Conditional Payment Bonds: Owners and Contractors Beware

Whether you are an owner, contractor, subcontractor, or supplier, payment problems on a construction project can have dire consequences.  To better protect against those payment problems, and depending on the type of construction project, Florida law gives certain persons the right to look to a payment bond when they have not been paid.  However, not all construction payment bonds are created equal.  The focus of this blog post is the scope of a conditional payment bond on private construction projects.  That type of bond is very different than its unconditional payment bond counterpart.

PURPOSE OF FLORIDA BOND LAW

On Florida private construction projects, certain parties have lien or bond rights to better insure payment to them.  Those statutory lien or bond rights are in place to protect certain persons and entities providing labor and materials to improve real property, and will be construed favorably to give them the greatest protection.  WMS Construction, Inc. v. Palms Springs Mile Association, Ltd. 762 So. 2d 973 (Fla 3rd DCA 2000).  In some cases, the only way these persons will get paid for their work on a construction project is by exercising their lien or bond rights.

Conditional Payment Bonds: Owners and Contractors Beware

CONDITIONAL VS. UNCONDITIONAL PAYMENT BONDS

When the construction project is protected by a payment bond (meaning the project is, except as provided below, exempt from liens), a party performing work on that project must understand the type of bond in place.  On private construction projects, there are two types of payment bonds, conditional and unconditional.

Section 713.23 of the Florida Statues descries unconditional payment bonds and reads in part as follows:

The payment bond required to exempt an owner under this part shall be furnished by the contractor in at least the amount of the original contract price before commencing the construction of the improvement under the direct contract, and a copy of the bond shall be attached to the notice of commencement when the notice of commencement is recorded. The bond shall be executed as surety by a surety insurer authorized to do business in this state and shall be conditioned that the contractor shall promptly make payments for labor, services, and material to all lienors under the contractor’s direct contract. Any form of bond given by a contractor conditioned to pay for labor, services, and material used to improve real property shall be deemed to include the condition of this subsection.

Thus, when this unconditional payment bond is in place on a construction project, that bond will exempt the owner’s property from all liens.  Therefore, when the owner or general contractor fails to pay certain classes of persons, those persons will look to the surety (bonding company) for payment.

Conditional payment bonds, on the other hand, are governed by Section 713.245 of the Florida Statutes.  The bond surety’s obligations to pay under a conditional payment bond are more limited than with an unconditional payment bond.

Specifically, and subject to requirements set forth below, the payment bond surety will only be obligated to pay certain classes of workers if the general contractor has been paid for its work, and that general contractor’s duty to pay lienors is “expressly conditioned upon and limited to payments made by the owner to the contractor.”  Section 713.245 of the Florida Statutes.  If the general contractor has not been paid for its work, and its subcontract with its subcontractors contains a pay-if-paid provision, that unpaid subcontractor has lien rights, rather than bond rights.

REQUIREMENTS OF A CONDITIONAL PAYMENT BOND

To qualify as a conditional payment bond in Florida, that bond must satisfy certain requirements.  Those requirements, in addition to the pay-if-paid requirement set forth above, are:

(a)   The bond is listed in the notice of commencement for the project as a conditional payment bond and is recorded together with the notice of commencement for the project prior to commencement of the project.

(b)   The words “conditional payment bond” are contained in the title of the bond at the top of the front page.

(c) The bond contains on the front page, in at least 10-point type, the statement: 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.

Section 713.245 of the Florida Statutes.

READ THE BOND AND KNOW THE CONTRACT

An owner of a construction project, or a person performing work on it, must be vigilant as to the type of payment bond in place for that project.  The type of bond will dictate whether a party has a bond claims or whether liens can be recorded on the project.  When in doubt about the type of bond and your rights and obligations associated with it, one should consult counsel.

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