What typically happens when a principal fails to perform as stipulated in the contract?

When a principal fails to perform their obligations as outlined in a contract, the surety bond comes into play as a safeguard for the obligee (the party requiring the bond). The primary function of a surety bond is to provide financial protection to the obligee. In this situation, the surety will pay any valid claims resulting from the principal's failure to complete the contract or perform as agreed. Following the payment of those claims, the surety will then seek reimbursement from the principal to recover the costs incurred.

This mechanism is essential because it ensures that the obligee is protected against potential losses caused by the principal's non-compliance, while also holding the principal accountable for their contractual obligations through the surety's actions. Additionally, the surety's obligation to pay claims is a critical aspect of maintaining trust and financial stability in contractual agreements.

The other choices do not accurately reflect what typically happens in these situations. Automatically voiding a contract without penalties, imposing fines by local authorities, or completing the project at the contractor's expense do not align with the standard procedures followed when a surety bond is invoked.