Conditional payment bonds are becoming more popular on private construction projects. From a general contractors’ perspective, the conditional payment bond provides it security in the event the owner does not pay. With an unconditional payment bond, a claimant can still sue the bond and the pay-if-paid defense does not apply. That puts a tremendous amount of risk on the general contractor that is furnishing the bond because it is assuming all of the risk associated with the owner’s nonpayment. With a conditional payment bond, the bond can reap the benefits of the pay-if-paid defense since the bond is not on the hook if the owner does not pay.
Conditional payment bonds are governed under Florida Statute s. 713.245. For a conditional payment bond to be effective, a few important things need to take place:
- The subcontract must contain pay-if-paid language. Most do, and if a general contractor is furnishing a conditional payment bond, it would be very surprising for a subcontract not to expressly condition the general contractor’s payment to the subcontractor on its receipt of payment from the owner.
- The bond is listed in the Notice of Commencement as a conditional payment bond and recorded with the Notice of Commencement prior to construction.
- The words “conditional payment bond” must be in the title of the bond at the top of the front page of the bond. And,
- The bond must contain on the front page in at least 10-point font, “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.”
Fla. Stat. s. 713.245(1).
These statutory requirements must be complied with. The contractor should initially ensure that the conditional payment bond satisfies the requirements of the statute by making sure the words “conditional payment bond” is in the title at the top of the front page and the bond contains the capitalized language on the front page. Then, because the owner is responsible for recording the Notice of Commencement, or if there is a construction lender, the lender is responsible for recording it, the contractor must work with the owner and lender, as required, to ensure the Notice of Commencement is properly recorded with the conditional payment bond. If the owner or lender do not, the contractor should ensure an amended notice of commencement is properly recorded ASAP so that the contractor does not lose the benefits of the conditional payment bond.
Please contact David Adelstein at firstname.lastname@example.org or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.