Form: This form collects details of facilities, minimum/maximum balances, review dates and security. It should be supported by a formal facility renewal letter and loan documentation. It should include details of the:

Sectors: We welcome all sectors that require guarantees. We do not work on a sector basis.

Subjectivities: Subjectivities provided within the quotation may include but are not limited to:

Surety: Also known as the guarantor. The surety is the organisation that assumes responsibility for the debt if the debtor, for example, if the contractor, defaults or cannot make the payments.

Surety Input into Loss Calculation: A surety will always want an input into ascertaining the level of damages and to avoid damages being agreed solely between the employer and contractor.

Tender Bond: Also known as bid bonds. They are used at the point of tendering to demonstrate a contractor’s ability to commence work if a contract is awarded to them.

Terms of Business: A comprehensive document provided to new clients so that they understand what they would commit to.

Unsecured: Bonding facilities are usually unsecured, i.e. no physical or liquid asset.

Uncommitted: With the exception of committed facilities for investment grade companies, all surety facilities are similar to an overdraft and can be removed at any time.

Waste Resources Action Programme (“WRAP”) Bond: This bond ensures waste is disposed of safely and responsibly.