Conditional vs. Unconditional Payment Bonds in Florida
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A payment bond is a security posted by the general contractor that ensures that payments will be made to subcontractors, sub-subcontractors, and material providers for services or products provided on private and public construction projects. The amount posted to exempt the owner needs to be in at least the amount of the original contract. While payment bonds are most commonly associated with public projects, which are governed by Chapter 255 (“Florida’s Little Miller Act”), Chapter 713 governs payment bonds on private construction projects. In such case, there are two types of bonds that can be obtained to exempt an owner. This blog post will cover general considerations for unconditional and conditional payment bonds.
Unconditional Payment Bonds in Private Construction
With an unconditional payment bond, the owner is exempt from a lien being placed on their property. Instead, the subcontractor, sub-subcontractor, or material provider will assert a claim against the payment bond, regardless of whether payments are made to the general contractor. Just like Florida’s Construction Lien Law, there are particular steps that must be taken to recover against a payment bond for non-payment. First, the owner must record the payment bond along with and at the same time of recording the notice of commencement. Under Section 713.13, the Notice of Commencement must be posted to the job the site.
Before beginning work or within 45 days after beginning to furnish labor, materials, or supplies, a lienor who is not in privity with the contractor shall serve the contractor with notice in writing that the lienor will look to the contractor’s bond for protection on the work. The form of the notice to contractor is contained in Section 713.23. If the bond is not recorded with the notice of commencement, the contractor can record and serve a Notice of Bond to the lienor. Thereafter, the lienor will have 45 days from the date he was served a copy of the bond to provide the notice to contractor. The owner, contractor, or surety shall furnish a true copy of the bond to any lienor demanding it. Any person who fails or refuses to furnish the copy without justifiable cause shall be liable to the lienor demanding the copy for any damages caused by the refusal or failure.
The next requirement to place a claim against the payment bond is to supply both the contractor and the surety with a Notice of Nonpayment within 90 days of the final furnishing of labor, services, or materials. Thereafter, the payment bond claim is perfected. In many cases, the surety will send a document to the lienor requesting that it substantiate its claim. Whether the lienor chooses to reply or not will not affect its perfected bond claim.
A lienor has a direct right of action on the bond against the surety. Any provision in a payment bond issued on or after October 1, 2012, which: (1) further restricts the classes of persons who are protected by the payment bond, (2) restricts the venue of any proceeding relating to such payment bond, (3) limits or expands the effective duration of the payment bond, or (4) which adds conditions precedent to the enforcement of a claim against a payment bond beyond those provided in Section 713.23, Florida Statutes is unenforceable. In order to recover against the bond, the lienor must file suit against the surety within one year of final furnishing of labor, materials, and services.
Conditional Payment Bonds in Private Construction
The second type of payment bond is a conditional payment bond. Under a conditional payment bond, a lienor will place a claim against the payment bond only if payments have been made to the general contractor. Otherwise, non-payment will be recovered by placing a construction lien on the owner’s real property. A conditional payment bond situation can add an extra level of difficulty because the lienor may not always be privy to information about payments between the contractor and the owner. The process is governed by Florida Statutes 713.245 and outlines the steps that lienors should take in order to recover payments for labor, services, or materials.
With a conditional payment bond, the owner is required to attach the bond to the notice of commencement when it is recorded with “Conditional Payment Bond” on the front page title of the bond. It must also have the statement in at least 10 point font at the top of the front page that says:
THIS BOND ONLY COVERS CLAIMS OF SUBCONTRACTORS, SUB-SUBCONTRACTORS, SUPPLIERS, AND LABORERS TO THE EXTENT THE CONTRACTOR HAS BEEN PAID FOR THE LABOR, SERVICES, OR MATERIALS PROVIDED BY SUCH PERSONS. THIS BOND DOES NOT PRECLUDE YOU FROM SERVING A NOTICE TO OWNER OR FILING A CLAIM OF LIEN ON THIS PROJECT.
In regards to the lienor, claims are perfected in the same manner as would be done when filing a construction lien. The notice to owner/contractor should be supplied within 45 days of the first furnishing of labor, services, or material, and the claim of lien/Notice of Non-Payment should be recorded within 90 days of the final furnishing of labor, services, or material. Once the claim of lien is filed, the owner has 90 days to transfer the lien to the bond, after which the lienor has one year to file a claim against the bond to recover payment. If the lien is not transferred, the lienor should move forward with foreclosing on the lien within one year from the filing date of the claim of lien. A careful lienor may want to record a claim of lien and perfect the notice of non-payment given that it may be difficult to ascertain what payments have been made by the owner to the general contractor.
Within 90 days after a claim of lien is recorded, the Owner may record a Certificate of Payment to the Contractor where they provide, under oath, the amount of money that has been paid to the Contractor. The contractor may agree with the amount by recording a Joinder of Certificate of Payment. This may be difficult to obtain, because usually when liens are being recorded, the Owner and Contractor are in the midst of their own construction dispute.