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Why buyers demand bonds
Bonds give buyers contractual completion security as they demonstrate a financial performance obligation and commitment to the project by the Exporter.
- Bid bonds ensure financial commitment to the tender process by providing for sanctions in the event an exporter’s bid is successful, they are awarded a contract and then do not either sign the contract or post the necessary contract bonds agreed to.
- Advance payment bonds secure any money paid to an exporter by the buyer prior to it being earned.
- Performance bonds provide the buyer with financial security if the Exporter doesn’t honour its contractual obligations.
- Labour and material payment surety bonds ensure subcontractors and suppliers will be paid so that liens are not placed against the project. (Only surety companies issue these types of bonds.)
- Warranty or maintenance bonds ensure all warranty obligations and claims are honoured and defective workmanship and materials are compensated for.
Contract Surety Bonds
How they work:
- The surety company and the Exporter together are both jointly and severally obligated to the buyer;
- Any payments contemplated by the surety under the bond to rectify a contractual default cannot be made without the buyer providing proof of exporter contactual default;
- The surety company, exporter, and buyer can all demand arbitration or ligitation to settle a dispute;
- If default is proven, the surety can complete the contract (with or without the Exporter's participation), replace the company with another supplier, or negotiate a settlement. Any funds expended by the surety are with full recourse to the exporter via an indemnity agreement.
How they’re issued:
- Extensively in North America and increasingly in other parts of the world, notably in South America;
- In the United States, contract surety bonds are required on virtually all public sector contracts and on many private sector projects.
How they’re secured:
- Through an indemnity agreement between the Exporter and the surety (which may also include cash or personal guarantees).
EDC can support your customer by:
- Providing the Bank with the necessary collateral to issue a letter of guarantee to the buyer; (PSG)
- Providing your customer with insurance against the buyer making a "wrongful" call under the letter of guarantee; (PSI)
- Increasing their surety capacity limits by risk sharing with the issuing surety through the provision of reinsurance of up to 85% of the bond liability amount. (Reinsurance – Risk sharing)
- Facilitating the issuance of a surety bond for a company that otherwise would not meet usual surety underwriting criteria by providing 100% indemnity to an EDC partner fronting surety who will issue a surety bond to the buyer when your customer can demonstrate that they cannot access the usual surety market (Reinsurance - Fronting)
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