What Is a Supply Bond?
A supply bond is a legal contract between a supplier and a purchaser that guarantees that the supplier will deliver an agreed upon amount and type of material to the purchaser. If the supplier does not deliver what is agreed upon, the bond reimburses the purchaser.
How Does a Supply Bond Work?
A supply bond, being a type of surety bond, shares similar characteristics with its parent bond in that it is a legally binding contract between three parties, parties being the Principal, the Obligee and the Surety that ensures that the principal will fulfill agreed-upon obligations. In the case of a supply bond, the conditions are that the principal will supply a quantity of agreed upon materials to the Obligee within a certain period of time and in certain conditions. If the principal fails to fulfill his obligation, a claim is made by the obligee and the Surety pays damages equivalent to the size of the bond. The principal must then settle the amount paid by the Surety. In the case of supply bonds the supplier is the principal, the purchaser is the obligee and the surety is a third party that finances the bond.
Supply bonds do not include installation or labor, they exclusively cover the supply of materials.