Section 713.245 conditional payment bonds - panacea or Pandora?

• Author: Sobel, Stuart H.
• Position: Florida

While the limitation on the surety's undertaking may suit the insurance industry, the statute creates uncertainty, difficult application, multiplicity of claims, and varying levels of protection.

In 1991, F.S. [sections] 713.245 (Conditional Payment Bond Statute) became effective.(1) North American Specialty Insurance Company v. Hughes Supply, Inc., 705 So. 2d 616 (Fla. 4th DCA 1998) is the first and, thus far, only, reported appellate decision construing the statute. In North American, the Fourth District held that a payment bond containing the conditional payment language and legend required by the statute would, nevertheless, be considered as an unconditional payment bond, to be construed pursuant to F.S. [sections] 713.23, where the underlying subcontract did not have conditional payment language. The purpose of this article is to explore the events leading to the enactment of the Conditional Payment Bond Statute, the manner in which the protection of the statute is invoked, and the effect of practical construction industry circumstances on the value of the statutory scheme.

Creating the Need for Conditional Payment Bond

In February 1990, the Florida Supreme Court decided OBS Company, Inc. vs. Pace Construction Corp., 558 So. 2d 404 (Fla. 1990). OBS was a subcontractor who sued a general contractor, Pace, and the surety on an ES. [sections] 713.23 labor and material payment bond (bond). The subcontract between OBS and Pace contained conditional payment language, which conditioned Pace's obligation to pay OBS upon Pace's prior receipt of payment from the project owner.(2) The Supreme Court held the particular conditional payment language to be ambiguous and, therefore, unavailing as a defense to OBS' claim against Pace. Under the plain language of the bond, therefore, the surety was liable to OBS, as well.

Nevertheless, the court went further, and considered the surety's liability under the assumption that the conditional payment language was enforceable to validly insulate the contractor from liability to the subcontractor's claim:

Furthermore, even if we found the subcontract unambiguously shifted the risk of the owner's nonpayment to OBS, we would still hold the sureties liable under the terms of the payment bond.(3)

Basing its ruling on considerations of public policy, the Supreme Court found that a surety on a payment bond could not avoid liability to a subcontractor by resort to conditional payment language in the subcontract between the contractor and subcontractor:

The payment bond is a separate agreement, and any inability to proceed against the general contractor does not necessarily prevent recovery against the sureties under the bond. In this case, recovery under the bond is in no way conditioned on the owner making final payment to [the...