Performance Bond Law and Legal Definition

A bond is an obligation, expressed in writing, to pay a fixed and liquidated sum on the happening or nonoccurence of a specified condition or event. The term "bond" is conditioned on the performance of duties, or other obligations undertaken by the principal obligor in the bond or collateral things to be done by the principal obligor; and indemnity and fidelity bonds or undertakings to indemnify the obligee against loss from conduct of the principal.

A performance bond guarantees the owner that the principal will complete the contract according to its terms including price and time. The owner is the obligee of a performance bond, and may sue the principal and the surety on the bond. If the principal defaults, or is terminated for default by the owner, the owner may call upon the surety to complete the contract. Many performance bonds give the surety three choices: completing the contract itself through a completion contractor; selecting a new contractor to contract directly with the owner; or allowing the owner to complete the work with the surety paying the costs.