Principal and Surety

Principal and Surety

A contractual relationship whereby one party—the surety—agrees to pay the principal's debt or perform his or her obligation in case of the principal's default.

The principal is the debtor—the person who is obligated to a creditor. The surety is the accommodation party—a third person who becomes responsible for the payment of the obligation if the principal is unable to pay or perform. The principal remains primarily liable, whereas the surety is secondarily liable. The creditor—the person to whom the obligation is owed—can enforce payment or performance by the principal or by the surety if the principal defaults. The creditor must always first seek payment from the principal before approaching the surety. If the surety must fulfill the obligation, then he can seek recovery from the principal after satisfying the creditor. An example of a principal and surety relationship occurs when a minor purchases a car on credit and has a parent act as a surety to guarantee payment of the car loan.

A suretyship arises from an agreement. The parties must be competent; there must be an offer and acceptance; and valid consideration is necessary. The parties must openly assent to the contract so that all the parties are known to each other. The surety must be identified as such so that the creditor will not hold that person primarily liable. If the face of the contract indicates a suretyship, the creditor receives sufficient notice of the three-party arrangement.

No special form of contract is needed to create a principal and surety relationship. The agreement can be consummated by written correspondence or be in the form of a bond. No particular language is needed to identify the relationship, since courts will examine the substance and not the form of the contract to determine whether a suretyship exists. Courts will rarely imply a suretyship agreement, except when an involuntary suretyship arises out of an implied oral agreement. When joint debtors obtain a loan, each is a principal for a proportionate share of the debt and a surety for the remaining amount. In practice, however, each joint debtor is a principal and is primarily liable for the entire loan if the creditor seeks repayment. A joint debtor who pays the entire debt can, however, seek contribution from the other debtors.

The surety's liability is indicated by the terms of the contract. Unless otherwise provided, a surety assumes the obligation of the principal. A surety, however, can limit his liability to a certain amount since the obligations of the principal and surety do not have to be coextensive. When a surety agrees to be accountable for a certain amount, she cannot be held responsible for a sum greater than that for which she contracted. The surety becomes liable when the principal breaches a contract with the creditor. In the absence of a contractual limitation, a surety's liability is measured by the loss or damage resulting from the default by the principal. The liability of the surety terminates when the principal's obligation is fulfilled.

References in periodicals archive ?
The bond form provided: "Both Principal and Surety desire to guarantee to the Obligee, performance of the agreement [between developer and the county]." (2) The developer abandoned the project.
The Massachusetts federal district court granted summary judgment to the principal and surety. The performance bond provided that the surety's obligations arose only if there was "no owner default." The court found that the owner was in default by failing to abide by the construction contract's requirement to provide the surety and the principal with a seven-day written notice before terminating employment of the contractor prior to finishing the work by other reasonable methods.
If the obligee releases the principal without more, (a) both the principal and surety are discharged from duties to the obligee, and (b) the principal is discharged from all duties to the surety.
Obligee Does Not Have Right to Discharge Obligations Between Principal and Surety
The bond merely stands in the place of the real property as security for the lien claimant and does not hinder the principal and surety on the bond from raising any defense that would have been available as a defense to the lien foreclosure.
The court went on to state that "the principal and surety are not required to be placed in the position of detectives and the statute does not require a surety to piece together various correspondence to get the information required."
At the time of the declaration of default, there were approximately $700,000 in payment bond claims made against the principal and surety from various unpaid suppliers and subcontractors.
The obligation of a surety under a payment bond corresponds to that of its principal, the court stated, and the substantial correspondence of the obligation for principal and surety extends to the obligations to pay interest.
IND-COM Electrical Co.,(15) Aetna filed a declaratory judgment action to determine the rights and liabilities of the principal and surety. While this case involved a public construction project, it is equally applicable to a private construction project.
"If the principal and surety extend rights above and beyond those contained in the statutes, the bond is characterized as a common-law bond and is enforceable as written."
On the failure of the surety to take any action, the obligee sued the principal and surety. Since there was an arbitration clause in the contract, the obligee first submitted the claim to arbitration and obtained an award.
The defendant bank and its officer provided the certificate, and a subcontractor who was unable to recover because of the insolvency of principal and surety sued them, alleging negligence, negligent misrepresentation and fraud in connection with the issuance of the certificate because they failed to ascertain the true financial condition of the sureties.