Can the Language of a Payment Bond Limit its Duration?
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A payment bond provided by the general contractor is a valuable asset to any subcontractor or supplier on that project. Payment is assured by the bond—a subcontractor or supplier will get paid even if the general contractor doesn’t make payment. While there are certain hurdles to perfecting your bond rights that get a lot of attention, such as the Notice to Owner Requirement, there is one possibly critical question that has been largely ignored: What is the effective duration of the payment bond? In other words, does the work have to be provided during a certain time period in order for payment to be covered by the bond?
This question becomes critical when a construction project gets extended or delayed, and the subcontractor or supplier seeks payment for work provided after the original duration of the project. If the payment bond contained language that limited the term of the bond to only a certain period of time, or only to the original duration of the project, will the bond cover work provided after the end of that limited time period? The answer is: most likely yes. This blog examines why a payment bond should provide coverage for work performed at any time during the prime contract schedule, even if the schedule is extended, and even if the bond contains a time limitation provision.
Payment bonds are governed by Florida Statute. A payment bond on a Public project is governed by Section 255.05; a payment bond on a Private project is governed by Section 713.23. Both Statutes contain a similar provision that prevents sureties from limiting the effective duration of a payment bond: “Any provision in a payment bond…which limits or expands the effective duration of the payment bond…is unenforceable.” Fla. Stat. §§ 255.05(1)(e) and 713.23(1)(f).
The proper interpretation of this provision, read in context with the entire Statute section, is that the effective duration of a payment bond is equal to the full duration of the prime contract schedule. If the original duration stated in the prime contract (the contract between the owner and general contractor, which is incorporated into the bond) is extended by change order, the effective duration of the payment bond is likewise extended. A surety cannot stop this from happening by including a time limitation provision in the language of the bond. The payment bond is going to cover work performed during the extended period of the prime contract schedule, and after any time limitation stated in the bond.
At least one recent case has followed this rule and held that a payment bond must pay for work performed after the time limitation stated in the bond. Maschmeyer Concrete Co. of Florida v. Am. S. Ins. Co., 615CV912ORL37KRS, 2016 WL 3746379 (M.D. Fla. July 12, 2016). In Maschmeyer, the general contractor entered into a contract for a public works project on December 1, 2011. The contract had an initial duration of only 12 months, but could be extended to a total of 60 months on agreement by the parties. The Court found that this “continuous term” provision contemplated a 60-month project term.
Maschmeyer, a supplier, provided materials to the general contractor during the years 2014 and 2015, which the general contractor refused to pay for. When Maschmeyer asserted a claim under the payment bond, the surety refused to pay, claiming that the materials were supplied after the effective duration stated in the bond. The surety relied on a provision in the bond: “Provided, however, the term of this bond shall be for a period of one year dated 12/01/12 – 11/30/13 regardless of contract language to the contrary.” The language of the bond tried to limit coverage to work provided on the project only during the one-year period ending on November 30, 2013. Since Maschmeyer was seeking payment for materials supplied after November 30, 2013, the surety felt it did not have to pay. Id.
The Court disagreed. The bonded prime contract had a continuous 60-month term, resulting in a project duration through December 1, 2016. As the bond provision stated that its coverage only extended to November 30, 2013, the Court held that the provision was unenforceable pursuant to Section 255.05(1)(e), Florida Statutes, because it attempted to limit the effective duration of bond coverage to a duration less than the bonded-contract duration term.
In conclusion, subcontractors and suppliers can take comfort in knowing that the payment bond will assure payment for work performed throughout the term of the prime contract, regardless of the language of the bond. At least under Maschmeyer’s interpretation of Section 255.05, a bond provision limiting coverage to a time period less than the full duration of the prime contract is unenforceable, even if the original duration is extended. Maschmeyer should be likewise applicable to private projects with a Section 712.23 payment bond because it contains the same provision contained in Section 255.05.
There remains an unanswered question, though, which subcontractors and suppliers need to be aware of. What about work provided after the prime contract term completion date, when the general contractor delayed the schedule and is trying to complete the project after the required completion date? In that situation, the parties do not agree to extend the project duration term. The work is being performed outside of the term of the bonded contract. Is a subcontractor or supplier covered by the payment bond for work it supplies after the required completion date when the project is delayed? It appears that this question has not been answered by Florida courts, and the outcome is not clear under a reading of the Statute. Therefore, subcontractors and suppliers should be wary of this risk when providing work on a delayed project.