Understanding The 5 Elements Of A Surety Bond Contract
There is simply no denying that surety bonds are complex. In fact, did you know that there are 5 elements that must be present before the Canadian law will even enforce the guarantee? That’s right, and these elements could include competent parties, agreement, consideration, lawful object, and prescribed form. This terminology probably only confused you even more. Not to worry because we are here for our customers. We are more than willing to take the time and weight everything out in front of you. However, before we do you must understand what a surety bond is.
Understanding A Surety Bond
When it comes right down to things a construction bond is nothing more than a contract. It might be a complex one, but it is a contract at heart. This guarantee, usually in the form of a performance bond, letter of credit, or cash, is put in place to ensure the performance of an obligation. In most cases, the bond forces the principal to perform as specified in the agreement. To make things simpler, just imagine if you were getting a new roof installed. If you (the obligee) wanted to force the roofing company (the principal) to get a surety bond, you could. This contract will give you the peace of mind that you need to know the roofing company will do a satisfactory job.
However, this is not the only case where a surety bond can be utilized. They can pretty much come in handy any time two parties are involved in any kind of agreement.
Competent Parties
One element that you learned about earlier was competent parties. Well, this term simply refers to any individual that is entering into a binding agreement. Keep in mind that in order to enter into a binding agreement like this and make it legal, you must be declared competent. There are some situations where the individual entering into the contract can and will not be deemed competent. Someone might not be deemed competent by the court of law if they are under the legal age limit, elderly to the point where they need assistance, intoxicated, or mentally disabled. When an individual falls under this classification and enters into a contract that contract can be deemed void.
Things can get even trickier when a corporation is involved. There are some situations where a corporation will not only be considered a competent party, but they will be able to enter into a contract with implied powers. When this happens and it does often in Canada this will allow these corporations to own or sell real estate properties as well as adopt regulations. There are some powers that can go beyond the reach of the corporation. These powers are usually referred to as an ultra vires act. Corporations do not even have the implied power to become a guarantor or surety on behalf of another party unless such a guarantee is designed for the continuance of certain corporate goals.
There are a lot of times when insurance providers are granted this kind of power to engage in such activities, but unfortunately, this is not the case for other corporations involved.
The Agreement
One of the most important components of a surety bond is the agreement. The agreement is so important because it outlines the project in detail. The agreement will entail important details of the project or service. For example, a surety bond for a development project will consist of an agreement with details about the supplies, deadline, overall costs, termination, principal’s business license, renewal, and parties.
The agreement also outlines the party responsible for the bond. The principal is generally the main party responsible for fulfilling the surety bond agreement. Most surety companies will write up their surety bonds to include information about the results of a termination, failing to fulfill the agreement, missing the deadline, and recovery.
If at any time, the obligee determines the principal has not fulfilled the surety bond agreement, he/she has the right to file a claim against the surety bond. With that said, surety companies go through a great deal to ensure the principal is fully capable of handling the project or service before agreeing to issue the surety bond.
An agreement in a surety bond is comprised of three main elements, including the acceptance, offer, and subject matter. The surety company acts as a mediator for the principal and obligee, making sure the agreement is informative, thorough, and meets the Canadian rules and regulations of the surety bond market.
No surety bond will be deemed “binding” until the obligee acknowledges it. All parties will have to sign the surety bond before it is deemed “binding”. Only then will the surety bond stand in the court of law. Once the surety bond is considered “binding”, it cannot be broken.
What To Know About The Consideration
The consideration will be a part of the contract. In legal terms, the consideration is the price that was agreed upon for the promise in question. It is pertinent to make sure that your contract is effective. To do that, you need to make sure that something valuable is given by the promise. And, the law must regard the payment as valuable. And, the guarantor must bargain for the consideration. Simultaneously, you have to understand that it is something that the promisor did not have a right to in the beginning.
If you’re able to meet these demands, you can rest assured knowing that your contract will be considered legal and enforceable. The consideration should promises results to the party that is asking for those promises. Otherwise, there is a good chance that you’re contract is not going to be valid and you may run into problems. This is why you should think about working with a professional. The laws are very complex. There is a good chance that you will not be able to understand them on your own.
ConstructionBond is here to help. Get in touch with us and we’ll make sure that you fully understand your obligations.
Must Have A Legitimate Object
Ultimately, the contract will need many things before it can be enforced legally. One of the most important things to remember is the legitimate object. If the contract does not have a legitimate object it will not be legally enforceable and everyone will be wasting their time. A surety company will go above and beyond to ensure that this information is present. The agent in charge will review the bond form as well as its terms and conditions. This prevents the company from entering into an agreement that may be illegal. And, this would result in the rights and obligations of both parties becoming confusing.
With this in mind, it is best to work with a surety when attempting to obtain surety bonds. Failing to do so will likely damage your business. You may end up signing into a surety contract that requires unrealistic things from your business and that would lead to major issues. Working with a reliable surety bond is highly recommended.
The Prescribed Form Is Needed
The law associated with surety contracts has changed somewhat over the years. One thing to note is that the Statute of Frauds has remained in place for many years. Since it was implemented in 1677, the law makes it clear that contracted must be evidenced in writing. This is one of the most important conditions of enforceability. If the contract is not evidenced in writing, it may not be honored by the court and this could create big problems for you, your company, and the client.
There are many situations where this would occur. For instance, the company may not be able to perform the contract within a year after the contract was created. Or, there might be a chance that the parties come to an agreement to see interest in the real property. Another situation that this might occur is when the promises have been made in consideration of marriage. Finally, you should know that this will be true if there is a promise that one party will pay for the default, debt, or miscarriage of another party.
Ultimately, you have to remember that the last provision makes it clear that the surety bond needs to be in writing. If it is not in writing, it may not be valid and this means that the client is not going to be protected. Once the written contract is completed, it cannot be changed or altered. The courts will not allow it. And, you should know that the courts will prevent changes by writing, other memorandum, or oral testimony. This ensures that the contract will remain the same from start to finish.
Otherwise, you should know that there are no other general rules that govern surety contracts. Insurance companies are regulated by many laws and standards. This makes it possible for the insurance company to bind themselves to any contract using numerous methods. However, it is very simple. When you break it down, you will find that the concept is easy to understand. If a paper is signed by the president and secretary of a corporation and countersigned by the licensed agent of the company, the paper will be binding. It is important to remember that certain people are authorized to sign a surety bond under the terms of Powers of Attorney.
This means that certain people will be required to sign the document. It depends on the individual’s status in your company. You do not have to worry about using a specific form because there isn’t one. However, you may be able to add specific details to the paper. For instance, you can use dates, names, locations, and other things. This ensures that the document is more thorough and that will make it more beneficial for both parties.
When The Contract Is Completed
You need to understand that things are going to change when the contract is completed. There are numerous ways for the completion of the contract to be brought about. And, you have to understand that this will result in a discharge by performance. If you’re going to be involved in a surety contract, you need to find out what this means. Again, there are numerous ways for the contract to be discharged. The agreement may be terminated. You may agree with the client to eliminate the contract immediately.
Also, there is a change that it is impossible for performance to be achieved. Finally, statutory laws may get involved. It is pertinent to read between the lines before signing a surety contract. Failing to do so could result in major problems for your company. Never enter into a bond agreement until you’re positive that you fully understand the contract and your requirements.
It might be a good idea to consult with a lawyer. This will ensure that you’re able to gain a better understanding of the contract. If the contract is not good for your company, you should not sign on the dotted line.
