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Electronic Bonding Technologies

In recent years, public owners, particularly state departments of transportation, have implemented or considered the implementation of electronic bonding methodologies. Processing bonds electronically results in reduced processing costs and greater efficiency.

However, a bond is a contract and all necessary elements to ensure an enforceable contract must be preserved when the process moves from a physical to an electronic environment.

The Paper Bond Execution Process

A surety bond is a three party agreement in which the surety guarantees one party (the principal) will perform its obligations owed to another (the obligee). Both the surety and the principal are liable to the obligee. Therefore, both the surety and principal sign the bond. When the bond is a paper document, the bond execution process generally consists of the following steps:

  • the surety agent completes the necessary information on the bond form;
  • the surety agent signs the bond on behalf of the surety and attaches a power of attorney evidencing its authority to do so;
  • the surety agent sends the bond form to the principal;
  • the principal signs the bond form; and
  • the principal delivers the bond to the obligee.

An electronic methodology must translate these steps, which contain legal implications, from the “paper world” to the “electronic world.”

Electronic Bond Execution Process

A major interest to sureties is bond obligees implement methodologies that are not restricted to a technology provided by a specific vendor. Sureties want to be able to choose the technology or vendor that best meets their needs rather than be required to use a particular vendor in order to foster competition. SFAA and NASBP assist vendors by providing guidance as to the interests of principals, obligees, agents, and sureties and the legal requirements implicit in the bond execution process. Possible methodologies for bond execution are:

  • transmitting an electronic bond with digital signatures using secure messaging technology; and
  • executing a bond electronically through a web-based bond clearinghouse or “virtual signing room.”

Checklist of Required Characteristics

Any electronic bonding methodology must possess certain essential characteristics, which include:

  • the methodology maintains the existing legal relationships and obligations among the parties;
  • the filing process ensures the validity and non-repudiation of all aspects of the bond transaction;
  • the process contemplates the requirements of the statute of frauds. The methodology includes or permits the inclusion of the language of the obligation and the signature of the surety and principal using digital signature technology;
  • permits the signing by two or more different parties at different points in time;
  • provides assurance to obligee that, aside from its signature, principal has not altered the bond transaction; and
  • ensures the identity and authority of the surety’s attorney-in-fact by incorporating or allowing the incorporation of unalterable electronic powers of attorney, which must be granted by the surety.

The electronic bond transaction should be stored in a secure manner and retrieved only by those parties presenting appropriate permissions and credentials. The bond transaction must be transmitted using 128 bit encryption and/or SSL to avoid repudiation and tampering. Following are suggested characteristics.

  • Use ACORD data standards.
  • Integrates with the variety of systems and processes of the various parties involved in the bond transaction.
  • Permits the use of a trusted third party to certify the delivery and signature.