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What is a Surety?
Providing guarantee of debt repayment by another party, is called standing in as Surety. An individual or an organization can offer Surety for another individual or organization that's borrowing the money, and is liable on record to step in and fulfill the obligation of debt repayment if the original borrower fails to pay the money back. The guaranteeing party is called the Guarantor or Surety.
Surety is an additional safeguard against loan defaulters. It improves lender confidence as there's a backup person or entity who will take on the task of repaying the borrowed money if the original borrower is indisposed. It reduces the lending risk with the inclusion of the Surety in the loan contract. It also benefits the borrower by facilitating cheaper interest rates.
Back To: COMMERCIAL LAW: CONTRACTS, PAYMENTS, SECURITY INTERESTS, & BANKRUPTCY
What is a Surety Bond?
Surety can be guaranteed by way of Surety Bonds. Its a legal contract with three main parties - the borrower, the lender, and the guarantor, also known as the principal, obligee, and the Surety respectively.
The Surety's guarantee is a legal bond to secure the loan for the principal from the obligee, who may or may not be a government entity. Surety is on the record stating that the principal will repay the borrowed sum to the obligee.
The principals obligations could range from repaying loans to providing specific business services. If the principal fails to fulfill its obligations, obligee can sue them for failure to fulfill a legally entered contract and obtain damages.
The Surety is liable to provide the necessary assistance in repairing damages, and repaying the losses incurred, along with the principal. The principal will eventually also have to repay the Surety for the guarantee damages they paid for.
Surety is a guarantee of payment as opposed to an insurance which kicks in under different circumstances. Principal is the sole party required to repay the borrowed amount or fulfill other legal obligations of the bond, even the obligations that were fulfilled by Surety, need to be repaid with interest. It is an individual or private firm guarantee, not a bank guarantee for liabilities.
Related Topics
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What is the role of a Guarantor or Surety of a negotiable instrument?
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Surety
- Cosign
- Accommodation Paper Definition
- Secondary Liability
- Avalize Definition
Academic Research on Surety Bond
- Predicting contract surety bond claims using contractor financial data, Severson, G. D., Russell, J. S., & Jaselskis, E. J. (1994).Journal of Construction Engineering and Management, 120(2), 405-420. This paper presents the results of a study of 87 contractor financial statements to predict contractor Surety bond claims patterns.
- Mining and the vanishing surety bond market, Kirschner, L. A., & Grandy, E. B. (2003). Natural Resources & Environment, 17(3), 152-189. This paper takes a look at the Surety Bond market and its decline in the Mining, and Oil and Gas industries.
- The Importance of Surety Bond Verification, Gallagher, E. G., & McCallum, M. H. (2009). Pub. Cont. LJ, 39, 269. This paper sheds light on the importance of verifying Surety Bonds. Suretyship Agreements and the Enron Surety Bond Litigation, Antaramian, R. (2004). Fla. St. U. Bus. Rev., 4, 203. This paper explores the Surety Bond agreements and the litigation surrounding the Enron Deals.
- Systematic Evolution and Some Practical Routes of Project Surety Bond High Quota Pattern [J], Jinfeng, S. U. N. (2008). Construction Economy, 10, 004. This is a new thesis on Project Surety Bond that breaks down complex bond mechanisms and their evolution.
- Surety Bonds: A Basic User's Guide for Payment Bond Claimants and Obligees, Toomey, D. E., & McNulty, T. (2002). Constr. Law., 22, 5. This paper presents a user guide to understand Surety Bonds and the various aspects associated with executing one.
- Surety Bad Faith: Tort Recovery for Breach of a Construction Performance Bond, Frakes, A. J. (2002). U. Ill. L. Rev., 497. This paper sheds light on Tort recovery of performance bond breaches.
- Ethical Considerations to Multiple Representation in Construction and Surety Bond Litigation, Dyer, R. O. (1997). Constr. Law., 17, 14. This paper studies the litigation practices around Surety Bonds in the construction industry and their ethical considerations.
- Handling Surety Performance Bond and Payment Bond Claims, REYNOLDS Jr, J. R. (2012). Margolis Edelstein. Camp Hill: s/d, 14. This paper sheds light on the procedures of handling Surety Bond claims.
- The Nurture of Surety Bond Company for Project in China [J], TANG, L., & SHEN, J. (2005). Construction Management Modernization, 5, 020. This paper looks at the set up and execution structure of Surety Bonds Company for a Chinese Project.
- Surety-Effect of Premature Payments on Surety Bond, Kramer, M. H. (1952). Miami LQ, 7, 590. This paper examines the legal rulings around premature payments of Surety Bonds and its adverse impact on Surety.