A bond represents a loan made by an investor to a borrower and can be thought of like an IOU (according to Investor.gov). When you purchase a bond, you are lending money to the entity selling it – usually a corporation or the government. Like other loans, the bond will gain interest over time, which is why bonds are considered investments (i.e., stocks and bonds).
Bonds can also be used as a kind of insurance in complex contracts, such as those in the construction industry.
What Is a Surety Bond?
Value Penguin defines a surety bond as “a legally binding contract that ensures obligations are met.” In the construction industry, a contractor might purchase a surety bond to “guarantee” their contract. The surety or issuer of the surety bond (usually an insurance company) will pay the person who purchases a service (called the obligee) if the contractor fails to make good on their promise (or perform the services specified in the contract).
The simplest way to think about a surety bond is as a financially backed promise. Homeowners can also use bonds to discharge mechanic’s and materialmen’s liens. In this situation, a bond says, “I promise to pay the money if I get what I want.”
Confused About Bonds?
Bonds can be complicated, especially when they are used to remove liens. In the context of construction litigation, bonds and liens only come up when someone fails to meet a financial or contractual obligation.
For example, a contractor might file a mechanic’s lien if they have performed work on someone’s home and have not been paid. The homeowner could then purchase a bond to counter the lien. By purchasing a bond, the homeowner is saying, “I am capable of paying you and plan to pay you.” Usually, homeowners purchase bonds when they are withholding payment because they are not satisfied with a contractor’s work.
To make our example clearer, consider a homeowner hiring a contractor to remodel their bathroom for $10,000. The contractor performs the work but uses the wrong kind of tile. The homeowner is unsatisfied and does not pay the $10,000 specified in the contract. Because the contractor has not been paid, they file a mechanic’s lien on the home. The homeowner has every intention to pay once they are satisfied with the work, so they purchase a bond to prove it.
The bond takes the power away from the lien, but the title to the home is still not clean. Eventually, the lien might be “bonded off.”
Bonds and liens are a complicated way of resolving disputes within the construction industry. If there is a dispute over financial and contractual obligations, there are simpler ways to solve it – perhaps via negotiation and settlement or litigation.
If you are confused about bonds or looking for a way to resolve a financial or contractual disagreement, Reed Leeper, P.C. can help. We have insight and experience across a wide range of legal fields, so we can explore all solutions and help you choose the right one.
Our attorneys have over 150 years of combined experience, and we are ready to use it to serve you. We offer free initial case evaluations to help you get started and you can always expect big city experience with small town prices.
