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Surety Bond 101- What is a surety bond and what parties are involved?

Now that we’ve learned about the different types of bond classifications,  let’s dive deeper into the parties involved in this surety bond 101 crash course.

Definition of SURETY BOND

The surety bond is a bond given to protect the recipient against loss in case the terms of a contract are not filled; a surety company assumes liability for nonperformance

Synonyms: performance bond

What is a surety bond and how does it work?

A surety bond is essentially as a contract among at least three parties: the obligee – The party who is the recipient of an obligation. the principal – The primary party who will perform the contractual obligation. the surety – Who assures the obligee that the principal can perform the task

[Surety Bond 101: 3 Basic Q&A’s about Surety Bonds from The Surety Place on Vimeo]

 

What Is A Surety Company?

sur·e·ty
ˈSHo͝orədē/
noun
noun: surety; plural noun: sureties
The surety company is a person who takes responsibility for another’s performance of an undertaking, for example their appearing in court or the payment of a debt.

In finance, a surety, surety bond or guaranty involves a promise by one party to assume responsibility for the debt obligation of a borrower if that borrower defaults. The person or company providing this promise is also known as a “surety” or as a “guarantor”.

A surety most typically requires a guarantor when the ability of the primary obligor or principal to perform its obligations to the obligee (counterparty) under a contract is in question, or when there is some public or private interest which requires protection from the consequences of the principal’s default or delinquency. In most common-law jurisdictions, a contract of suretyship is subject to the Statute of Frauds (or its equivalent local laws) and is only enforceable if recorded in writing and signed by the surety and by the principal.

What Is An Obligee?

ob·li·gee
ˌäbliˈjē/
noun
noun: obligee; plural noun: obligees
The obligee is a person to whom another is bound by contract or other legal procedure.

In other words, the party a bond protects from loss; the beneficiary of the bond. For example the project owner on a construction site that is requiring the principle to acquire a bond.

Who Is The Principal?

The principal is the person who is purchasing the bond at the request of the Obligee to guarantee the quality their work to be done in the future. This is usually a business owner or other professional.