|
Conditional Payment Bonds
and "Pay When Paid" Provisions
One of the more problematical contract
clauses under Florida law is the payment clause
in a subcontract where the general contractor
seeks to avoid payment to the subcontractor or
supplier until payments are received from the
owner. These so-called "pay when paid" provisions
in subcontracts are usually classified as either
condition precedent or time of payment provisions.
Time of payment provisions can
be deceiving and require careful analysis by contractors
and their attorneys. For example, many agreements
provide for payment to subcontractors "after receipt
of payment from the owner" or "when payment is
received by the owner and the work is approved
by the architect." Florida courts generally interpret
this language as requiring payment. In the event
the payment is not made by the owner, for a reason
not the fault of a subcontractor, then the time
of payment by the general contractor will be a
reasonable time, regardless of non-payment by
the owner.
For example, in Peacock Construction
Company, Inc. v. Modern Air Conditioning, Inc.,
353 So.2d 840 (Fla. 1977), the contractor agreed
to make final payment to all subcontractors:
" . . . within 30 days after
the completion of the work included in this subcontract,
written acceptance by the Architect and full payment
therefor by the Owner."
853 So.2d at 840.
After final completion of its work,
one subcontractor requested final payment. The
general contractor refused to pay and defended
the action based on failure of the owner to pay.
It was the contractor's contention that payment
from the owner was an express condition which
had to occur before payment could be made to the
subcontractor.
On appeal, the Florida Supreme Court
adopted the majority view of courts throughout
this country and held that:
...provisions of the kind disputed
here do not set conditions precedent but rather
constitute absolute promises to pay, fixing payment
by the owner as a reasonable time for when payment
by the subcontractor is to be made. . . . This
is so because small subcontractors, who must have
payment for their work in order to remain in business,
will not ordinarily assume the risk of the owner's
failure to pay the general contractor.
Id. at 841-42 (emphasis supplied).
However, the court went on to hold
that Florida law does not prevent a clear and
unambiguous shifting of the payment burden from
contractor to subcontractor. Condition precedent
provisions usually contain language such as "payment
is expressly conditioned upon," "payment is not
due unless and until," "payment is contingent
upon," or "as a condition precedent to payment.
. . ."
Where it is clear and unambiguous
that payment to the subcontractor is not earned
and payable unless payment for the subcontractor's
work is obtained from the owner, then such a provision
will be enforceable under Florida law. However,
the burden of clear expression is on the general
contractor. Dyser Plumbing Co. v. Ross Plumbing
and Heating, Inc., 515 So.2d 250 (Fla. 2d DCA
1987) (by using "condition precedent" language,
it is hard to imagine a more clear expression
of an intent to shift the risk of payment failure
by the owner to the subcontractor). See also,
Aetna Casualty and Surety Co. v. Warren Bros.,
355 So.2d 785 (Fla. 1978); Snead Construction
Corp. v. Langerman, 369 So.2d 591 (Fla. 1st DCA
1978); DEC Elec., Inc. v. Raphael Const'n Corp.,
538 So.2d 963 (Fla. 4th DCA 1989), aff'd 558 So.2d
427 (Fla. 1990).
In O.B.S. Co., Inc. v. Pace Construction
Corporation, 558 So.2d 404 (Fla. 1990) the Florida
Supreme Court added an unusual twist to what appeared
to be settled law. The court held that a surety
on a payment bond would be liable to an unpaid
subcontractor, regardless of the existence of
an enforceable pay when paid clause. The court
reasoned that under the terms of the payment bond
the subcontractor may turn to the surety if the
general fails to pay the subcontractor. To hold
otherwise would give absolute protection to the
owner, the surety and the general contractor,
thwarting the purpose of the construction lien
statute, to protect subcontractors. Although the
court reiterated its earlier position that an
unambiguous pay when paid clause is a defense
for the general contractor, it is not a defense
for the general's surety. The net result is that
the surety pays the subcontractor and the general
then must indemnify its surety. The risk of non-payment
is effectively shifted back to the general, regardless
of the unambiguous pay when paid contract language.
This shifting does not take place where there
is no bond.
In response to the O.B.S. v. Pace
decision, the 1990 legislature revised the Construction
Lien Statute to accommodate pay when paid clauses
used in conjunction with statutory surety bonds.
A new type of statutory bond called a Conditional
Payment Bond was created. Use of this type of
bond permits a general contractor and his surety
to use the pay when paid defense against subcontractors
and suppliers.
Section 713.245 Fla. Stat. (1995)
prescribes the form of a Conditional Payment Bond
for use in conjunction with a pay when paid clause.
The bond must contain a notice, in bold type,
warning that it is subject to a pay when paid
defense. In all other respects the bond must conform
to the requirements of a standard payment bond.
This bond (unlike the standard payment bond) does
not exempt the owner's property from construction
liens. A lienor must file a timely Notice to Owner
and Claim of Lien rather than the Notice to Contractor
and Notice of Nonpayment required with the standard
payment bond. The owner or contractor may record
a Notice of Bond together with a Certificate of
Payment to the Contractor and the lien is transferred
to the bond. The owner certifies that the general
contractor has been paid for the labor, services
or materials described in the Claim of Lien filed
by the lienor. Copies of the Notice of Bond, the
bond and the certificate will be served by the
Clerk of the Court on the lienor, the surety and
the lender. This method of service of notice by
the Clerk is the same for all of the other notices
and certificates required under § 713.245 Fla.
Stat. (1995).
A contractor may join in the Certificate
of Payment through a form called Joinder in Certificate
of Payment wherein the contractor agrees with
the owner that payment has been received. In those
instances where the contractor disputes the certificate
of payment, the contractor must record, within
15 days after the Clerk has certified service,
a Notice of Contest of Payment wherein the general
contractor disputes the owner's assertion of payment.
In those instances where the Certificate
of Payment has been joined by the contractor or
is unchallenged by a Notice of Contest of Payment,
the lien, up to the amount specified in the certificate
of payment is transferred from the property to
the bond. To the extent of any additional amount,
the lien remains in place. Where the Notice of
Contest of Payment specifies that the contractor
has been paid a portion, then the lien is transferred
to the extent of that specified amount.
Any person making a material misstatement
of fact is guilty of a felony of the third degree.
These penalties apply individually and to the
business entity if the false certificate is signed
in a representative capacity.
Any ambiguity in a pay when paid
clause renders it unenforceable. The burden of
showing that there was no ambiguity is placed
on the general contractor and the determination
of ambiguity is made by the court and not the
jury. DEC Electric, Inc. v. Raphael Constr. Corp.,
538 So.2d 427 (Fla. 4th DCA 1989), aff'd 558 So.2d.
427 (Fla. 1990). Where the general contract is
incorporated into the subcontract virtually any
difference between the payment clauses in the
two contracts renders the pay when paid clause
ambiguous and thus unenforceable. Harris Air Systems
v. Gentrac, Inc., 578 So.2d. 879 (Fla. 1st DCA
1991).
Private Payment Bonds
Section 713.23, Fla. Stat. (1995)
allows an owner to exempt his property from the
lien law by posting a payment bond to cover the
obligations to lienors. A copy of the private
payment bond must be attached to the Notice of
Commencement at the time of recording for it to
exempt the property from liens. § 713.13(1)(e),
Fla. Stat. (1995).
In addition, any lienor can demand
a copy of the payment bond at any time from the
owner, general contractor or surety. § 713.23(1)(b),
Fla. Stat. (1995). Obtaining information on a
surety bond is crucial to maintaining your rights
to recover under that bond. The statute requires
that both the Notice to Contractor and the Notice
of Nonpayment be timely served to preserve your
rights under the bond. The failure to file either
one of these is excused only when the bond is
not recorded or referred to in the Notice of Commencement.
In one case, the court held that neither filing
a Claim of Lien nor a lawsuit on the bond met
the statutory notice requirements resulting in
loss of bond rights by the material supplier.
Mursten Construction Co. v. C.E.S. Industries,
588 So.2d 1061 (Fla. 3rd DCA 1991).
Public Payment Bonds in Florida
There are no lien rights in Florida
when work is performed on publicly owned property.
Under § 255.05, Fla. Stat. (1995), any person
entering into a contract with the state or any
county, city or other political subdivisions,
or other public authority in excess of $100,000
for the repair or construction of a public facility,
must provide a payment and performance bond. The
requirement may be waived by a local government
for a contract for $200,000.00 or less. The purpose
of a § 255.05 public payment bond is to protect
subcontractors and suppliers since they cannot
obtain lien rights when working on a public project.
Harvesters Group v. Westinghouse Elec. Corp.,
527 So.2d 257 (Fla. 3d DCA 1988), review denied,
536 So.2d 246 (Fla. 1988).
Claimants who may look to a § 255.05
public payment bond are those defined as lienors
under § 713.01(10), Fla. Stat. (1995). The § 255.05
notice provisions differ slightly from those under
a private payment bond. A claimant contracting
directly with the general contractor need only
file suit on the bond within one year of last
furnishing labor, services or materials on the
job. Those claimants doing business with subcontractors
or sub-subcontractors must first furnish the contractor
with notice that they will look to the bond for
protection. This notice must be served within
45 days of first furnishing work or delivering
materials to the job. The sub-subcontractor or
supplier must also, within 90 days after the final
furnishing of labor services or materials to the
project, serve on the contractor and on the surety
a Notice of Nonpayment setting forth, among other
things, the nature of the claim, the public project
on which the work was done, and the name of the
general contractor. No action against the contractor
or the surety may be instituted unless both notices
are given. § 255.05(2), Fla. Stat. (1995). After
serving the Notice of Nonpayment, the claimant
has one year from last performing work or delivering
materials to file suit on the public payment bond.
Attorney's fees are recoverable from the prevailing
party. § 255.05(2) Fla. Stat. (1995).
<<
Back to FAQ Main
 To
Top
| 
