Chapter 5 Flashcards
Surety
The state of being sure, certain, secure
Suretyship
Guaranteeing performance made by one to another
2 main classes of bonds issued by surety company
Fidelity
Surety
Fidelity bond
To ensure employers would be protected from the dishonest acts of their employees
Surety bond
Undertaking by one party (surety) to become accountable to another party (Obligee) for the performance by a third party (principal)
3 C’s that form the basis of credit appraisal
Character
Capacity
Capital
How are surety bonds like banks
Surety does not bond those who cannot perform obligations where banks don’t lend to those who don’t meet eligibility requirements
Three parties to a contract
Principal
Obligee
Surety
Benefit of suretyship to the principal
Confidence gained from fact that surety is satisfied with their abilities
Benefit of suretyship to obligeee
Confidence needed to undertake various projects
Principal
The person primarily liable
Obligee
The party to whom someone else is obligated under a contract
Surety
One who undertakes to pay money or to do any other acts in event that his (the) principal defaults.
3 characteristics of the guarantee made by the surety
- Is a promise made to the Obligee and not the principal
- Is a secondary obligation arising in on the default of the principal
- Surety’s duty to pay arises upon default of principal
Statutory bond
One that is required by a municipal ordinance, or federal or provincial regulation or statute.
Non statutory bond
Not required by law but flow from the contract agreement between the parties
Two methods for surety to collect amounts owed by the principal
-Assignment to surety of obligee’s rights
-Right of subrogation
No losses expected
Surety expects not losses to occur
Bond limit (penalty)
Reflects amount of credit given to principal by surety
Bond premium
Sum charged for pre-qualification and other company expenses
Contract bond
Intent is to guarantee the fulfillment of certain obligations required under public and private contracts
4 categories of bonds
Contract bonds
Judicial bonds
License and permit bonds
Miscellaneous bonds
Bid bond
Used in large contracts, calling for tenders or bids from interested parties
Surety’s consent
Assure owner that if the principal is the successful bidder, surety will issue other bonds required to ensure performance of the contract
Reasons for default under a bid bond
Error in judgment
Mistakes in Arithmetic
Supply bond
Agreement to furnish & deliver supplies at an agreed price
Performance bond
Guarantees performance of contract with terms and conditions and any fault work will be corrected and defective materials replaced within a 1 yr period after completion.
Labour & material payment bond
Guarantees that the sub-trades and suppliers will be paid for the work and materials that enter into the project.
Maintenance bond
Guarantee given to Obligee that the principal will fulfil the warranty obligations stated in the contract.
3 risks faced by owners when undertaking a construction project without protection bond
- Refusal or inability of best bidder to enter contract
- Failure of contractor to complete project at contract
- Inability of contractor to pay subcontractors and suppliers
Two methods of tender deposits acceptable when tenders at called
Bid bond
Certified cheque
5 causes of involuntary default
Insolvency
Imcompetence
Banks refusal to grant credit extension
Delays
Failure of subcontractor when no bond is in place
License and permit bond
Required as a requisite to apply for any licenses or permits
Judicial bond
Prescribed by statue and depending on matter, may be filed with probate court or court of equity
Plaintiffs and defendants bonds
In the event the plaintiffs action should fail, the bond guarantees the defendant(Obligee) that the plaintiff (principal) will pay any damages including court costs and vice versa
Attachment bond
If court decides against the plaintiff, defendant will be paid damages as the result of having such property attached
Release of attachment bond
Guarantees that if the matter is decided in the plaintiffs favour, the defendant will return property and pay any damages and court costs
Injunction bond
To ensure that the defendant in an action performs or refrains from performing som act or function
Appeal bond
Guarantees the payment of all court costs on the appeal.
Fiduciary bond
Requires the fiduciary be bonded for the faithful performance of those duties as prescribed by law.
Types of miscellaneous bonds
-Customs and excise bonds
-Lost document bond
-Consignment bond
-Utility payment bond
-Land restoration bond
Net worth calculation
Networth = assets - liabilities
Profitability
Analysis of working capital and net-worth
Working capital
Amount of funds available to pay continuing business operating expenses
Percentage of completion method
Preferred accounting method- earnings from work completed are calculated as a % of total contract price
2 types of judicial bonds
Court bonds
Fiduciary bonds
Financial guarantees
Grant the license or permit against monetary damages resulting from the failure of licensee to comply with statutes regulations, ordinances or code switch control their activities
