I am protected by a performance bond: what are my guarantees?

Created on 02 September 2020
Description

The purpose of the performance bonds guarantee is to honour, in case of the failure of a bank or financing company, the performance bonds issued by it to business professionals who are required by law to provide a guarantee to their customers. These professionals may be builders, travel agents, insurance brokers, etc.
If the bank or financial institution fails, the FGDR takes over and honours the performance bond until the project is completed.If the professional subsequently defaults vis-à-vis their customer, the FGDR compensates the customer. 

The business professionals in question:

either hold funds received from their customers for the purpose of delivering them to third parties to whom such funds are owed;

  • for example: a travel agent who organises a trip and takes bookings,

or must ensure the proper completion of a service which they have agreed to provide to their customers and for which they have been paid;

  • for example: off-plan sale of property by a real estate developer.
Sommaire

Two conditions for initiating the performance bonds guarantee 
The performance bonds guarantee mechanism applies when two conditions are met simultaneously: 

  1. the institution that issued the performance bond on behalf of the professional has failed and can no longer fulfil its commitment to the professional;
  2. the performance bond is called, i.e. the professional for which the performance bond was issued can no longer fulfil its obligations to its customers who, in order to seek compensation, call on the bank or the financing company that issued the performance bond in favour of the defaulting professional.

In this case, the FGDR intervenes by compensating, in place of the bank or financing company that issued the performance bond, the customers injured as a result of the professional's default.
 

Regulated performance bonds protected by the FGDR

A regulated performance bond can be issued by a bank or a financing company that has been authorised by the Prudential Supervision and Resolution Authority (ACPR i). They then become members of the FGDR under this mechanism and are required to contribute to it annually. This contribution is an express condition of their business.

The FGDR covers several types of regulated performance bonds:
 

PERFORMANCE BONDS PROTECTED BY THE FGDR

Performance bonds issued by a builder

Completion bonds in case of sale of property prior to completion by a real estate developer

Payment guarantees that must be provided by the successful bidder of a labour contract

Repayment guarantees that must be provided by regulated business professionals who receive funds from their customers intended for third parties:

  • lawyers, real estate agents, property administrators, 
  • travel agents, tour operators, tourism accommodation and activities managers, passenger transport companies,
  • insurance brokers, etc.

The performance bonds guarantee covers and compensates 90% of the harm sustained by the customer, with an excess of €3,000 payable by the customer.

Decree no. 99-776 of 8 September 1999 establishes the list of professions that are required to provide a guarantee and that fall within the scope of the guarantee scheme.

90%

of the harm sustained is paid by the FGDR to the end customer injured as a result of the professional's default. 

3 000€

excess deducted by the FGDR from the total amount paid for the harm sustained. 

286

banks or financing companies authorised to issue performance bonds are covered by the FGDR. 

All end customers are protected in cases where their service provider, from one of the professions listed above, fails to fulfil its obligations to them and the bank or financing company that issued the performance bond has itself failed.

Performance bonds guarantee scheme: protection for all customers

  • If the bank or financing company fails, the FGDR takes over and protects the performance bond until the customer's project is completed;
  • And if the professional defaults vis-à-vis their customer, the FGDR compensates the customer. The compensation is capped at 90% of the harm sustained by the customer, with an excess of €3,000 payable by the customer.

Why was the performance bonds guarantee scheme created?

Many categories of business professionals receive funds from their customers for the purpose of either financing services that will be provided at a later date or over a long period of time, or forwarding such funds to third parties. The public authorities wanted to ensure that such professionals were guaranteed by a bank or financing company so that, if they went out of business or disappeared before fulfilling their obligations to their end customers, the bank or financial institution would assume responsibility for the agreed service without customers having to pay for it a second time. 

Such guarantees are “mandatory” or regulated and must be established at a bank or financing company in order for these professionals to do business. When the institution that issued a mandatory performance bond in favour of a business professional fails, the FGDR takes its place in order to fulfil the commitment made by the professional to the end customer. This is known as “assumption of commitment” by the FGDR (Article L. 313-50 of the French Monetary and Financial Code).

The FGDR's performance bonds guarantee ceases to have effect on the expiry date of the performance bond: 

  • if it has not been called (the professional has fulfilled its obligations); 
  • or upon payment of compensation under the performance bond, i.e. if the professional has itself defaulted and the performance bond has been called.