Sometimes an individual agrees to undertake a project for the government or a private individual in his capacity as a contractor, such as constructing a school, a hospital, a street or any similar project. The contractee (obligee) may request for a surety bond for a particular amount from the contractor (principal) in order to be confident that the contractor will complete the task according to agreement. In the event that the contractor fails to complete the project or fails to complete it according to the terms of the agreement, the contractee may recover any potential losses owing to the breach of contract through the surety bond, and acquire the specified amount.
In such a case, a contractor applies for a surety bond for an amount specified by the contractee, and in return the bank issues the surety bond after acquiring the necessary guarantees. The bank also charges a fee for issuing the surety bond that is proportional to the amount that it guarantees on behalf of the contractor.
2855. A security agreement (surety bond) is realized through any means that signifies it, be it verbal, such as an offer and an acceptance, or non-verbal. It will also make no difference if the issuing bank guarantees the contractee that the contractor will pay the secured amount (payment bond), or guarantees that the contractor will act according to the terms and conditions of the agreement (performance bond), and in the event that he fails to do so, he will pay the secured amount.
2856. It is mandatory upon the contractor to fulfill the stipulated condition of paying the amount of the bond in the event of a breach of contract, given that the condition is stipulated within the contract. In the event that he fails to pay the bond amount, the employer may refer to the issuing bank. Since the surety bond was issued at the behest of the contractor, he guarantees the bank to pay the amount. The contractor must pay whatever the bank pays, and the bank reserves the right to demand the payment from him and acquire it from him.
2857. The specified fee or premium that the banks demands from the contractor in return for issuing a surety bond is legal, and the transaction of the bank with the contractor can be legalized through many ways. One of these ways is that it takes the form of a hiring contract, wherein the contractor hires the issuing bank for a specific wage to perform the aforementioned task. It can also take the form of a ju‘¡lah, wherein the contractor pays the wages as a ju‘l in return for the aforementioned task.