Beware of Contractual Solutions to Statutory Problems

Every state has a multitude of statutory rules and regulations that apply to construction activities in that state. In many (although not all) cases, the statutory protections provided by state laws cannot be eliminated, restricted, or modified by contracts entered into between the parties. In other words, a party cannot, by contract, surrender the protections the law says he or she enjoys. And yet, many contracts attempt to do exactly that. When these contract provisions fail, they create a double whammy for the party that drafted them: first, that party is deprived of the protections it thought it had; second, that party has lost its chance to secure, through other, enforceable, means, the protections it wanted. A quick look at Florida’s surety bond law illustrates this point.

Florida generally enforces “pay-if-paid” clauses, whereby the prime contractor shifts the risk of owner non-payment to subcontractors, through subcontract language that states that the subcontractor is only entitled to be paid for its work if the prime contractor is paid by the owner for that work. See DEC Elec., Inc. v. Raphael Constr. Corp., 558 So.2d 427 (Fla. 1990). It is common for prime contractors in Florida to insert “pay-if-paid” clauses into their subcontracts. Florida’s statute governing payment bonds on private projects, Fla.Stat. ss. 713.001 et seq., allows a surety on a private project to issue a conditional payment bond, whereby the surety’s obligation to pay subcontractors is conditioned on the owner having paid the prime contractor for the subcontractor’s work. Fla.Stat. ss. 713.245. Thus, on private projects, a surety can avail itself of the same “pay-if-paid” protections…if it issues a conditional bond that complies with the statute’s requirements.

The interplay between these laws illustrates the problem. The payment bond surety on a private project may review its principal’s standard subcontract, note the “pay-if-paid” language, and assume that it will be allowed to “stand in the shoes of its principal” and assert that defense to a payment bond claim. The surety who believes that will find that (1) in order to invoke “pay-if-paid” as a defense, the surety is obligated to issue a conditional payment bond that complies with the requirements of Fla.Stat. ss. 713.245; (2) reliance on the subcontract language is not sufficient to satisfy Fla.Stat. ss. 713.245; (3) by the time the bond has been issued, it is too late to cure these problems, and as a result (4) the surety will be deprived of a defense it thought it had, and that it would have been otherwise entitled to assert.

The lesson is a simple one: don’t assume that contract language will always be effective to invoke, revise, minimize, or eliminate protections or rights that have been created by, or are governed by, statute. Instead, look to the statutory scheme to see if the law itself gives you options.