Research On Surety System

Generally, there are five ways of guaranty: suretyship, mortgage, pledge, lien and security, among which the last four belong to the guaranty with the property,and surety is a way of guaranty with people's credit. The main objective of guaranty is for the carrying out of the creditor's right. If the guaranty with the property is not sufficient, then there is suretyship from the third party's credit to ensure the creditor's right. Therefore, the surety bond is a kind of three party's contract which is based on the main contract.There is a long history of surety system which origins from ancient Rome where the primal law of suretyship was enacted. In modern industrialized world, surety became the main component of social credit system. During the 1900s in America, there were lots of public works being built such as heavy ones: dams, bridges, and highways which were financed by the government and the contract tiers became more and more sophisticated. If the payment chain was broken, for example, the contractor defaulted on the contract's conditions or payment was make in arrears to his next tier's subcontractors, the suppliers or the workers, the federal government's interest would be infringed: first, the public works funded would be delayed in completion and be late to be put into use, which the public interest was affected; the second, the defaulted ones would appeal to the court for the lien of public works, which affected the usual operation the government. To be released from the burden and exclude the public works from the lien, the Congress enacted the Miller Act in 1935 which compulsorily required the contractor provide the performance bond and payment bond. And there followed the states'familiar statues which were called"Little Miller Act". The Miller Act is the symbol of formal establishment of surety system where there are many corporate sureties. Now, surety has alienated form the conditional industry of property and casualty and became an independent industry.The base contract of suretyship under The Miller Act is the construction contract and the surety controls the contractor's default risk. There are three main forms of surety bond: bid bond, performance bond and payment bond. The surety industry demonstrates some characters familiar with the general insurance industry such as the different risk preference of the contracting parties and the incomplete market, etc. Here in this paper, the writer induces the mainframe analysis of uncertainty, and comparatively analyses the surety system in America and Europe to the conclusion that the USA model and Europe model in surety industry is the result of different risk preference of three parties'on the surety contract.In the last part of the paper, the proposed system of surety for construction project in China is surveyed. the writer suggests that, with recourse to the development of surety industry in America, we should induce the surety mechanism into the public works and public procurement with the corporation of the government, the judicial system, financial and insurance institutions and guaranty companies,research on the contract bonds and commercial bonds, and abandon the low positioned loan guaranty, and this would be the future strategy for the guaranty industry in China.Surety, or suretyship in this paper is also named as surety guaranty or surety insurance under different circumstances. Generally, surety contract means construction bond or construction guaranty.