A surety bond is a contract among at least three parties:
The principal – the primary party who will be performing a contractual obligation
The obligee – the party who is the recipient of the obligation
The surety – who ensures that the principal’s obligations will be performed.
Through this agreement, the surety agrees to uphold—for the benefit of the obligee—the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the obligee. The contract is formed so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal and guarantee performance and completion per the terms of the agreement. Contract bonds guarantee a specific contract. Examples include performance, bid, supply, maintenance and subdivision bonds. Commercial bonds guarantee per the terms of the bond form. Examples include license & permit, union bonds, etc.