Protecting your Business!
A bond guarantees the performance of a contract or other obligation. Bonds are three party instruments by which one party guarantees or promises a second party the successful performance of a third party.
How Surety Bonds Work
- The Surety–Is usually a corporation which determines if an applicant (principal) is qualified to be bonded for the performance of some act or service. If so, the surety issues the bond. If the bonded individual does not perform as promised, the surety performs the obligation or pays for any damages.
- The Principal–Is an individual, partnership, or corporation who offers an action or service and is required to post a bond. Once bonded, the surety guarantees that he will perform as promised.
- The Obligee–Is an individual, partnership, corporation, or a government entity which requires the guarantee that an action or service will be performed. If not properly performed, the surety pays the obligee for any damages or fulfills the obli gation.
The example below illustrates how a surety bond works:
Joe, the principal, has promised someone (the obligee) that he will do something. If Joe fails to perform as he has promised, financial loss could result to that person. Consequently, the obligee says to Joe, “If you can be bonded, I’ll accept your performance promise.” Joe goes to a surety and asks to be bonded. After the surety is satisfied that Joe is qualified and will live up to his promise, it issues the bond and charges Joe a “premium” for putting its name behind Joe’s promise. Joe is still responsible to perform as promised. The surety is responsible only in the event that Joe does not fulfill his promises.