A surety bond is 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 be performing the contractual obligation
- The surety – who assures the obligee that the principal can perform the task
Through a surety bond, the surety agrees to uphold — for the benefit of the obligee — the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the obligee.
The contract is formed so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal and guarantee performance and completion per the terms of the agreement.
Contract bonds are used heavily in the construction industry, are a guarantee from a Surety to a project’s owner (Obligee) that a general contractor (Principal) will adhere to the provisions of a contract.