Summary: Anyone who must obtain a license or permit from a political subdivision in order to conduct business usually needs a license and permit bond. These bonds guarantee to the governmental unit that the holder of the bond will comply will all regulations on their particular activity.
Other license and permit bonds permit members of the public to sue directly on the bonds. Typical wording allows suit by “any person or persons who may have a cause of action against said principal” under a particular ordinance or law.
Bonds That Run to State and Local Governments
State and local governments require licenses or permits of many types of businesses—from abstracters to wholesalers; from riding academies to used car dealers.
General Form.
WHEREAS, the above bound Principal has applied for a license to do business as a _____ in the city of _____, during the year ending _____, 20__.
NOW, THEREFORE, the condition of this obligation is such that, if said Principal shall well and truly observe the ordinances of the City of _____ in relation to ____ and conduct his business in conformity thereto and shall well and truly account for and deliver to any person legally entitled thereto any goods, wares or merchandise, article or things which may come into his hands through his business as such _____ or in lieu thereof shall well and truly pay in money to such person or persons the reasonable value thereof. . .
Analysis
This bond exemplifies the purpose behind license and permit bonds—to protect the general public from unscrupulous business dealings. It guarantees that the principal will comply with all local regulations. In some cases, third parties may sue the principal directly, without having to go first to the government entity named as obligee.
Abstracters.
WHEREAS, the above bound Principal doing business under the name of [ ] in the City of [ ], County of [ ], State of [ ], has made application for license as an abstracter in said County under Chapter [ ] of the laws of the state of [ ].
NOW, THEREFORE, the condition of this obligation is such that, if the above Principal shall well and truly comply with the Laws of [state] and faithfully discharge his trust and duties as an abstracter and shall pay any and all damages that may accrue to any party or parties by reason of any error, deficiency, or mistake in any abstract or certificate of title made and issued by said Principal, then . . .
Analysis
An abstracter is someone who searches and verifies title to real estate. The report of an abstracter is used at real estate closings in order to facilitate the transfer of the property.
A typical abstracter bond reads as above. These bonds indemnify the public if damaged by the negligence of the abstracter when preparing the title. They also cover fraud, but do not guarantee the title or the abstracter's opinion concerning the title.
Such bonds remove responsibility from the surety if the principal meets his or her obligations under the applicable statute.
The Suretymaster warns that an applicant for an abstracters bond must have a thorough knowledge of real estate and probate law. It also says that the abstracter should “stand high in his community and be well-to-do.”
Note that in some states, abstracter bonds are classed as “public official” bonds.
Master Electricians.
THE CONDITION OF THE ABOVE OBLIGATION IS SUCH THAT, whereas, the above bound principal has made application to the State of _____ for a license to operate and engage in the business of master electrician under the laws of the State of _____ and the said State having determined to grant such license upon filing this bond with the State Board of Electricity as provided by law.
WHEREAS, the above bound, as a licensed master electrician, plans to enter into contracts with others for the performance of electrical work and labor.
NOW, THEREFORE, if said principal shall faithfully perform all work entered upon or contracted for by said principal then this obligation shall be void, otherwise to remain in full force and effect.
Any person injured or damaged through the want of skill or the use of unsuitable material or improper use of material in the performance of any work contracted for or undertaken by said principal or his servants or his employees, may maintain an action hereon.
This bond shall be effective from the date said license is granted in the current year and shall expire one year from that date.
Analysis
Note that the master electrician has a special bond. Unlike the bonds issued to other electricians, the general public may sue directly on a master electrician bond. Suretymaster points out that a master electrician requires four years of experience and should, therefore, be less of a risk than other electricians. Also, a master electrician is more likely to own—or to be affiliated with—a financially responsible firm.
Note that abstracters and master electricians are two examples of occupations that utilize a fairly simple and generic license and permit bond.
Itinerant or Temporary Merchants, Transient Photographers, Vendors, Peddlers, Etc.
WHEREAS, the above bound _____, Principal, has made application for a license to engage in the business of _____, within the City of _____, pursuant to the provisions regulating such occupation (or pursuant to such and such a code or ordinance adopted, _____).
NOW, THEREFORE, the condition of this obligation is such that, if the said Principal shall fully and faithfully comply with all the laws or ordinances relating to the said business or occupation so licensed (or comply with the said code), or in the event of failure to so comply shall pay to the said city any and all penalties which may lawfully be assessed against (him, her, or it) for such failure, together with costs of prosecution, (and—if vending—shall use honest weights, measure, and grades, make accurate representations as to quality or class of merchandise sold), and shall well and truly account for and deliver to any person legally entitled thereto any goods, wares or merchandise, article or thing which may come into his hands through his business as such _____, or in lieu thereof shall well and truly pay in money to such person or persons reasonable value thereof…
Analysis
Merchants who travel must often post this bond with local authorities. The government may simply require the principal's “honesty and faithful discharge” of duties. However, it may also require that the principal guarantee any checks written in that locale by the principal. The Suretymaster says that such risks “can be very hazardous” and that “circumstances dictate whether and how bond should be written.”
Public Amusements—Theaters, Dance Halls, etc.
WHEREAS, the above Principal, _____, has applied to the City of _____ to maintain a _____ at _____ within the city during the year ending _____. . .
NOW, THEREFORE, the condition of this obligation is such that, if the said Principal is granted such license and, if the said Principal shall fully and faithfully comply with all State laws and the rules, regulations or ordinances of the said city pertaining to such business, and shall at all times maintain an orderly establishment, pay all fees or penalties which may lawfully be imposed upon said Principal, and shall indemnify and save harmless the said city from any and all liability, direct or indirect, resulting from any negligence or failure on the part of the principal, his agents or employees, to observe and comply with all said laws and ordinances in the operation or maintenance of said business or concession. . .
Analysis
The public amusement bond guarantees that such businesses will comply with all local ordinances and regulations. It also guarantees that the business will “maintain an orderly establishment.” Sometimes this bond allows for direct third-party action against the principal. If it also guarantees the payment of taxes and license fees, the Suretymaster says that it must be “underwritten with more care.” The agent is also admonished to check on the “reputation, financial responsibility, and permanence in the neighborhood” of the applicant.
Wholesale Dealers
THE CONDITION OF THIS OBLIGATION IS SUCH that, whereas, the principal, under the provision of Laws of the State of _____ relative to Wholesale Produce Dealers, has made application in writing to the Commissioner of Agriculture for license as dealer at wholesale is _____ and, as a condition to the granting of such license, is required by the Commissioner to give bond to the state in the amount named herein.
NOW, THEREFORE, if the principal, being so licensed, shall faithfully perform the duties imposed upon a licensed dealer at wholesale, and shall observe all the laws and regulations relating to the carrying on of such business within the state, and shall make payment, when due, of the purchase price of all produce purchased, and shall promptly report all sales as required by law to persons consigning produce to such dealer for sale on commission, and shall promptly pay to the person entitled thereto the proceeds of such sales, less lawful charges, disbursements and commissions, and shall make prompt settlement and payment of all claims and charges due the state for services rendered or otherwise, under any existing law, rule or regulation, then this obligation shall be void, but otherwise shall remain in full force and effect.
It is understood in accordance with the provisions of the statute, that this bond shall be effective only when notice of default of the dealer is given the Commissioner as defined by statute, and that it shall not cover transactions wherein a voluntary extension of credit has been given by the seller beyond the due date; and that this bond will expire on _______.
Analysis
Most states require wholesalers who deal in farm products to obtain this bond for the protection of the seller (or consignor). It guarantees that the consignor will be paid and it guarantees that all appropriate reports will be filed with the necessary government agencies. The Suretymaster says that because these bonds “guarantee financial performance by the principal, both in the present and at some future date,” they should be written only for principals whose financial position is “thoroughly satisfactory.”
While the treatment of the various types of license and permit bonds could go on for a long time, the above examples give a good indication of how and why such bonds are used.
Bonds That Run to the Federal Government
The Federal bond that generates, by far, the most premium among writers of surety is the federal customs bond.
While the text of a customs bond form 301 could not be found, what follows is the wording of 19 CFR 113.62 that outlines the requirements for a customs bond:
113.62 Basic importation and entry bond conditions.
BASIC IMPORTATION AND ENTRY BOND CONDITIONS
(a) Agreement to Pay Duties, Taxes, and Charges.
(1) If merchandise is imported and released from Customs custody or withdrawn from a Customs bonded warehouse into the commerce of, or for consumption in, the United States, or under @ 181.53 of this chapter is withdrawn from a duty-deferral program for exportation to Canada or Mexico or for entry into a duty-deferral program in Canada or Mexico, the obligors (principal and surety, jointly and severally) agree to:
(i) Deposit, within the time prescribed by law or regulation, any duties, taxes, and charges imposed, or estimated to be due, at the time of release or withdrawal; and
(ii) Pay, as demanded by Customs, all additional duties, taxes, and charges subsequently found due, legally fixed, and imposed on any entry secured by this bond.
(2) If the principal enters any merchandise into a Customs bonded warehouse, the obligors agree;
(i) To pay any duties, taxes, and charges found to be due on any of that merchandise which remains in the warehouse at the expiration of the warehousing time limit set by law; and
(ii) That the obligation to pay duties, taxes, and charges on the merchandise applies whether it is properly withdrawn by the principal, or by the principal's transferee, or is unlawfully removed by the principal or any other person, without regard to whether the merchandise is manipulated, unless payment was made or secured to be made by some other person.
(3) Under this agreement, the obligation to pay any and all duties, taxes, and charges due on any entry ceases on the date the principal timely files with the port director a bond of the owner in which the owner agrees to pay all duties, taxes, and charges found due on that entry; provided a declaration of the owner has also been properly filed.
(b) Agreement to Make or Complete Entry. If all or part of imported merchandise is released before entry under the provisions of the special delivery permit procedures under 19 U.S.C. 1448(b), released before completion of the entry under 19 U.S.C. 1484(a), or withdrawn from warehouse under 19 U.S.C. 1557(a) (see @ 10.62b of this chapter), the principal agrees to file within the time and in the manner prescribed by law and regulation, documentation to enable Customs to:
(1) Determine whether the merchandise may be released from Customs custody;
(2) Properly assess duties on the merchandise;
(3) Collect accurate statistics with respect to the merchandise; and
(4) Determine whether applicable requirements of law and regulation are met.
(c) Agreement to Produce Documents and Evidence. If merchandise is released conditionally to the principal before all required documents or other evidence is produced, the principal agrees to furnish Customs with any document or evidence as required by law or regulation, and within the time specified by law or regulations.
(d) Agreement to Redeliver Merchandise. If merchandise is released conditionally from Customs custody to the principal before all required evidence is produced, before its quantity and value are determined, or before its right of admission into the United States is determined, the principal agrees to redeliver timely, on demand by Customs, the merchandise released if it:
(1) Fails to comply with the laws or regulations governing admission into the United States ;
(2) Must be examined, inspected, or appraised as required by 19 U.S.C. 499; or
(3) Must be marked with the country of origin as required by law or regulation.
It is understood that any demand for redelivery will be made no later than thirty days after the date that the merchandise was released or thirty days after the end of the conditional release period (whichever is later).
(e) Agreement to Rectify Any Non-Compliance with Provisions of Admission. If merchandise is released conditionally to the principal before its right of admission into the United States is determined, the principal, after notification, agrees to mark, clean, fumigate, destroy, export or do any other thing to the merchandise in order to comply with the law and regulations governing its admission into the United States within the time period set in the notification.
(f) Agreement for Examination of Merchandise. If the principal obtains permission to have any merchandise examined elsewhere than at a wharf or other place in charge of a Customs officer, the principal agrees to:
(1) Hold the merchandise at the place of examination until the merchandise is properly released;
(2) Transfer the merchandise to another place on receipt of instructions from Customs made before release; and
(3) Keep any Customs seal or cording on the merchandise intact until the merchandise is examined by Customs.
(g) Reimbursement and Exoneration of the United States . The obligors agree to:
(1) Pay the compensation and expenses of any Customs officer, as required by law or regulation; and
(2) Exonerate the United States and its officers from any risk, loss, or expense arising out of principal's importation, entry, or withdrawal of merchandise.
(h) Agreement on Duty-Free Entries or Withdrawals. If the principal enters or withdraws any merchandise, without payment of duty and tax, or at a reduced rate of duty and tax, as permitted under the law, the principal agrees:
(1) To use and handle the merchandise in the manner and for the purpose entitling it to duty-free treatment;
(2) If a fishing vessel, to present the original approved application to Customs within twenty-four hours on each arrival of the vessel in the Customs territory of the United States from a fishing voyage;
(3) To furnish timely proof to Customs that any merchandise entered or withdrawn under any law permitting duty-free treatment was used in accordance with that law; and
(4) To keep safely all withdrawn beverages remaining on board while the vessel is in port, as may be required by Customs.
(i) Agreement to comply with Customs Regulations applicable to Customs security areas at airports. If access to the Customs security areas at airports is desired, the principal (including its employees, agents, and contractors) agrees to comply with the Customs Regulations in this chapter applicable to Customs security areas at airports. If the principal defaults, the obligors (principal and surety, joint and severally) agree to pay liquidated damages of $1000 for each default or such other amount as may be authorized by law or regulation.
(j) Agreement to comply with electronic entry and/or advance cargo information filing requirements. (1) If the principal is qualified to utilize electronic entry filing as provided for in part 143, sub-part D, of this chapter, the principal agrees to comply with all conditions set forth in that sub-part and to send and accept electronic transmissions without the necessity of paper copies.
(2) If the principal elects to provide advance inward air or truck cargo information to Customs and Border Protection (CBP) electronically, the principal agrees to provide such cargo information to CBP in the manner and in the time period required, respectively, under § 122.48a or 123.92 of this chapter. If the principal defaults with regard to these obligations, the principal and surety (jointly and severally) agree to pay liquidated damages of $5,000 for each regulation violated.
(k) Agreement to ensure and establish issuance of softwood lumber export permit and collection of export fees. In the case of a softwood lumber product imported from Canada that is subject to the requirement that the Government of Canada issue an export permit pursuant to the Softwood Lumber Agreement, the principal agrees, as set forth in @ 12.140(a) of this chapter, to assume the obligation to ensure within twenty working days of release of the merchandise, and establish to the satisfaction of Customs, that the applicable export permit has been issued by the Government of Canada.
(l) Consequence of default.
(1) If the principal defaults on agreements in this condition other than conditions (a), (g), (i), (j)(2)or (k) of this section the obligors agree to pay liquidated damages equal to the value of the merchandise involved in the default, or three times the value of the merchandise involved in the default if the merchandise is restricted merchandise or alcoholic beverages, or such other amount as may be authorized by law or regulation.
(2) It is understood and agreed that whether the default involves merchandise is determined by Customs and that the amount to be collected under these conditions shall be based upon the quantity and value of the merchandise as determined by Customs. Value as used in these provisions means value as determined under 19 U.S.C. 1401a.
(3) If the principal defaults on agreements in this condition other than conditions (a) or (g) and the default does not involve merchandise, the obligors agree to pay liquidated damages of $ 1,000 for each default or such other amount as may be authorized by law or regulation.
(4) If the principal defaults on agreements in the condition set forth in paragraph (a)(1)(i) of this section only, the obligors (principal and surety, jointly and severally) agree to pay liquidated damages equal to two times the unpaid duties, taxes and charges estimated to be due or $ 1,000, whichever is greater. A default on the condition set forth in paragraph (a)(1)(i) of this section shall be presumed if any monetary instrument authorized for the payment of estimated duties, taxes and charges by @ 24.1(a) of this chapter is returned unpaid by a financial institution, or if a payment authorized under Automated Clearinghouse (see @ 24.25 of this chapter) is not transmitted electronically to Customs in a timely manner. If the principal defaults on agreements in both of the conditions as set forth in paragraphs (a)(1)(i) and (b) of this section, the measure of liquidated damages assessed shall be as provided in paragraph (l)(1) of this section for a default of the agreements in the condition set forth in paragraph (b) of this section. For purposes of this paragraph, the phrase “unpaid duties, taxes and charges” shall include any appropriate ad valorem fees described in @ 24.23 of this chapter, fees relating to dutiable mail described in @ 24.22(f) of this chapter, and harbor maintenance fees described in @24.24(e)(3) (i) and (ii) of this chapter.
(5) If the principal defaults on agreements in the condition set forth in paragraph (k) of this section only, the obligors agree to pay liquidated damages equal to $100 per thousand board feet of the imported lumber.
Analysis
Customs Bond Form 301 is required of importers and customs brokers. The amount of the bond penalty is tied to the amount of duties and taxes paid by the applicant in the previous year. If the bond penalty is less than $1,000,000, this bond is written in multiples of $10,000; if $1 million or more, in multiples of $100,000. If the applicant made no imports during the previous year, the penalty is based upon the applicant's estimate, subject to a minimum of $10,000.
As the CFR outlines, the customs broker or importer is required to guarantee several things:
1. The amount of the estimated duty on the items imported and any additional duty.
2. The amount of duty on merchandise that is left in a bonded warehouse or that is removed improperly from a warehouse.
3. That the merchandise will make proper entry into the United States.
4. That any evidence required by U.S. Customs will be provided.
5. That any merchandise that Customs releases on a conditional basis will be redelivered to Customs to determine any of the following:
(1) if the merchandise fails to comply with the laws or regulations governing admission into the United States ;
(2) if the merchandise must be examined, inspected, or appraised as required by 19 U.S.C. 499; or
(3) if the merchandise must be marked with the country of origin as required by law or regulation.
6. That any released merchandise will comply with all U.S. admission requirements.
7. That he or she (the customs broker or importer) will see that any merchandise that has been conditionally released is held for final examination.
8. That he or she will pay all necessary Customs officers' compensation and hold the Customs Service harmless.
9. That any merchandise that is allowed to enter duty-free or at reduced rate will comply with all provisions of such an agreement.
10. That he or she will comply with all security regulations at U.S. airports.
11. That the necessary electronic documents will be filed.
12. That any export documentation required by the Canadian government for a shipment of lumber will be provided.
The CFR goes on to describe the penalties to which the importer or customs broker is subject if any parts of the code are violated. Penalties involving merchandise range from the one to three times the value of the merchandise. If the default does not involve merchandise, the fine is $1,000 per offense. If the appropriate taxes and duties are not paid, the fine is the greater of double the taxes or $1,000. Finally, if the default involves lumber imported from Canada , the fine is $100 per 1,000 board feet.