A surety’s consent to agreement guide for the Canadian business owner

Surety’s Consent refers to a construction bond primarily utilized in the construction industry. The objective of bonds is to protect the owner of the project from any sort of financial loss.  These bonds are something of a necessity for Obligees (owners) because with each project they’re making themselves vulnerable to some kind of financial risk. For the sake of one’s understanding, it can be considered as protection of a sort for one’s investment.

While often referred to as an insurance of sorts, surety does not in fact function in that manner. When contractors and clients acquire the bond, they are essentially providing the surety with a legal commitment which does not hold the latter responsible for all manner of financial loss and costs that occur in the process of the construction project.

What is Surety’s Consent?

As mentioned above, Surety’s Consent is a type of bond meant to guarantee that an Obligee won’t have to face any sort of financial loss. This agreement functions as a legally binding document between the bond issuer (Obligee or owner) and the underwriter. The purpose of this agreement is to formalise certain matters, including: the conditions and price of the sale, Redemption Provisions, interest rates, and conditions which permit the contract to be voided.

The protection offered by this legally binding agreement, then makes sure that the project is completed satisfactorily, and that all workers are paid in full for their efforts.

Essentially the Obligee would make contact with the Surety (the bonding company) before committing to any sort of decision so that they can assess said decision’s impact on the Surety itself.

Examples of this would include the Obligee wanting to close out a contract and make the last payment, or possibly even Release Retainage to the Principal. For this situation, the Obligee is reaching out to guarantee they have Surety’s Consent before the payment is finalized, in the event that the suppliers and subcontractor have expressed any discontentment with regard to the contract.

Similarly, the Consent of Surety can be used to Change Order. To understand how this works, one must first be aware of the fact that when it comes to bonds, regardless of whether they’re Contract, Performance, or Payment ones, there is always a full contract guaranteed.

Role of the Surety

The purpose fulfilled by the Surety within the terms of this agreement, is essentially that of a ‘middle-man’, a party that is in contact with both the contractor and the owner. What the Surety does is that it accepts responsibility for the performance of the contractor.

They are to make sure that the terms of the contract are followed exactly with no deviation of any sort. These parties will find that they will be able to acquire surety bonds from a bank or bonding company at a reasonable cost.

Investor Benefits

Surety bonds are in general, a greatly beneficial legal contract to have issued. Of course, the greatest convenience afforded to investors is that they are completely protected from any sort of financial loss on what funds they’ve provided to the project. Additionally, contractors are also at a great advantage because having access to options like surety bonds (and their various other types) keeps them protected. It provides a reassurance and guarantee that they won’t be at risk of any sort of financial loss by joining the team on the project.

Within this arrangement, the contractor is in a position where they can easily request the owner of the project to respect their end of the contractual terms and provide them with their hard-earned pay. These benefits can impact your project in an immensely positive way. Therefore it is generally advised by professionals that all project owners go the extra mile and acquire their own surety bond due to the fact that it provides great protection for your finances.

Common Surety Products

When pursuing surety, contractors have access to different products for the sake of being able to accommodate their individual needs with regard to a given project. Of these products, five are generally the most common; these are listed below. The first two are related to contract performance while the latter three are used during the tendering or pre-tendering stage.

  • Performance Bond: Ensures that the project is completed in line with the terms set out by the contract. Essentially working as insurance against the performance of the workers.
  • Labour and Material Bond: Used to guarantee that developers and suppliers are paid an appropriate amount and in a timely fashion for their work. Whenever these bonds are used, it is required that they are issued in conjunction with a Performance Bond.
  • Pre-Qualification Letter: Neither a bond nor a legal commitment, in fact the Pre-Qualification Letter is not a binding commitment. It’s basically a letter which is sent by the surety to the Obligee and is meant to confirm whether or not their contractor client is qualifying for the bond. The implication of issuing this letter is that the surety is acknowledging that with regard to the contractor there is a healthy business relationship along with a general familiarity. This serves as reassurance to the owner (Obligee) that the surety has a fair amount of trust in the contractor and vice versa.
  • Consent of Surety/Agreement to Bond: Provides a guarantee to the owner from the surety company. In that, contractors who respect the contract and complete the project as instructed will be provided with their payment in accordance to the terms of aforementioned contract.
  • Bid Bond: A risk management tool at the tendering stage. It is also a three party agreement. A bid bond is issued from the surety company to the Obligee (project owner). The surety company is essentially providing the necessary reassurance to aforementioned Obligee that the bidder in question is qualified for the job and that they will most definitely treat their contractual obligations with the utmost seriousness.

Additionally aside from those outlined above, other surety products include:

  • Maintenance Bond: Typically this bond is most useful for any obligations related to long term maintenance projects. The insurance provided by this bond is that in the event the contractor is unable to handle or complete the necessary maintenance within the specified timeframe, then security is provided to protect the contractor.
  • Lien Bond/Release of Bond: Most commonly used as the construction process is on-going. Generally speaking, contractors request this bond when it is necessary for them to discharge a lien against the property upon which the construction project is currently underway.

Common Surety Contracts

The following are the most public sector related contracts which are secured by the presence of surety.

  • On site security for construction contracts
  • Performance security for service contracts
    • Snow removal
    • Recycling
    • The collection of waste
  • P3 Contracts (hospitals would be an example of this)

Requirements for Industry Licensing

In the case of Canada, only companies licensed to do so can issue surety bonds. As such, this means it’s only possible to get a hold of them through official channels, this means you would have to arrange for one federally or alternatively you could enlist the help of a provincial insurance regulatory body.

To qualify for these licenses, applicants are required to satisfy various stringent criteria. It is expected that they are capable of providing suitable information for the purpose of confirming financial solvency and proving that they have the strength and ability to meet potential claim related responsibilities.

Underwriting Criteria

Prior to actually receiving the bond, it’s also important to understand that certain conditions are to be met for the underwriting process to provide its approval. Some of the factors examined include:

  • Character: Over here some areas of interest would be the contractors personal and professional history, integrity, behaviour under stressful circumstances, and frequency with which they’ve been involved in legal disputes of any sort.
  • Capacity: In terms of this area, they will look at things like the ownership of the company, the efficiency (or lack thereof) that the contractor’s company has exhibited in terms of managing their operations and how skilfully they are able to run their systems (under this one would include: accounting, estimating, job cost tracking, scheduling, etc.).
  • Capital: Here the underwriters would be most interested in the company’s tangible net worth, debt load and working capital. Though aside from these things they would also go on to consider other factors such as: contingent liabilities, non-construction investments, and also financial trends.

References