Performance Bonds

Performance Bonds, are the most popular forms of bonds in Hong Kong ( see below)

A surety or insurance bond is an agreement in writing involving three parties, namely, the:

• principal,
• obligee and
• surety (or “guarantor”).

under which the surety, in consideration of a fee paid by the principal, provides a financial guarantee to the obligee that the principal will fulfil his obligations – statutory obligations, contractual obligations, etc.

Surety bonds are very different from insurance policies because they protects the party requiring the bond rather than the party paying for the bond!

If the principal, for whatever reason, fails to meet his obligations to the obligee, the obligee may seek compensation from the surety up to the bond amount.

Under the terms of the bond, the surety will then have the right to be repaid by the principal.

Performance bonds

Typically they are used where a contractor, upon winning a bid, may be obliged to submit a performance bond to the principal of the contract, which bond will guarantee that the contractor will complete the job according to the terms of the contract.

(b) Limitations and exclusions

With bond claims, almost none of the usual exclusions and limitations surrounding insurance contracts will apply, becuase the surety will either pay or deny a claim.

In addition, the surety is likely to have options to :

• remedy a performance default, e.g. advancing funds to finance completion of the job by the principal, or
• assume the responsibility for completing the remaining work with the help of appointed construction professionals

(c) “Premium” basis

The payment to the surety is not a premium, and is more properly called a “fee” or a “charge” and is almost invariably a single payment.

(d) Other features

(i) Technically, a renewal is not necessary because a surety bond normally has no expiry date.

(ii) The surety usually requires personal counter guarantees in its favour from the directors of the principal or of the principal’s parent company, or others acceptable to the surety, to safeguard recovery prospects in the event of a bond claim.

(iii) “Signed, sealed and delivered”: A surety bond must be evidenced in writing and must be issued under seal, otherwise the obligee, who has provided no consideration to the surety, will not acquire the right to make a claim under the bond.

IF you have any questions, you can speak to Romi Gill on 2530 2530 or email her as below:

romi.gill@navigator-insurance.com