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We get a LOT of questions about Performance Bonds (we are the experts, after all).  These questions tend to centralize around the two types of performance bonds – contract contingent performance bonds, and on-demand performance bonds.  In the international arena, there are a lot of on-demand performance bonds that are required.  These bonds are just what they seem – the obligee makes a demand on the bond and the surety has to pay it.  Compare that with a contract bond, which requires that the surety be notified first that there is a problem with the contract, and then has to pay damages or find someone else to finish the project.

On-demand bonds sound great.  However, in the real world, they are not always as good as they seem.  Many times, they are very difficult to get.  What’s worse, is that the sureties on these bonds many times disappear without a trace – making the entire point of getting a bond worthless.

Breaking a contract

Here is a great example of On-Demand Performance Bonds defaulting

http://www.bworldonline.com/content.php?section=Economy&title=audit-commission-urges-customs-to-rein-in-balances-of-surety-bonds&id=108382

Audit commission urges Customs to rein in balances of surety bonds

THE BUREAU of Customs should declare bonds issued by defunct surety companies as forfeit, the Commission on Audit (CoA) said, as part of efforts to collect more than P5 billion worth of unpaid accounts from four major port facilities.
State auditors said that as of 2013, due and demandable bonds for the Customs bureau hit P5.7 billion from the two ports in Metro Manila and from the Port of Batangas.

“The Bureau’s operational procedures, monitoring and enforcement on the settlement/collection of Due and Demandable Bonds and Unpaid Accounts in the three major ports in the National Capital Region and the Port of Batangas were not effective resulting in accumulated balances of P5,604,492,259.66 and P104,304,989.00, respectively,” the CoA report read.

For the Port of Manila, auditors found that 25 surety companies with P1.65 billion worth of bonds due were already closed, rendering them impossible to settle.

Due bonds amounting to P1.07 billion in the Manila International Container Port and P66.64 million from the Ninoy Aquino International Airport Custom house also remain unsettled based on the report.

“These amounts, if collected, would augment the government funds and may be used to finance government projects,” the auditors said.

The auditors said the bureau should declare the bonds forfeit and “demand payment of duties and taxes due from the principal and the sureties involved,” given that the bonds due have remained unsettled for several years.

Accreditation for companies with unliquidated bonds should likewise be suspended, the CoA said, so that the uncollected amount does not expand further.

The bonds may be settled through the submission of proper liquidation documents or the payment of the due accounts. — Melissa Luz T. Lopez