Insurance bond is a type of guarantee involving three parties namely, the principal debtor or contractor, the creditor or beneficiary and the surety or guarantor, whereby the surety or guarantor undertakes to answer the debt, default or miscarriage on the part of the principal or debtor.

With the bond in place, one party, the surety, binds itself with the party that has an obligation to fulfil under a contract to the party that will benefit by the fulfilment of the obligation under the contract.  Accordingly, the obligation is no longer that of the party that has agreed to fulfil the performance of the agreement alone.  The surety has also bound itself.

Parties to a suret bondWe have now recognised that there are three parties to a Surety Bond.  The parties are normally identified as below:

lThe principal:  This is the party responsible for the fulfillment of the obligation set forth in the bond. The party that obliges the execution of the contract.  This party may otherwise be referred to as the Obligor.

lThe obligee:  This is the party that benefits from the performance of the contract. The beneficiary under the terms of the bond. The Obligee is the employer.

The surety:  This is the party that joins itself with the Principal for the purpose of guaranteeing to the Obligee that the obligation set forth in the bond will be fulfilled by the Principal.

Types of surety bonds

Various types of bonds exist. But those that are of concern to us are those that have to do essentially with Project Procurement. In practice, we come across contract bonds, freight bonds, custom bonds, excise bonds, licence and permit bonds, court bonds. We shall focus essentially on contract bonds and perhaps some supply bonds as listed below:

1.  Bid or Tender Bond

2.  Advance Payment Bond

3.  Performance Bond

4.  Retention or Maintenance Bond.

5.  Supply Bond

6.  Custom (and Excise) Bond.

We shall examine in more detail the various types of surety bonds as listed above in the next take of this column. Keep the date!