A surety bond subordination agreement is a legal document that outlines the rights and obligations of parties involved in a surety bond. Specifically, it establishes the priority of claims between the surety and other creditors in cases where the principal (the person or entity that obtained the surety bond) defaults on its obligations.
In simple terms, a surety bond is a contract between three parties: the principal, the obligee (the party requiring the bond), and the surety (the party providing the bond). The purpose of a surety bond is to ensure that the principal fulfills its obligations to the obligee. If the principal defaults, the surety is responsible for compensating the obligee for any losses incurred.
A surety bond subordination agreement comes into play when the principal has other creditors, such as lenders or suppliers, who also have a claim against the principal`s assets. In such cases, the subordination agreement establishes the order in which these creditors will be paid in the event of a default.
For example, let`s say a construction company obtains a surety bond to guarantee its work on a project. The company also has a loan from a bank to finance its operations. If the company defaults, the surety and the bank would both have a claim against the company`s assets. The surety bond subordination agreement would determine which party would have priority in receiving payment from the company`s assets.
Typically, the surety will require a subordination agreement as a condition for issuing a surety bond. This is because the surety wants to ensure that it will be able to recoup its losses in the event of a default. By establishing its priority in the agreement, the surety can minimize the risk of losing out to other creditors.
In summary, a surety bond subordination agreement is a key component of any surety bond. It establishes the priority of claims in cases where the principal defaults and helps to protect the surety`s interests. If you are involved in obtaining a surety bond, it`s important to understand the terms of the subordination agreement and how they could affect your business in the event of a default.