What is a bond?

A surety is a guarantee offered to ensure the fulfilment of a contractual or legal obligation. It is a contract whereby a third party, called a surety or guarantor, undertakes to respond for the principal obligation in the event that the obligor fails to meet its commitments. In other words, the surety is a promise to pay in case the debtor is unable to meet his obligations. Bail may be required in various fields, such as commercial, labour or taxation.

For example, in the commercial sphere, a company may require a bond from a supplier to ensure that the supplier meets agreed delivery deadlines. In the labour sphere, an employee may require a bond from an employer to guarantee that his or her salary will be paid in case the company goes bankrupt.

What is a surety bond for?

The main purpose of a surety bond is to guarantee the fulfilment of a contractual or legal obligation. It is a form of protection for the party that grants a credit or contracts a service, since in the event that the debtor does not comply with his obligation, the bond can be executed to cover the damages that have been caused.

Among the main uses of the surety bond are:

1. Guaranteeing the payment of debts: a person can request a surety bond to guarantee the payment of a debt, which offers greater security to the creditor.
2. Guaranteeing the fulfilment of a contract: a company can request a surety bond from a supplier to guarantee that the supplier will meet agreed delivery deadlines.
3. Guaranteeing the fulfilment of labour obligations: an employer may request a bond from an employee to guarantee the fulfilment of labour obligations, such as the payment of rent, in case the employee does not comply with them.
4. Guaranteeing compliance with fiscal obligations: a company may request a bond to guarantee compliance with its fiscal obligations, such as the payment of taxes.

How does the payment of a surety bond work?

The payment of a surety bond is made through a contract in which the surety or guarantor undertakes to pay a certain amount in case the debtor does not fulfil his obligations.

The guarantor becomes liable for the debt or commitment undertaken by the debtor in the event that the debtor fails to meet his obligations. In order to enforce the surety, certain requirements must be met, which may vary depending on the type of obligation being guaranteed. In general, the process for enforcing a bond may be as follows:

• Breach of the obligation: when the obligor fails to fulfil its obligation, the affected party must notify the surety or guarantor of the situation.
• Claiming the debt: the obligee must claim the debt or the performance of the obligation from the surety or guarantor, following the procedure established in the surety agreement.
• Verification of the breach: the surety or guarantor will verify that there has indeed been a breach of the obligation on the part of the obligor, in order to be able to determine whether it must respond with the payment of the bond.
• Payment of the bond: if the surety or guarantor determines that there has indeed been a breach by the obligor, it will proceed to pay the bond, thus covering the debt or the unfulfilled commitment.

It is important to note that the surety or guarantor has the right to reclaim from the obligor the amount paid as surety, if he is entitled to do so under the terms of the surety agreement.

Types of surety bonds

There are several types of surety bonds, depending on the field in which they are used. Some of the most common types of surety bonds are described below:

1. Performance bond: this is the most common and is used to guarantee the performance of a contract. For example, in the case of construction work, the contractor may require a performance bond to guarantee that he will comply with the terms of the contract, such as delivering on time.
2. Surety bond: used to guarantee the quality of a product or service. For example, a service provider may require a surety bond to guarantee that the work performed meets the required quality standards.
3. Judicial bond: this is used in the judicial field and is required to guarantee the payment of an indemnity or fine imposed by a judge or court. For example, in the case of a lawsuit for damages, the defendant may require a bail bond to guarantee payment of compensation if he loses the lawsuit.
4. Lease bond: this is used in real estate and is required to guarantee the payment of rents and damages caused by the tenant to the leased property.