- A breach of the terms of a surety agreement. A bond violation occurs when a surety bond, which protects one party against a financial loss caused by the other party's failure to perform, fails to meet the conditions of the agreement. For example, the owner of a shopping center who hires a contractor to perform a seismic retrofit of the building might require the contractor to purchase a surety bond. If the contractor's work fails to bring the building into compliance with current earthquake construction codes as stipulated in the surety bond, the contractor has failed to perform and thus committed a bond violation.
In the event of the bond violation in this example, the surety company would pay the shopping center owner for this loss and the surety company would then collect that sum from the contractor. The surety bond guarantees that the shopping center owner gets his or her money even if the contractor can't pay. The surety arrangement reduces the shopping center owner's risk and makes him or her more willing to hire the contractor.
Investment dictionary. Academic. 2012.
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