Rob Tolley, former London broker, launched a surety in the Middle East in the early 2000s. Mr Tolley presented seminars across the MENA region to increase awareness of the benefits of using surety bonds in the construction industry, as well as working with local insurance companies to educate staff. This article will take a closer look at sureties, exploring the different types and their applications.
A surety is essentially a promise by one party to take responsibility for the debts of another party if the borrower defaults. The party guaranteeing the debt is the guarantor. A surety can be made through the issuance of a surety bond, which is a legal contract obligating the guarantor to pay the creditor if the borrower fails to adhere to the agreement terms.
A surety provides a financial guarantee that the borrower will fulfil their obligations, which could include complying with laws regarding a specific business licence or adhering to the terms of a construction contract. If the principal, i.e. the borrower, fails to deliver on the terms of the contract they entered into with the obligee, the obligee has the right to file a claim against the surety bond to recover damages and losses incurred. If the claim is upheld, the surety company is obliged to pay reparations, although this sum cannot exceed the bond amount. The underwriters will then expect the principal to reimburse them for any claims paid.
A surety is not a bank guarantee or an insurance policy. Where the surety covers performance risks posed by the principal, the guarantor is liable for the financial risk of the contracted project. A surety is a legally binding contract that assures the obligee that the guarantor will pay any debts if the principal fails to do so.
There are four different types of surety bond:
- Contract Surety – a form often used for construction projects that ensures contractual agreements will be met
- Commercial Surety – issued by governments to ensure business owners follow regulations and codes
- Fidelity Surety – used by companies to guard against employee misconduct and theft
- Court Surety – often used in civil court cases to provide protection against losses
Business owners are constantly entering into obligations with customers. Customers want to be sure that the business will honour its agreements. Business owners, in return, want to be sure that they will be paid. Sureties are instruments that enable both parties to offer more security in a business deal. Entrepreneurs or their family members sometimes act as a surety for their business, providing creditors with assurance that if the business is unable to fulfil its obligations the creditor will still receive payment. Sureties are typically linked to a security, such as property, to provide further reassurance the creditor will receive their money.