Unraveling the meaning of performance bond in the Mexican context

Although the signing of a contract confers formality and certainty to any commercial transaction, this document does not guarantee that the parties involved will comply with the commitments made in it.

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To avoid being affected in one of these scenarios, there is a legal instrument called advance payment and performance bond, whose function is to provide financial support to investors in the event that the other party fails to comply with the agreed obligations.

On this occasion, we will elaborate on this instrument and the reasons why it is a fundamental provision in agreements that involve lease, work, order or purchase order contracts.

What is its function in commercial transactions?

It is common for this type of bond to be requested in supply contracts or public works, which require large investments and the assurance that the work will be delivered on time, according to the established terms and conditions.

Generally, an advance payment and performance bond is issued for the amount equivalent to 10% of the contract value, and may reach a maximum amount of 30 million pesos.

In this way, if the party that acquires an obligation refuses to fulfill it or does not do so in accordance with the defined terms and conditions, the affected party can claim compensation.

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How is an advance payment and performance bond processed?

The processing of this bond entails the following requirements:

1. Analyze the offer of surety companies in Mexico and verify that the one you have chosen is authorized by the National Insurance and Surety Commission (CNSF), the institution that supervises and regulates companies in the sector.
2. The surety company must verify that, as an applicant (natural or legal person), you do not have debts in the Credit Bureau history.
3. Gather the documentation required by the surety company and submit the application to obtain a retainer and performance bond.
4. The surety company will evaluate the request to determine if the level of risk is acceptable.
5. If the application is approved, you must pay a premium with a value proportional to the contract being supported, although factors such as your credit rating will also affect this cost.

A key tool to guarantee compliance with contractual obligations in Mexico

In summary, this type of guarantee can guarantee partial or total compliance with obligations (in terms of timely delivery and execution of work), so that assuming the risk associated with an investment does not result in the commitment of your assets.

In Mexico, there are legal instruments that support agreements and obligations established by contract. In addition to performance bonds, there are measures to defend your interests in various areas.

For example, to claim a termination of a contract that has not been notified by your insurance company or claim action in a situation in which you need to recover a property you own.

In summary, after winning a jurisdictional trial and if the insurer seeks protection to avoid paying the judgment, it must provide a bond to the court. This bond guarantees that the insurer will comply with the payment in the event that the protection is unfavorable, thus ensuring compliance with the contract and the payment obligation established by the judgment won.

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At LEX & CO mexican law firm, insurance lawyers, we specialize in banking and tax insurance law. We are supported by more than 30 years of experience and commitment to our clients, so we are ready to assist you at all times on the telephone numbers available on our website, via email firma.lex.co@gmail.com or WhatsApp. We offer top-notch specialists in Mexico for probate law, real estate law, and tax law. We provide information about how to sue an insurance company for bad faith.

Lic. Carlos Figueroa Rodríguez

Carlos Figueroa Rodríguez, attorney at law at Lex & Co. He has more than 10 years of experience in specialized cases involving insurance claims and medical malpractice. He is a graduate of the Universidad Anáhuac and has a Master’s Degree in Constitutional Law and Amparo from the National Bar Association. He also has a Doctorate in Juridical Sciences from the UCI Mexico. Professional license 6577215.