Glossary of Business Credit Terms

# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Contract Surety Bond

What is Contract Surety Bond? 

A contract surety bond is a type of bond that guarantees fulfillment of contracts and confirms that contractor will perform all duties defined in a construction contract.

How Does Contract Surety Bond Work?

A contract surety bond brings three parties together in a legally binding agreement. These three parties are known as principal, obligee and surety. First party is referred as the principle, which is a profession or a business that must purchase a bond. When a principal purchases the bond, they offer a financial guarantee and prove their potential to follow certain rules and regulations. Second, there is obligee which is the party that requires principle to buy the bond. The obligee is typically a local or federal government agency, but can also be an individual or business that contracts to regulate an industry and protects consumers from financial loss. Finally, there is surety which is either the insurance company or surety bond breaker that guarantees the bond on behalf of principal. The surety offers a financial guarantee that principal will fulfill the bonds obligations. If the bonded principle doesn't meet the bond's terms, then the beneficiary can make a claim against the bond to collect repayment for damages. If the claim seems to be valid, the surety will reimburse the beneficiary.

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