• The Conditional Payment Bond Trap Facing Florida Subcontractors
  • April 17, 2017 | Author: Ryan W. Owen
  • Law Firm: Adams and Reese LLP - Sarasota Office
  • Many subcontractors have run into situations where the general contractor has purchased a standard payment bond for the project. The payment bond is attached to the recorded notice of commencement and makes first tier subcontractors’ lives easier. Although most subcontractors still send them out as a matter of routine, notices to owner aren’t required. Pay-when-paid clauses don’t entirely disappear from subcontracts, but they aren’t enforceable defenses to a subcontractor’s claim for payment on the bond. So long as the first-tier subcontractor files its “Notice of Non-Payment” (the equivalent of a claim of lien on a bonded project) within 90 days’ of its last day on the Project and files suit against the payment bond within one year of its last day on the Project (not one year from the forwarding of the notice), its rights against the bond are protected. 

    Rarely do subcontractors fully understand that the peace of mind that comes with having a standard payment bond standing behind the owner and contractor shouldn’t exist where the general contractor has purchased a conditional payment bond. Conditional payment bonds do not provide owners or subcontractors with the same protections as standard payment bonds. The surety’s obligation under a conditional bond is only triggered when the owner pays the general contractor and the general contractor fails to pay its subcontractors. Accordingly, to protect their lien rights against the project and their claim against the conditional payment bond, subcontractors are forced to follow the normal routine for claims of lien and the routine for payment bonds. Herein, lies the trap. 

    Often unpaid subcontractors only comply with only one or the other:

    If the subcontractor knows that the general contractor isn’t being paid by the owner and the general contractor is encouraging the subcontractor to file a claim of lien, the subcontractor will often forget to forward its notice of non-payment to the contractor and surety. This could result in the subcontractor forfeiting its claim against the contractor in the event that the owner prevails in the lien foreclosure action.

    If the subcontractor fails to realize that the payment bond attached to the notice of commencement is conditional, it can inadvertently forfeit its lien rights against the project and its ability to make a payment claim directly against the owner.
    Florida subcontractors must carefully examine any bonds attached to a notice of commencement and remember to take all the appropriate steps necessary to protect their lien rights against the project and their claim against the bond when the bond is conditional. 

    For your future reference, this chart below summarizes the information contained above:

                                           

    No Payment Bond

    Standard Bond

    Conditional Bond

    Project Lien Rights

    Yes

    No

    Yes

    Pay When Paid Clause Effective

    Yes, but only against Contractor

    No

    Yes, if Contractor is unable to collect due to Owner’s insolvency

    1st Tier Sub file NTO/NOC

    Yes (within 45 days of 1st day on Project)

    No (but many subcontractors send them anyway as part of an organizational habit)

    Yes (within 45 days of 1st day on Project)

    2nd Tier Sub/Material Supplier file NTO/NOC

    Yes (within 45 days of 1st day on Project)

    Yes (within 45 days of 1st day on Project)

    Yes (within 45 days of 1st day on Project)

    File Claim of Lien

    Yes

    No

    Yes

    File Notice of Non- Payment with Surety

    No

    Yes

    Yes

    Deadline to FileLawsuit

    One year from recording claim of lien

    One year from last day of work on Project

    One year from last day of work on Project