Bonds are Legal Documents providing a Legal Guarantee from one Commercial Party to another for the Performance / Required Payments under a Commercial Contract. Should the Client / Supplier default under the Contract, the Bond will provide a Guarantee to the Employer / Purchaser for the Obligations under the Contract, which in turn will assist with the correction / completion of the Contract.
All Bonds will require Security from the Client to support the Bond.
Bonds can either be Conditional or On Demand / Unconditional. However some Bonds can be Conditional On Demand Bonds which have additional Clauses / Conditions added to a Standard On Demand Bond for the Contractor to fulfil.
Bonds can be provided by Surety Companies / Banks. Banks commonly assist with On Demand Bonds and will utilise the Clients Overdraft Facility to provide the Bank with the necessary Security to support the Bond and will also charge a Fee.
The most common form of Surety Bond is a Conditional Bond, meaning there is a need to prove that the Acceptor (Beneficiary) has suffered a loss. On Demand Bonds are less common, do not require proof of loss and as such are imprudent for the Party being guaranteed (Contractor) in many situations. Surety Bonds can be obtained from Bondsmen & Banks although Banks rarely issue Conditional Bonds. On Demand Performance Bonds will hold 100% Counter Indemnity against the Party being guaranteed (Contractor), normally as a Charge against Cash held or Credit Lines. Bondsmen or Surety can be more flexible with Counter Indemnity and more reputable Providers will make separate Insurance Arrangements particularly against the Insolvency of a Guaranteed Party.