In a typical surety relationship there are four parties that arise when a bond is executed: the principal, indemnitor, obligee, and surety. The principal is the party that obtains the bond, and the bond will secure the principal’s performance of specific duties on a project. Typically a bond will be obtained by a contractor, and the bond will secure the contractor’s obligation to enter into a contract based on the contractor’s bid. Often the principal will be the surety’s indemnitor and may be liable to the surety for damages or payments made by the surety to the obligee. The principal may be found to be the surety’s indemnitor even in the absence of an express consent, as held in Carrols Equities Corp. v. Villnave (1997), in which the court upheld an indemnity judgment against a principal and in favor of the surety despite the fact that the principal did not sign the bond and no consent was found.
The indemnitor is responsible for obligations owed by the principal to the surety in case of the principal’s default under a secured contract. There are often other indemnitors, in addition to the principal, such as when a surety requires personal guaranties of a corporation’s officer’s and their family members. The obligee is the beneficiary of the bond and the party to which the principal has promised the specified performance. Typically an owner of a construction project will be the obligee, whether the project is state owned or privately owned. Contractors are often obligees of performance and payment bonds obtained by subcontractors, just as subcontractors are often third-party beneficiaries of their contractor’s payment bonds. Also, there may be multiple obligees to one bond.
The surety secures the principal’s obligation to perform the contract or pay its subcontractors. The surety is usually the bonding or insurance company that issued the bond. Liability placed on the surety is derived from the principal’s obligation to the obligee to perform the specified duties or pay the specified parties, as held in U.S. v. Seaboard Sur. Co. (1987). Compensated sureties are paid for their agreement to secure the principal’s performance, while uncompensated sureties are not. In Aetna Cas. and Sur. Co. v. County of Nassau (1996), the Second Department held that Nassau County had the right to bar a surety from issuing bonds on publicly bid contracts while it was allegedly in default.