A surety bond is a contractual agreement involving three parties:
The principal is the party that needs the bond, the obligee is the party that requires the bond, and the surety is the party that assures the obligee that the principal will fulfill their obligations.
Surety bonds function like a security deposit. When a party owes legal duties to others, they post a surety bond to guarantee their performance. If the party fails to perform their duty, the obligee is compensated out of the bond. Surety bonds are frequently used to secure fiduciary relationships and in international, large, or complex transactions.
For example, many jurisdictions require guardians to post a surety bond before formally taking responsibility for their wards. Similarly, a company making a large purchase from a foreign supplier might require the supplier to post a surety bond.
[Last updated in June of 2024 by the Wex Definitions Team]