The word bond refers to anything that binds, fastens, or restrains. Typically, it refers to binding agreement or covenant — a promise. Sometimes, it is enough to say that "My word is my bond." But often this kind of promise is cemented using a monetary or non-monetary "bond", as with those negotiated by bailbondsmen. Similarly, we see the institution of the surety bond.
Many individual contractors are "bonded" in the sense that the quantity and quality of the work they do is guaranteed by a surety bond. In the words of the U.S. Small Business Administration, (http://www.sba.gov/financing/bonds/osgprogram.html) "A surety bond is a three-party instrument between a surety, the contractor and the project owner. The agreement binds the contractor to comply with the terms and conditions of a contract. If the contractor is unable to successfully perform the contract, the surety assumes the contractor's responsibilities and ensures that the project is completed."
Thus if the surety asserts a defense based on representations by the indemnitors or the principals, and the defense ultimately is found to have been frivolous, the indemnitors would be required to reimburse the surety for any damages or sanctions sustained by the surety.
When the surety is advised of a claim or possible claim, the surety may establish a “reserve”-which is an account or fund with a sum sufficient to pay the estimated extent of the possible claim.
A surety has the right to defend itself by asserting all the defenses of its principal (e.g., the principal was actually not in default; was prevented from performing by defective specifications; or was not given contractually required cure notices, etc.), as well as asserting any defenses the surety may have under its performance bond.
A suretybond is a guarantee, in which the surety guarantees that the contractor, called the “principal” in the bond, will perform the “obligation” stated in the bond.
Bonds frequently state, as a “condition,” that if the principal fully performs the stated obligation, then the bond is void; otherwise the bond remains in full force and effect.
The owner is the obligee of a performance bond, and may sue the principal and the surety on the bond.
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