What is a Legal Bond?

Getting a Legal Bond

performance bond application

A Legal Bond is another name for a surety bond. The designation of legal bond means that this is not a financial bond (which is a type of debt). Unlike a financial bond, a legal bond is really more of a guarantee. The guarantee in this situation is a legal bond whereby a three party contract is created. In this tri-party agreement, one party (the surety) provides a guarantee that another party (the Obligor) will perform. If the Obligor does not perform, then the surety has to provide damages to the Obligee. If that occurs, then the surety will try and recover those damages from the Obligor.

Many times, these bonds are performance or payment bonds. A performance bond is a bond where the Obligor goes out and enters into a contract with a party (usually the Obligee). Let’s assume that this contract is to build a house. The performance bond will state that the house will be built in one year for $250,000. If the house isn’t built timely, or if the house is built defectively, then the Obligee (the house owner) can have the surety find another contractor to finish the job or the surety will have to pay the homeowner damages. The payment bond makes sure that the contractor pays for all materials as well as pays any subcontractors, like the plumbing and electrician teams.