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
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
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 obligation.
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.
This information is courtesy of Western Surety Company.