A surety bond is a bond, which is created to protect the obligee against breach of the contract by the principal. This surety bond involves three parties; they are the principal, the obligee and the surety. In this surety bond, the surety gives guarantee to the obligee that the principal will perform his obligation as per contract. The surety bond involves many types. Performance of the contract determines the rights and obligation of the surety and the obligee. Mostly the contractor use contract bond and commercial bond.
With the help of the performance and payment bond the obligee can be ensured, that the principal will perform his obligation as per the terms and condition of the contract. In failure of the principal the surety has to finish the contract. The obligee has every right to sue the principal and the surety in failure of the contractor.
Prequalification of surety bond
The surety company issues surety bond to the contractor based on his performance of the job. When the principal complies with adequate capability to complete the job within the time specified and at the contract price, then this surety bond is issued to him. The Surety Company and the creator review the principal entire business operation. He should compose of adequate financial resources, well experienced and good skills to carry on the business. This process has been followed to reject the unqualified contractor from the bond.
Borrowing Capacity of surety bonds
To the some contractor, performance and payment bonds are issued even in an unsecured basis. This facility is provided based on the financial strength, experience and personal indemnity Fingerprinting of the construction company. This bond issuance as no terms regarding the contractors financial position in the bank. But sometimes the contractors credit position is also revealed. When payment bond is issued to the subcontractors, they are protected by supplying proper labor to the contractor.
Claim surety bond
In the surety, bond both the principal and the obligee as certain obligation to perform the contract. The obligee has every right to sue the principal and the surety for breach of the contract. When the owner does not satisfy with the performance of the contractor, then he/she can ask the surety to perform the contract as per terms.
The surety has several choices;
- He may perform the contract with his own contractor.
- He may appoint a new contractor for construction of the contract.
- He can assist the owner by issuing the entire contract amount needed to complete the contract.