Surety companies are occasionally asked to bond contracts that require the end-product to perform to a specified technical standard. Referred to as "efficiency guarantees", this form of guarantee is sometimes found in manufacturers’ or suppliers’ contracts, most notably on energy-related projects (e.g. solar, electrical, etc.).
Surety companies possess underwriting expertise in evaluating risks associated with construction projects, and service and supply contracts. This underwriting process involves assessing the contractor's overall operations in terms of prior track record and history, financial strength, and profit trend analysis, as well as organizational capability. The underwriting considerations for risk factors associated with guaranteeing product efficiencies, are vastly different and for the most part fall outside the surety industry’s focus of expertise.
This exposure should be managed by the use of a finite risk product known as ‘efficacy insurance’, which is tailored specifically for this type of risk mitigation sought by the Obligee.
Surety bonds may be unavailable for contracts containing performance or efficiency guarantees due to the difficulty in adequately evaluating the risk. As a result, many competent and otherwise qualified bidders will be unable to bid as bonding will be unavailable to them.
In some cases, a surety may require that the contract be modified to remove the efficiency guarantee wording before providing a surety bond or certain exclusions may be incorporated into the bond wording itself.
A surety bond is neither designed nor priced to act as efficacy insurance. The challenge of establishing a default stemming from technical non-performance can be extremely complex and can lead to costly delays and protracted litigation to the frustration of all concerned.
The Surety Association of Canada (SAC) recommends that obligees and/or design professionals do not require a surety bond to guarantee performance to a certain technical standard; or specific output be achieved; or specific output be maintained over an extended period of time. Such obligations go beyond the realm of a surety company’s expertise and will be unavailable to a significant number of otherwise qualified contractors or suppliers.
SAC would be pleased to assist obligees and/or design professionals in the preparation of appropriate tender specifications particularly related to the issue of unique, emerging and/or unproven technology.
This information is intended to serve as a general guideline. Nothing contained herein should be construed as legal advice. Readers are cautioned to consult with legal counsel for such advice.
Glossary of Terms
An individual or organization in whose favour an obligation is created and to whom a bond is given.
The individual or organization that bears the primary responsibility for fulfilling the obligation under the written contract referenced in the bond and that has the duty to perform for the Obligee’s benefit.
The party to a surety bond who answers to the Obligee for the Principal’s default or failure to perform as required by the underlying contract, permit or law.