A surety bond is a guarantee that a company will live up to a specific obligation. The bond is issued by the insurance company (the Surety) after they have underwritten the company requesting the bond (the Principal). Underwriting involves scrutinizing a company’s financial wherewithal to determine whether or not they are able to meet their obligation. The bond is then issued to the party (the Obligee) for whom the work is being completed or the obligation is being made. With this bond, the Surety is now a guarantor of the Principal. Depending on the obligation, there are many types of surety bonds. Some of them are:
Advance Payment Bond: Surety against the risk of principal’s failure to fulfill its obligations to the obligee, within a scope of a contract, project or commercial activity of goods and services, and failure to return the advance payment.
Warranty Bond/Maintenance Bond: Surety against the occurrence of a damage after a specified time upon delivery due to faulty workmanship, in cases where the performance is measured after the delivery such as construction, engineering or machine production.
Bid Bond: Surety against the risk of the bidder withdrawing from the bid before the tendering process is completed, not signing the contract if the tender is granted, failure to provide the necessary guarantees within the scope of the tender.
Payment Bond: Surety against the failure to make payment to all the subcontractors and the labor.
Performance Bond: Surety against the failure of the project owner to fulfill its obligations in compliance with the terms specified in the contract.
This product is fairly new in Turkey, it became available only in February of 2014 with the publishing of its General Conditions, but has been used around the world in many circumstances for many, many years.