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).