CONDITIONAL PAYMENT BOND CONSIDERATION-MAKE SURE THERE IS PAY-IF-PAID PROVISION

If a general contractor is going to have a conditional payment bond, it needs to ensure it subcontracts contain pay-if-paid  or pay-when-paid provisions.  This conditional payment language in subcontracts is the general contractor’s defense that it doesn’t have to pay a subcontractor UNTIL owner has paid the general contractor for the subcontractor’s work.

The general contractor (and the surety) can look at the conditional payment bond with the s. 713.245 legend stamped on its face designating the conditional nature of the bond, and assume the conditional structure is locked in against the bond: no payment from the owner, no obligation to the subcontractors under the bond. But what happens when the subcontracts contain no express conditional payment language despite having a valid conditional payment bond?

In North American Specialty Insurance Co. v. Hughes Supply, Inc., 705, So.2d 616 (Fla. 4th DCA 1998), the Fourth District Court of Appeals made clear that the statutory conditional payment bond legend stamped on the top of the bond means NOTHING without a valid pay-if-paid (or pay-when-paid) clause to back it up. The general contractor obtained a conditional payment bond. Unpaid subcontractors sued the owners, contractor, and the payment bond surety. The payment bonds contained the conditional payment bond legend specified in section §713.245.

 The Court affirmed that the mere presence of the section s. 713.245 conditional payment bond legend on the bond does not require application of section s. 713.245 when the contract between the contractor and the subcontractor does NOT contain express conditional payment language (i.e., pay-if-paid or pay-when-paid).

Thus, as a general contractor, if relying on a conditional payment bond, make sure that conditional payment language is included in your subcontracts to ensure the risk is shifted downstream when it comes to payment bond claims. Otherwise, the conditional payment bond could be on the hook even if the owner has not paid defeating the conditional nature of the bond.