While widely recognized and utilized in the United States, internationally, suretyship has a mixed reputation. Based mainly on a given foreign country's heritage/exposure to western influence, suretyship may or may not be utilized and/or accepted internationally. For U.S. Government Contractors and Technology companies working abroad, gaining a better understanding of the peculiarities of international suretyship can greatly assist them should they encounter these surety requirements.
Before we can discuss the peculiarities of International Surety Bonding, we must first have a basic understanding of suretyship and its related terminology.
A surety bond is a three party agreement between:
1. Obligee
2. Principal
3. Surety.
In exchange for a fee and a ‘hold-harmless’/indemnity agreement from the Principal to the Surety, the Surety agrees that, in the event of a default on the part of the Principal, the Surety is required to perform the terms of the contract between the Principal and Obligee. Each party to this three party agreement has unique roles, rights, and responsibilities.
Obligee – The Obligee is the entity protected by the Surety bond against loss. The surety bond ‘runs to’ the Obligee and the Obligee has the ability to set the language of the surety bond.
Principal – The Principal is the entity obligated, with the Surety, to the Obligee. The Principal pays the fee for the bond and, via the indemnity agreement, holds the Surety harmless for its failure to perform the terms of the contract.
Surety – The Surety is the entity obligated, with the Principal, to the Obligee. Generally*, the Surety is an unsecured creditor relying only upon the ‘promise to be made whole’ contained in the indemnity agreement. (*Surety does have a security interest in receivables and equipment on bonded jobs.)
International surety requirements can be loosely categorized into two distinct categories each with their own attributes.
1. Surety bonds required by a U.S. Contractor working abroad for a U.S. Obligee
Of the two categories, these types of "international" bonds are the easier of the two to obtain. While the work covered by these types of bonds can be construed as international, to most surety underwriters, they will view this as domestic work that just happens to be occurring overseas. This view is due to the fact that, given the Obligee is a U.S. entity, the surety underwriter can safely assume that the Obligee will readily accept a bond issued by a U.S. domiciled surety and also readily accept the jurisdiction of the U.S. Courts should a claim/issue arise. The surety is concerned with the acceptability of "U.S. paper" because the surety takes on additional costs and bureaucratic hurdles when a 'fronting arrangement' has to be established prior to bond issuance. Additionally, jurisdiction is a key risk factor in the surety's underwriting decision. Generally, most U.S. domiciled sureties will not allow their bonds to be governed by the courts of another nation.
As we will see below, when the Obligee is a foreign entity, these assurances/underwriting assumptions can not be readily established.
2. Surety bonds required by a foreign Obligee
When a foreign Obligee requires a surety bond of a U.S. Contractor, the first 'bridge' that must be crossed, is one of semantics. To many foreign Obligees, the terms "bond guarantee" and "performance bond" can be and are used interchangeably with the terms "bank guarantee" and "letter of credit". Given that the classic three party surety bond is not as widely used or well known in most of the world, many foreign Obligees ask for a "bond" when the really want a "letter of credit" or a "bank guarantee"!
Secondly, as we discussed above, many foreign Obligees will only accept bonds from sureties that are domiciled in their own country. To meet this requirement, the U.S. surety must:
a. have a pre-established relationship with the given foreign surety market or
b. go to the extra expense of establishing such a 'fronting' arrangement.
Expectedly, both a.) and b.) above add layers of cost to the surety which can diminish their interest in supporting the deal. Last, foreign Obligees frequently require that any bond they accept, must be governed by their domestic court system. Of course, this opens the U.S. surety to unknown risks, costs, etc. and also serves to diminish the U.S. surety's interest in supporting a given bond request.
Summary
When operating internationally, U.S. Government Contractors must be ready to meet the often complicated requirements of international suretyship. However, by utilizing the services of an experienced surety broker, these requirements can be planned for, managed, and achieved so the ultimate success of the contract is assured.
Timothy J. Hutton, AFSB, CPCU
Cell: 703-220-7771
timothyjhutton@gmail.com
No comments:
Post a Comment