Drafting A Surety Agreement

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Also note: This is not legal advice.

Introduction

Drafting a surety agreement is an integral part of doing business and is essential for protecting the interests of all parties involved in a transaction. Knowing how to draft a surety agreement correctly is critical for ensuring that all parties are sufficiently safeguarded, and that their rights and obligations are clearly stipulated.

When drafting a surety agreement, it is necessary to determine the purpose of the agreement first. Surety agreements are utilized to secure payment of loans, bonds, or any other contractual obligation between two parties; namely, a principal and a surety. It is crucial that both parties understand their responsibilities within the given context before legally enforcement can take place.

In addition to identifying the purpose of the contract, it’s important to provide all necessary details in order for it to be effective; this includes specifying the names of those involved as well as including terms related to duration and sum payable when applicable. Special conditions should also be noted if necessary. Moreover, due diligence must be done regarding legal implications as these tend vary according national jurisdiction or industry specifics - especially when involving loans or bonds - leaving room open for potential misunderstandings among parties if not properly addressed.

Enforcement requires that all signatures be provided along with witnesses present during signing process; furthermore, risks associated with surety agreements should not be overlooked during this phase either since potential financial losses may occur if there’s any breach on behalf of one party or another.

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Definitions (feel free to skip)

Surety: Party that agrees to be legally responsible for the performance of another’s obligations.
Principal: Party who is obligated to fulfill certain duties as outlined in the agreement.
Liability: The legal responsibility for a debt or other obligation.
Collateral: Property or other asset that a borrower offers to a lender as a way of securing a loan.
Default: Failure to fulfill an obligation or contract.
Dispute resolution: Process of resolving disputes between two or more parties.
Governing law: Set of laws that are applied to a particular legal agreement or dispute.

Contents

• Defining the parties involved in the agreement
• Identifying the surety
• Identifying the principal
• Identifying the obligations of each party
• Determining the specific obligations of the surety
• Determining the specific obligations of the principal
• Establishing the surety’s liability and any associated fees
• Clarifying the extent of the surety’s liability
• Outlining any fees related to the surety’s liability
• Specifying the length of the agreement
• Outlining the terms of payment of the surety
• Agreeing upon the payment method
• Establishing a payment schedule
• Establishing the surety’s right to collateral
• Identifying the collateral
• Specifying the process of using the collateral
• Determining the consequences of default
• Clarifying the consequences for the principal
• Clarifying the consequences for the surety
• Establishing the process for dispute resolution
• Identifying the type of dispute resolution process to be used (mediation, arbitration, etc.)
• Specifying the steps of the dispute resolution process
• Defining the governing law of the agreement
• Defining the language in which the agreement is written
• Agreeing upon the language
• Specifying which party is responsible for translations if necessary

Get started

Defining the parties involved in the agreement

• Gather the information you need about the parties involved in the surety agreement, including the names and addresses of each.
• Identify the primary obligee who will receive the financial assurance and the surety who will provide it.
• Determine the relationships between the parties and the type of surety agreement to be used.
• When you have all the necessary information, you can move on to the next step.

Identifying the surety

• Determine the exact type of surety that is needed for the agreement
• Obtain the necessary documents and forms to be filled out by the surety
• Have the surety provide proof of its financial ability to meet the bond amount
• Have the surety provide proof of its ability to pay claims made against the bond
• Have the surety supply references from previous clients
• Have the surety supply an indemnity agreement
• Have the surety sign the agreement

Once all of the above items have been completed, you can move on to the next step of identifying the principal.

Identifying the principal

• Determine who is the principal in the surety agreement. The principal is the individual or entity that is seeking the surety’s services.
• Research the principal’s creditworthiness, financial strength, and other qualifications to determine how much financial backing the surety should provide.
• Ask the principal to provide the surety with financial statements, credit reports, and other relevant documentation that can help the surety make a decision.
• When you have determined the principal and conducted sufficient research into their financial history and creditworthiness, you can move on to the next step.

Identifying the obligations of each party

• Determine what obligations each party has in the agreement
• Identify any obligations of the principal, such as paying debts or performing certain duties
• Identify any obligations of the surety, such as providing collateral or guaranteeing payment of the debt
• Review the agreement to ensure all obligations have been clearly defined and specified
• You can check off this step when all obligations of both parties have been identified and specified in the agreement.

Determining the specific obligations of the surety

• Understand the parties’ obligations outlined in the surety agreement
• Review and identify any specific obligations of the surety
• Determine any additional obligations of the surety
• Draft the surety agreement to reflect the specific obligations of the surety
• Ensure the surety agreement includes all relevant details

You can check this step off your list when you have completed the draft of the surety agreement that reflects the specific obligations of the surety.

Determining the specific obligations of the principal

• Review the contract between the principal and the creditor to determine the principal’s obligations and the associated payment deadlines
• Document the principal’s obligations, payment deadlines, and any other relevant details in the surety agreement
• Once the obligations of the principal are identified and documented, you can move on to the next step of establishing the surety’s liability and any associated fees.

Establishing the surety’s liability and any associated fees

• Determine the amount of the surety’s liability, taking into consideration the principal’s obligations
• Ensure that any fees are clearly specified in the agreement
• If the surety is to be responsible for any costs associated with the principal’s obligations, such as attorney fees, make sure that is also included in the agreement
• Make sure all parties involved in the agreement understand the surety’s liability and any associated fees
• Once the surety’s liability and fees are specified in the agreement, you can move on to the next step of clarifying the extent of the surety’s liability.

Clarifying the extent of the surety’s liability

• Determine the extent of the surety’s financial or legal liability in the agreement
• Identify any liabilities or risks associated with the surety’s responsibility
• Ensure that the surety’s liability is clearly laid out in the agreement
• Specify any limits for the surety’s financial or legal liability

You can check this off your list when you are confident that you have clarified the extent of the surety’s liability in the agreement and have specified any limits for the surety’s financial or legal liability.

Outlining any fees related to the surety’s liability

• Research what fees may be applicable in your jurisdiction and document them in the surety agreement
• Work with an attorney to ensure the fees outlined in the surety agreement are legally sound
• Include a schedule of fees that are applicable to the surety’s liability
• Ensure all fees are reasonable and applicable to your surety agreement
• Check off this step when you have outlined all applicable fees and they have been reviewed and approved by an attorney.

Specifying the length of the agreement

• Determine the desired length of the agreement, which should be based on the duration of the project or obligation being surety for
• Agree on a specific date for the start and end of the agreement
• Include language that allows for early termination of the agreement if desired
• Specify the conditions in which the agreement can be extended if needed
• When complete, add the length of the agreement to the document

Once you have specified the length of the agreement, you can move on to the next step which is outlining the terms of payment of the surety.

Outlining the terms of payment of the surety

• Consider the amount of the surety bond, the payment schedule, and the interest rate
• Research the legal regulations that apply to the surety bond
• Write the agreed-upon terms of payment in the surety agreement
• Make sure to include the details of the payment schedule, the amount of the bond, and any applicable interest rates
• Review the agreement with all parties present to ensure that everyone is in agreement
• When all parties have accepted the terms of payment, the surety agreement is complete and ready to be signed
• This step is complete when all parties have accepted the terms of payment

Agreeing upon the payment method

• Discuss and agree on the payment method with the surety and the obligee.
• Make sure to include details such as the payment amount, payment frequency, the duration of the agreement, and the payment method (e.g. cash, check, bank transfer, etc.).
• Document the agreed-upon payment method in the surety agreement.
• You will know when you have completed this step successfully when the payment method has been agreed upon and documented.

Establishing a payment schedule

• Outline the payment schedule including the amount, due dates, and any applicable late fees
• Agree upon a payment method, whether it be a lump sum or structured payments
• Specify the exact dates payments are due and how much is due each period
• Agree upon a payment plan that works for both parties
• Clearly define any late fees, payment penalties, or other charges that may be assessed
• Be sure to include the consequences if the surety fails to make payments on time

When you can check this off your list and move to the next step:

• Once both parties have agreed upon the payment schedule and payment method, the step is complete.

Establishing the surety’s right to collateral

• Research the applicable local and state laws to determine if a surety has the right to require collateral
• Draft language in the surety agreement that explicitly states that the surety has the right to require collateral
• Ensure that this language is clear and compliant with applicable laws
• Have the surety and obligee review and sign the surety agreement
• Ensure that both parties understand the implications of the surety agreement and that both parties agree to its terms
• Once the agreement is signed, you can move on to the next step of identifying the collateral.

Identifying the collateral

• Assess the value of the collateral
• Determine the type of collateral that the surety will accept
• List any special requirements or restrictions on the collateral
• Specify the type of inspections or tests that must be performed on the collateral
• Note any additional documents or information needed

When you can check this off your list and move on to the next step: Once you have identified and assessed the collateral, you can move on to specifying the process of using the collateral.

Specifying the process of using the collateral

• Agree on how the collateral is to be used and how the Surety will access it.
• Decide who is responsible for the costs of administering, maintaining, and protecting the collateral.
• Decide if the Surety will have the right to sell the collateral in the event of default.
• Draft a formal collateral agreement that outlines all of the agreed-upon terms.
• Once all parties have agreed to the terms of the collateral agreement, sign and date the document and make sure all parties have a copy.

Determining the consequences of default

• Understand the consequences of non-performance, including any breach of the agreement
• Consider the consequences for the surety, including any potential liability for the surety
• Draft any necessary clauses or provisions regarding the consequences for non-performance or breach of the agreement
• Consult with a legal professional to ensure the agreement is drafted correctly

Once you have drafted the clauses or provisions regarding the consequences for non-performance or breach of the agreement, you can move on to the next step of clarifying the consequences for the principal.

Clarifying the consequences for the principal

• Understand the circumstances of the principal’s potential default, including what would constitute a breach of the contract
• Research applicable legal regulations related to the agreement
• Consult with a lawyer or legal advisor to make sure your surety agreement is compliant with applicable laws
• Include language in the surety agreement that outlines the consequences for the principal in the event of a default
• Ensure that the language is clear and unambiguous, so that there is no confusion regarding the terms of the agreement
• Include a clause that stipulates the surety’s rights in the event of the principal’s default
• When you have finished drafting the surety agreement and have had it reviewed, you can check this step off your list.

Clarifying the consequences for the surety

• List out all the possible consequences for the surety in the event of a breach of the agreement
• Consider the types of damages that the surety may be responsible for, and the amount of such damages
• Review any applicable state laws or regulations that may outline the consequences for the surety
• Ensure that the language in the agreement is clear and unambiguous about the consequences for the surety
• When you have listed out all the possible consequences for the surety and have reviewed any applicable state laws or regulations, you can check this off your list and move on to the next step.

Establishing the process for dispute resolution

• Research various dispute resolution processes and decide on one that works for the parties involved in the surety agreement (e.g. mediation, arbitration, etc.)
• Record the process for dispute resolution in the surety agreement
• Outline the process in a way that all parties can understand and agree to
• Ensure that all parties are aware of the process and are comfortable with it
• When all parties have agreed on the dispute resolution process, check this off your list and move on to the next step.

Identifying the type of dispute resolution process to be used (mediation, arbitration, etc.)

• Research different types of dispute resolution processes and decide which one is best for your surety agreement (e.g. mediation, arbitration, etc.)
• Consider the advantages and disadvantages of each type of process
• Consider the costs associated with each type of process
• Consider the timescale of the process and how quickly a resolution can be reached
• Make a decision on which type of process should be included in the surety agreement
• Once you have identified the type of process, you can check this step off your list and move on to specifying the steps of the dispute resolution process.

Specifying the steps of the dispute resolution process

• Draft the dispute resolution process in the surety agreement, including:

• The steps that should be taken to settle a dispute
• The process of selecting a neutral party (if applicable)
• The timeline for the dispute resolution process
• The expenses to be paid by each party
• Any other necessary provisions

• Once the dispute resolution process has been drafted and agreed upon, check it off your list and move on to the next step of defining the governing law of the agreement.

Defining the governing law of the agreement

• Identify the state or country whose laws will govern the agreement.
• Specify in the agreement that the laws of the chosen state or country will be the governing law and the exclusive jurisdiction for any potential litigation.
• Make sure both parties agree to the governing law and jurisdiction and sign the agreement.
• Once both parties have signed the agreement, you can check this step off your list and move on to defining the language in which the agreement is written.

Defining the language in which the agreement is written

• Determine the language of communication that all parties should use in order to understand the agreement.
• Consult with all parties involved in the agreement to decide on a language for the agreement.
• Make sure all parties involved in the agreement are comfortable with the language being used.
• Once all parties agree on a language, document the language being used in the agreement.

Once the language for the agreement has been determined and documented, you can move on to the next step of agreeing upon the language.

Agreeing upon the language

• Read through the language given and make sure both parties understand the content and meaning of the agreement
• Make sure to address any discrepancies and questions that arise, and be sure to clarify anything that needs further explanation
• Once both parties are in agreement with the language of the agreement, this step can be checked off and the parties can move on to the next step

Specifying which party is responsible for translations if necessary

• Determine which party is responsible for any necessary translations.
• Consider any additional costs and whether the agreement should be written in multiple languages.
• Clearly state in the surety agreement who is responsible for any translations.
• Depending on the language and the agreement, consider having the agreement reviewed by a qualified translator.
• When all language and translation responsibilities are accounted for in the surety agreement, you can move on to the next step.

FAQ:

Q: Is a surety agreement different from a guarantee?

Asked by Daniel on May 3, 2022.
A: Yes, there are distinct differences between a surety agreement and a guarantee. A surety agreement is a contract between three parties - the principal, obligee and surety - that outlines the responsibilities of each party in the event that the principal fails to fulfil its obligations. A guarantee, on the other hand, is a promise from one party to another that the former will be liable for any losses incurred if the other party does not meet its obligations.

Q: Is there a difference between a surety agreement and an indemnity agreement?

Asked by Melissa on August 29, 2022.
A: Yes, there are differences between a surety agreement and an indemnity agreement. A surety agreement is typically used when one party (the principal) has to fulfil an obligation or make payment to another (the obligee). The principal can ask for help from a third party (the surety) who will take on the risk of any losses that the obligee may incur if the principal fails to meet their obligation. An indemnity agreement, on the other hand, is used when one party agrees to take responsibility for any losses or damages incurred by another party as a result of their actions (or inaction).

Q: What documents must be included in a surety agreement?

Asked by William on March 10, 2022.
A: Generally speaking, all surety agreements must include certain documents in order to be valid. These include an application form for the obligee and principal, an indemnity bond signed by all three parties (obligee, principal and surety), and any other documents such as security agreements or powers of attorney which may be required by law. Additionally, depending on the jurisdiction in which the contract is being signed, there may be additional documents required such as guarantees or performance bonds.

Q: What are ““condition precedent”” clauses in a surety agreement?

Asked by Sarah on October 11, 2022.
A: A condition precedent clause outlines certain conditions which must be met before any of the obligations outlined in the surety agreement become legally binding - for example, that all necessary paperwork has been completed or that all relevant legal requirements have been satisfied. This helps to ensure that all parties involved are protected in case something goes wrong when fulfilling their obligations under the contract. It also helps reduce the risk of legal disputes arising from misunderstandings about what was expected of each party.

Q: Are there risks involved with entering into a surety agreement?

Asked by John on July 14, 2022.
A: Yes, there are risks involved with entering into a surety agreement. The most common risks associated with this type of contract include financial loss to either party should an obligation not be met; failure to understand or comply with any relevant laws; and legal disputes arising from misunderstandings about what was expected of each party. It is important to understand these risks before entering into any such contract and to ensure that all parties involved are aware of their responsibilities and rights so as to minimise potential losses or disputes down the line.

Example dispute

Suing Companies for Breach of Surety Agreement

• Filing a lawsuit for breach of surety agreement requires that the plaintiff must demonstrate that the defendant had a legal obligation to fulfill the terms of the agreement and failed to do so.
• The plaintiff must also show that the breach of the agreement caused the plaintiff to suffer damages.
• The plaintiff must prove that the defendant had the legal capacity to enter into the agreement and that the agreement was valid and enforceable.
• The plaintiff may also be able to recover damages for breach of contract, such as for lost wages, lost profits, or other consequential damages.
• The plaintiff may also be able to recover punitive damages or attorney’s fees if the defendant’s breach was malicious or intentional.
• To prove the defendant’s breach, the plaintiff may need to provide evidence such as the surety agreement, the terms of the agreement, and any other documents related to the agreement.
• If the plaintiff is able to demonstrate that the defendant breached the surety agreement, the defendant may be liable for damages, and the plaintiff may be able to win the lawsuit.

Templates available (free to use)

Surety Agreement

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