Contract and legal bonds: an explainer

Today’s bond market offers a wealth of bond types, each with its advantages and specificities of application. But with so many choices, those seeking bonds may have a hard time differentiating between them. Adding further complexity, regulations and common practices can vary from country to country. Below, we explore the difference between legal and contract bonds around the globe, which projects need them, and why.

Legal bonds, also known as court bonds, are required by courts to secure any obligation that doesn’t arise from a contract. They include subtypes such as fiduciary, admiralty and appeal bonds.

“They’re very common in the US,” says Matthew Schmitt, Regional Contract Surety Manager at Allianz Trade in the US. “A defendant appealing against a judgement, for example, is required – by both federal and all state courts – to post an appeal bond.”

Appeal bonds provide a financial guarantee to the plaintiff – protection against the diminishment of assets during the appeal process. Matthew adds, “If the judgement is upheld and the defendant is financially unable to pay the plaintiff, the bond guarantees that the surety provider will pay out on the original judgement.”

Legal bonds are also common practice in France. “We use temporary work bonds to guarantee the payment of social charges, for example,” says Sylvain Nalies, Bonding Manager at Allianz Trade in France. “And green guarantees to ensure companies comply with national environmental protection regulations.”

A contract bond is a guarantee that the terms of a contract will be fulfilled, in terms of both performance and payment. This includes factors such as technical specifications, price and duration. “Contract bonds are the bread and butter of our business in Germany – they make up around 90% the bonds we issue,” says Andreas Krafft, Legal Advisor Department Claims & Legal, Guarantee & MidTerm at Allianz Trade in Germany. “These include warranty, performance, retention, advanced payment bonds – and more.”

Common across multiple types of commercial projects, from construction to equipment delivery, contract bonds offer considerable advantages to clients. Bid bonds, for example, can help companies win a contract. “When up against competition,” Andreas adds, “providing a tender bond can make you a more favorable candidate.”

“In the US, there is a long history and track record of surety thanks to the Miller Act,” Matthew says. “The act states that all federal construction contracts over a certain threshold must put contract bonds in place to guarantee both performance and payments. It’s applicable in all 50 states, so pretty much every public job of a significant size in the US must have, by law, a contract bond.”

Allianz Trade has a reputation as a global surety leader that employs cautious risk analysis. As an intercompany Credit Facilitator, our role is to help companies obtain credit from other companies. Our analysis of product risk has proved invaluable to companies looking for extra security and support from a trusted partner.