- September 26, 2022
- Posted By:hmvreeland
- Category:Surety Bonds
Learn the important differences between a Surety and a guarantee to make sure you’re informed. This way you can have peace of mind that you’re making the correct decision for which is most applicable to your needs.
What is a Surety?
A Surety is an assurance of one party’s debt to another. In a Suretyship agreement, the Surety assumes the responsibility of paying the debt in case the debtor defaults or is unable to pay the debt. In a construction contract, the Surety assumes the responsibility of protecting the project owner from losses that result from the Principal’s default.
There are three parties to a Surety agreement – the Principal, the Obligee, and the Surety.
What is a Guarantee?
A guarantee is a legal promise or commitment by a third party, known as the Guarantor to repay the debt to the lender in case the Borrower defaults. A Guarantor may also promise to pay off any other types of liabilities that result from the Borrower’s actions.
An independent guarantee is based on primary liability. It is not dependent or affected by an underlying obligation by the Principal debtor to the creditor. Depending on the nature of the contract, the guarantor may be required to pledge assets as collateral. There are three parties in a guarantee agreement: the Principal debtor, the guarantor and the creditor.
Surety vs Guarantee
Though the terms guarantee and Surety may seem similar, there are several differences between a Surety and a guarantee. A Surety is dependent and connected to the Principal agreement between the parties to the contract and there is financial backing by an insurance company. On the other hand, a guarantee is an independent agreement.
A Suretyship contract should be in writing. A guarantee can be oral or written, but we highly recommend that the parties complete a contract of guarantee put everything in writing. Also, for a guarantee to be enforceable, the guarantor or any other party representing them must sign the contract.
A Surety is dependent on the Principal debt. A guarantee is independent of other agreements. In case a debtor defaults, the creditor cannot compel the guarantor to pay unless they have exhausted all their options. Such protection is not available to a Surety. If a Principal/debtor defaults or fails to fulfill their contractual obligations, the Obligee can file a claim, directly asking the Surety to pay.
H.M. Vreeland is a trusted Surety company serving Los Angeles and California. We help businesses and individuals choose the right type of Surety bond in Los Angeles to suit their needs and obtain it. To talk to one of our experts, call (415) 566-3401.