Bonds transfer performance and payment risk to a surety, and are required on public projects where liens are unavailable.
Performance bond. Guarantees completion. On default, the surety’s options typically include financing the contractor, tendering a replacement, taking over the work, or paying the obligee. The bond form determines which, and whether the surety may insist on being permitted to complete.
Payment bond. Guarantees payment to subcontractors and suppliers. On public projects this is the substitute for lien rights.
Claim procedure. Notice within statutory or bond-specified periods — frequently ninety days from last furnishing for claimants without a direct contract with the principal — and suit within a further period, often one year. These are strictly enforced.
Who may claim. Generally first and second tier subcontractors and suppliers; more remote tiers are often excluded, which is a diligence point for suppliers.
Declaring default. A performance bond claim usually requires the obligee to declare the contractor in default and terminate, following the contract’s procedures. Failing to follow them can discharge the surety.
The surety’s defences. Those of its principal, plus defences arising from material alteration of the contract, overpayment, and failure to give required notice.
Indemnity. Sureties obtain broad indemnity from the contractor and its owners, which is why bond claims become personal for principals.