suretyship

Suretyship is a contractual arrangement in which a third party, the surety, guarantees the performance or payment of an obligation by another party, the principal, to a third party, the obligee. The surety's obligation is secondary: it arises only if the principal fails to perform or pay under the underlying obligation. In a typical three-party bond, the obligee may demand performance from the principal; if the principal defaults, the surety pays or provides performance up to the bond amount. After honoring a claim, the surety may pursue reimbursement from the principal and exercise subrogation rights to recover the payment.

Parties and forms: The principal is bound to perform or pay; the obligee is the party entitled to the performance or payment; the surety is usually an insurer or financial institution backing the obligation. Common forms include performance bonds (guaranteeing completion of a project), payment bonds (guaranteeing payment to subcontractors and suppliers), and bid bonds (guaranteeing that a winning bidder will enter into the contract). Some bonds are conditional or on-demand, depending on the terms and jurisdiction.

Legal framework and features: Suretyship rests on a written contract and consideration. The surety's liability is contingent on the principal's default, and the obligee generally must show breach before the surety is required to pay, though certain on-demand forms provide immediate payment. After payment, the surety may seek reimbursement from the principal. The surety's rights include subrogation to recover the amount from the principal; changes to the underlying contract by the obligee or release of the principal can affect the surety's liability.

Relation to insurance: Suretyship is distinct from insurance in that the bond guarantees a specific obligation rather than a broad risk pool. It is widely used in construction, licensing, government procurement, and other regulated or high-stakes contexts.