What are surety bonds

A surety bond is a contract between at least 3 parties:

   1. the principal - the primary party who will be performing a contractual obligation
   2. the obligee - the second party who is the recipient of the obligation performed by the principal
   3. the surety - the third party that ensures that the principal's obligations will be performed

By this agreement, the surety agrees to uphold the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the obligee. This is done for the benefit of the obligee. The contract is settled so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal.

Surety Bonds are bonds required by Private Industry, Municipalities, States and the Federal Government for making sure on the subject of the principal abides by the governing rules as well as policies.

Types of bonds

There are two main categories of bond types:

    * contract bonds
    * commercial (non-contract) bonds

Contract bonds guarantee a specific contract. Examples include supply, performance, bid, maintenance and subdivision bonds.

Commercial bonds guarantee per the terms of the bond form. Examples include license & permit, union bonds, etc.

Suretyship bonds origins and present

Suretyship bonds originated hundreds of years ago as a mechanism through which trade over long distance could be promoted. They are frequently used in the construction industry: in order to obtain a contract to build the project, the general contractor (and often the sub-contractors as well) must provide the owner a bond for its performance of the terms of the contract. Conversely, owners and contractors may also provide payment bonds to ensure that subcontractors and suppliers are paid for work done.

Under the Miller Act, payment and performance bonds are required for general contractors on all U.S. federal government construction projects where the contract price exceeds $100,000.00.

Surety bonds are also used in some other situations, for example, to secure the proper performance of fiduciary duties by persons in positions of private or public trust.

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What are surety bonds