Contract Glossary
Surety
Definition
A party that guarantees the performance or obligations of another party. If the principal (the party with the obligation) fails to deliver, the surety steps in to fulfill the obligation or compensate the aggrieved party. It's a three-way relationship: the principal (who owes the duty), the obligee (who is owed the duty), and the surety (who guarantees the duty will be met).
In Practice
A small construction company wins a government contract to build a school. The government requires a surety bond, a guarantee from a bonding company that the project will be completed as specified. If the contractor goes bankrupt mid-project, the surety (bonding company) either hires a replacement contractor to finish the work or pays the government the bond amount. The contractor pays a premium (typically 1-3% of the contract value) for this guarantee.
Example Clause
The Contractor shall, within [10] days of contract execution, furnish a performance bond in the amount of one hundred percent (100%) of the Contract Price, issued by a surety authorized to do business in [State] and acceptable to the Owner. The surety bond shall guarantee the faithful performance of the Contractor's obligations under this Agreement.
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