Getting a surety bond has become an integral part of any business transaction and negotiation. In today’s world where contracts are frequently breached, and fraudulent transactions have become quite commonplace, entering into a surety bond agreement greatly helps companies and individuals manage financial risk and eliminate any possibility of unnecessary frustration.
When entering into a bond agreement, it is important to remember that there are three different parties that will be involved in this: the obligee, the principal, and the surety. Here is an overview of the roles and responsibilities of each of these functions to give you a further understanding of how a bond works.
By definition, the obligee is the party in the surety bond agreement that is considered to be the recipient of the obligation. The obligee refers to the individual or the company that initiated the contract or the project which is expecting that the terms and conditions of the signed contract to be met. Usually, it is the obligee that writes up the original contract signed and quite often, it is the obligee that is the one who takes out the surety bond to incorporate into the contract.
The principal in the surety bond is the individual or company that will be fulfilling the terms and conditions of the contract. The head is expected to uphold the terms and conditions stipulated in the contract which has been signed with the obligee since one of the primary purposes of the surety bond is to ensure the credibility of the principal and ensure that all the terms and conditions stipulated in the signed contract would be met. While the obligee may be the one who takes out the surety bond, it is the responsibility of the principal to pay the premiums to keep the surety bond in force.
The last party involved in the surety bond is the bond. In the original contract, the surety is not included. However, in the surety bond agreement, the surety is the most famous party since it is the surety that serves as the guarantee to the obligee that the principal would be able to meet the terms and conditions of the contract signed and agreed upon. The surety may be an individual or another company.
The bond serves as a buffer to cover any financial loss that has been brought about by the inability of the principal to meet the stipulated terms and conditions of the agreed contract whether this is the failure to pay off a debt for a mortgage taken out or damages and financial loss incurred by a company due to the inability of the principal to complete the agreed project.