History

Generally, a surety bond is a contract comprising three parties namely the obligee, who is the recipient of an obligation, the principal who will be performing the contractual obligation, and the surety who assures the obligee that the principal can perform the task.  The first legal documentation of suretyship traces back to the Code of Hammurabi which was written around 1790 BC.

Initially, surety bonds were mostly in the nature of individual surety bonds.  Apart from the Code of Hammurabi, evidence of individual surety bonds are seen in the codes of  Babylon, Persia, Assyria, Rome, Carthage, the ancient Hebrews and later England.  “A Babylonian contract of financial guarantee from 670 BC is the oldest surviving written surety contract.”  The modern principles of suretyship relate back to Roman jurisprudence, which developed laws of surety around 150 AD.

However, corporate suretyship bonds were used only in the 19th century.  The high failure rate among the private firms in performing public construction projects has put enormous burden on tax payers.  The projects awarded to private contractors were left unfinished due to contractors’ insolvency and the taxpayers were forced to cover the additional costs arising from the contractor’s default.  In order to fix this problem, the Congress passed the Heard Act in 1894 to authorize the use of corporate surety bonds to secure all federally funded projects.  Subsequently, the Miller Act was passed in 1935, which is the current federal law mandating surety bond on federal public works.  The Miller Act requires “performance bonds for public work contracts in excess of $100,000 and payment protection, with payment bonds the preferred method, for contracts in excess of $25,000.”  Almost all 50 states and most local jurisdictions have enacted similar legislation requiring surety bonds on public works, which are often referred to as “Little Miller Acts.”


Inside History