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The following article was published in our article directory on May 8, 2013.
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Understanding Surety Bonds

Article Category: Business

Author Name: [email protected]

A surety bond involves a three-party agreement starting with a certain party (the surety company) promising a third party (the owner) that the second party (this time the contractor) will fulfill any contract made in between. The bond is designed to protect the owner (who also specifies the bond requirements) against any losses incurred due to the failure of the contractor to meet the stated obligation. The losses will be recovered thru the bond.

According to historical records (particularly the earliest recorded contract written on a Mesopotamian tablet dated 2750 BC) Suretyship is the original individual surety bond, together with other bonds discovered in Babylon, Assyria, Persia, Rome, Rome, the Hebrews, the code of Hammurabi, and England in the later centuries. The code of Hammurabi in particular (1790) was where suretyship was first addressed through legal written codes.

The bonds are classified into the following:

Contract surety bonds - this refers to any executed bond that promises fulfillment of the obligation to a client. This includes the supply, construction, installation, delivery, and other services indicated in the contracts.

Judicial bonds - this refers to the bonds initiated by the surety company in accordance to the statutory requirements.

Commercial surety bonds - using commercial bonds reflects the wide range of the types of bonds that does not really fit inside contracts. They are divided further into court, license and permit, miscellaneous, and public official.

The bonds are further divided according to types:

The bid bond - this represents the financial assurance that principals are bound to comply with, including the conditions to reach the final contract. It also makes sure that surety companies will issue the required advance payments, including performance bonds. If contractors gets the contract but fails to push through to the agreement phase, it may fall upon the sureties to pay what is in between the bid awarded to the next bid (the lowest).

The advantage payment bond - this guarantees the repayment of any payment made in advance to the obligee that is granted by the principal via deductions from the progress billings. Should the principal default the contract, the amount shall be forfeited towards the obligee.

The Performance bond - this protects owners from the possibility of financial loss if the contractor fails to execute the conditions stated in the contract. If the contractor happens to default, then the surety is bound to respond to the terms written on the bond.

The payment bond - this ensures the contractors will pay the laborers their dues, including other parties involved in the projects (subcontractors, suppliers, etc.). Payment bonds also make sure that projects remain lien-free from obligations courtesy of the principal. Should the contractor fail to pay what is due, the surety company will pay the bond amount as stipulated in the contract.

The warranty bond - this is what guarantees the owner that the contractor will keep up his promise to correct any defects discovered after project completion, which will be executed when the release of retention money is observed. If it happens that the contractor will fail to correct such defects, the surety company will pay the bond amount just to correct the defects.

In any way, the surety bond is what binds the three parties together to achieve something towards completion.

Keywords: surety bond, surety bonds, performance bond, getting bonded, bid bonds, minority contractors

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