Trouble viewing this email? View in Browser

The Conditional Payment Bond Trap Facing Florida Subcontractors


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 Bond Standard Bond Conditional Bond
Project Lien Rights Yes No Yes
Pay When Paid Clause Effective Yes, but only against Contractor No Yes, if Contractor is unable to collect due to Owner’s insolvency
1st Tier Sub file NTO/NOC Yes (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/NOC Yes (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 Lien Yes No Yes
File Notice of Non- Payment with Surety No Yes Yes
Deadline to File Lawsuit One year from recording claim of lien One year from last day of work on Project One year from last day of work on Project
Prepared by:

Ryan W. Owen
Litigation
ryan.owen@arlaw.com
Sarasota
P 941.316.7640


Adams and Reese LLP
www.adamsandreese.com

ALABAMA | FLORIDA | LOUISIANA | MISSISSIPPI | SOUTH CAROLINA | TENNESSEE | TEXAS | WASHINGTON, DC

Like Us on Facebook Follow Us on Twitter Connect With Us on LinkedIn

This is not an advertisement. The information in this newsletter does not constitute legal advice or opinion and should not be viewed as a substitute for legal advice. The information provided is based on laws and regulations in effect at the time of creation and is subject to change. Adams and Reese is a multidisciplinary law firm with approximately 275 lawyers and advisors. The firm has offices in New Orleans, LA; Baton Rouge, LA; Birmingham, AL; Mobile, AL; Columbia, SC; Memphis, TN; Nashville, TN; Houston, TX; Jackson, MS; Jacksonville, FL; Sarasota, FL; St. Petersburg, FL; Tallahassee, FL; Tampa, FL; and Washington, DC.

For additional information, please see the firm website at www.adamsandreese.com.

Subscribe to Adams and Reese Construction Bulletins.

Unsubscribe from Adams and Reese Construction Bulletins.

This newsletter is a periodic publication of Adams and Reese LLP and is intended for general purposes only. This newsletter is sent to friends and clients of Adams and Reese LLP. The sending of this newsletter is not a privileged communication and does not create a lawyer/client relationship. No representation is made that the quality of the legal services to be performed is greater than the quality of legal services performed by other lawyers. FREE BACKGROUND INFORMATION IS AVAILABLE UPON REQUEST.