The Conditional Payment Bond Trap Facing Florida Subcontractors

2/8/2017

Most subcontractors doing business in Florida have their construction lien rights down to an exact routine. The subcontract is signed, materials are ordered, and a notice to owner is sent. On most projects, the subcontractor never has to exercise its lien rights. The peace of mind knowing that the project stands as collateral for payment is worth the additional hassle of filling out monthly partial lien waivers.

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 BondStandard BondConditional Bond
Project Lien RightsYesNoYes
Pay When Paid Clause EffectiveYes, but only against ContractorNoYes, if Contractor is unable to collect due to Owner’s insolvency
1st Tier Sub file NTO/NOCYes (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/NOCYes (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 LienYesNoYes
File Notice of Non- Payment with Surety NoYesYes
Deadline to File Lawsuit One year from recording claim of lienOne year from last day of work on ProjectOne year from last day of work on Project
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