Payment bonds typically come into play when dealing with a public construction project. Because mechanics liens are not available on public projects, a party to a sub or supplier can file a surety bond claim against the contractor’s payment bond. Payment bonds are less common when dealing with private construction projects because the payment rights of contractors, subs, and suppliers are secured by mechanics lien laws. Bonds are not only for public projects, though, and two types of payment bonds have been established for Florida private projects: conditional and unconditional bonds.
Bond Types for Florida Private Projects
Florida is a hotbed for construction law discussion. It seems like we have a new Florida post every week- from surety bond fraud to changing anti-corruption laws, to contractors scamming homeowners out of insurance checks, the Sunshine State keeps things interesting. The development of two types of payment bonds for Florida private projects may not sound sexy, but subs and suppliers need to understand the differences in order to preserve their payment claims.
Unconditional Payment Bonds
Unconditional payment bonds on Florida private projects essentially mimic the payment bonds required on Florida public projects under the state’s Little Miller Act. With this standard bond, a property owner must record the bond along with the Notice of Commencement for the project. There are other requirements as well, but once an unconditional bond has properly been secured on a project, a subcontractor or supplier may no longer secure payment through a mechanics lien on the owner’s property. Rather, an unpaid party must make a claim on the bond. This bond claim is available to the sub or supplier regardless of whether or not a higher-tiered party has received payment.
Conditional Payment Bonds
Conditional Payment bonds do not eliminate the lien rights of a sub or supplier working on a Florida private project. When a conditional payment bond is at play, a subcontractor or supplier is only entitled to a bond claim when the general contractor has already been paid by the property owner. Effectively this is a “pay if paid bond.” Just as with a pay if paid contract provision, a subcontractor or supplier’s right to a bond claim does not exist until the general contractor has been paid by the property owner.
Because conditional payment bonds offer no protection when an owner fails to pay the general contractor, a sub or supplier still has lien rights when a conditional payment bond is at play. This is a very important distinction. Because a bond is in play, a subcontractor or supplier might be under the impression (or may even be instructed) that a mechanics lien is not available on the project. What’s more, a sub or supplier may feel safe once they have made a bond claim. However, if this claim is on a conditional payment bond and the general contractor has not yet been paid, the claim may be invalid. In this case, it’s best for a sub or supplier to file a claim on the conditional bond and file a mechanics lien on the property
So how do you know whether a payment bond is conditional or unconditional? Easy! Florida statute mandates that “the words ‘conditional payment bond’ are contained in the title of the bond at the top of the front page.” Further, the statute requires that this statement is on the front page of the bond in at least 10-point type:
“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.”
Payment bonds are not commonplace on private projects, but they’re not unheard of in the construction industry either. These bonds are attractive for property owners because they can eliminate the possibility of a lien on the property, even in the event of nonpayment. However, only unconditional payment bonds will block a party’s right to file a mechanics lien. When dealing with conditional payment bonds, it’s important to cover all the bases. While filing a claim on the bond is one way to secure payment rights, the safer route for a sub or supplier is to file a mechanics lien in addition to a bond claim.