Are Florida Conditional Payment Bonds Really Conditional?

Florida construction projects may or may not be protected by payment bonds, depending on the type of project and what the contract documents require. Payment bonds serve to protect the real property from construction liens when persons and entities are not paid for their work on a construction project. There are different types of payment bonds that are applicable to Florida construction projects. Examples of such bonds include statutory payment bonds, conditional and unconditional payment bonds, and common law bonds. This blog focuses on conditional payment bonds and how they are interpreted and treated under Florida law.

What Is a Conditional Payment Bond?

Conditional payment bonds are governed by Section 713.245 of the Florida Statutes. Assuming certain conditions are met, this type of bond provides protection to the general contractor, in the event the owner fails to pay the general contractor. When the statutory requirements are met, the bond does not ensure payment to downstream subcontractors. Instead, those subcontractors have lien rights and not bond rights. The conditional payment bond is nothing more than a risk shifting mechanism for an owner’s non-payment. As an owner of a construction project, it is always advisable to have the general contractor provide an unconditional payment bond, rather than a conditional payment bond, in order to keep liens off the property.

In the context of a construction project shielded by a conditional payment bond, the payment bond surety will only be obligated to pay certain classes of persons performing work, 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. The statute also imposes conditions as to the form of the bond, as well as its conditional status being referenced in the notice of commencement, as well as its recording with the notice of commencement.

But what happens when the conditional payment bond and the underlying subcontract do not contain all the bells and whistles required by Section 713.245 of the Florida Statutes? The court in North American Specialty Insurance Company v. Hughes Supply, Inc. examined this very issue and determined that a purported conditional payment bond was, in fact, not conditional but unconditional.

Not All Conditional Payment Bonds Are Created Equal (Conditional) — North American Specialty Insurance Company v. Hughes Supply, Inc.

In the North American Specialty Insurance Company trial, the general contractor provided a payment bond for the construction project, that was thought to be a conditional payment bond. When subcontractors were not paid for their work on the project, they brought claims against the payment bond.

The bond at issue contained the following legend:

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.

Despite this seemingly “conditional” language of the bond and its form being compliant with F.S. 713.245, the trial court determined the bond was unconditional and not conditional. Its reasoning, on which the appellate court agreed, was that the applicable subcontracts did not have the required pay-if-paid language that’s required by the statute. Specifically, 713.245 provides that:

Notwithstanding any provisions of ss. 713.23 and 713.24 to the contrary, if the contractor’s written contractual obligation to pay lienors is expressly conditioned upon and limited to the payments made by the owner to the contractor, the duty of the surety to pay lienors will be coextensive with the duty of the contractor to pay, if the following provisions are complied with . . .

The court concluded that when a contractor does not have a pay-if-paid provision in its subcontracts, the surety bond will be construed as an unconditional payment bond, rather than a conditional bond. The fact that the bond may have a legend that says its conditional is of no consequence in that scenario. In sum, the court held that “a bond which would have been a conditional payment bond (section 713.245), but for the absence of a “pay-when-paid” clause in a contract is a section 713.23 bond by definition.” As such, subcontractors must comply with the notice requirements in Section 713.23 of the Florida Statutes to perfect bond claims.

Lessons Learned from North American Specialty Insurance Company

Despite a contractor’s best intentions, unless all the requirements of F.S. 713.245 are followed, the construction project may be covered by an unconditional payment bond. However, careful drafting of subcontracts (to include pay-if-paid provision), as well as following all the other requirements of F.S. 713.245 will best ensure that the conditional bonds are, in fact, conditional.