Performance bonds serve as a crucial financial guarantee within contractual agreements, ensuring one party is protected if the other party fails to fulfill its obligations. This type of bond provides a layer of security, assuring that the terms of the contract will be met as agreed upon. In the event of non-performance or default, the performance bond compensates the affected party, mitigating potential financial losses and maintaining trust in the contractual relationship. By utilizing performance bonds, businesses and individuals can engage in contracts with greater confidence, knowing they have a safeguard against potential breaches.