Construction Law Alert: Minnesota Supreme Court Acknowledges "Trap" For Subcontractors In Safety Signs Ruling

by Stinson Leonard Street
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Subcontractors and suppliers take careful note. Last week, the Minnesota Supreme Court issued a ruling in which it admitted that a statute created "a trap for the unwary" subcontractor or supplier that files a claim under the contractor's payment bond on a public project. In Safety Signs, LLC v. Niles-Wiese Construction, Inc., the Court rejected a subcontractor's bond claim because the required notice of claim was delivered to the contractor at the address that the contractor listed in the subcontract rather than the contractor's address listed in the bond.

In Safety Signs, a contractor agreed to construct a runway and taxiway at the Owatonna airport. The contractor subcontracted traffic-control and pavement-marking duties to Safety Signs, LLC. The surety provided a payment bond to cover the contractor's payment obligations on the project. The contractor's address on the subcontract was different than its address on the payment bond.

Safety Signs's work on the project was divided into two phases. After the first phase, the contractor refused to pay Safety Signs the full amount owed. Safety Signs then served notice of a bond claim on both the contractor and the surety. The notice was sent by certified mail to the surety's address listed in the payment bond and the contractor's address listed in the subcontract. Safety Signs received signed, certified return receipts from both the contractor and the surety. A few months later, the contractor paid Safety Signs the full amount of its claim. Neither the contractor nor the surety objected to Safety Signs's claim on the ground that Safety Signs had served notice at the contractor's address listed in the subcontract rather than the address listed in the bond.

Safety Signs then completed the second phase of its role on the project, and again the contractor refused to pay the full amount owed. Safety Signs served notice of another bond claim on both the contractor and surety. Again, Safety Signs sent the notices by certified mail to the surety's address listed in the bond and the contractor's address listed in the subcontract.

This time, however, the notice that Safety Signs had sent to the contractor was returned to sender because it was unclaimed and unable to be forwarded. The surety received its notice and sent Safety Signs a letter demanding that it submit a proof of claim while also reserving all of its defenses, including failure to comply with notice requirements. Safety Signs submitted its proof of claim, but, after consulting with one of the contractor's principals, the surety denied payment.

Safety Signs sued both the contractor and the surety to recover on its second claim. The contractor did not participate in the lawsuit, but the surety argued that it was not required to pay out Safety Signs's bond claim because Safety Signs did not send notice of its claim to the contractor's address listed in the bond.

The Public Contractors' Performance and Payment Bond Act requires all contractors on public projects, like the one in this case, to provide payment bonds to ensure that all those providing labor and material on a project will be paid. Here, the Minnesota Supreme Court focused on one particular provision in the Act that covers the requirements that a bond claimant serve a notice of claim within 120 days after its last work on a project. Specifically, the provision requires that a claimant serve written notice of claim on both the contractor and the bonding company "at their addresses as stated in the bond." In addition, the provision states that "notice is sufficient if served personally or via certified mail to the addresses of the contractor and surety listed on the bond." Minn. Stat. § 574.31, subd. 2(a).

Safety Signs first argued that the statute's language required it only to substantially comply with the notice requirements. And because it had sent the notice by certified mail to the general contractor's address listed in the subcontract, Safety Signs believed that it had substantially complied. The Supreme Court disagreed, stating that where a statute gives a contractor the right to file a claim, the contractor must follow all of the prerequisites strictly. Because Safety Signs did not follow the strict requirement to send notice to the contractor's address listed in the bond, Safety Signs was not entitled to payment on its claim.

Safety Signs next argued that the surety had waived its strict-compliance argument because the surety did not raise the argument at all when Safety Signs submitted its first bond claim, and, when Safety Signs submitted its second bond claim, the surety waited until after Safety Signs had filed suit to raise the argument. The court held that the surety did not waive its argument because its response letters that it sent to Safety Signs after both bond claims contained a reservation of rights, including a specific reservation to raise a defense based on failure to comply with notice requirements.

At bottom, this case serves a cautionary tale for contractors that make bond claims. Minnesota courts require strict compliance with all of the statutory prerequisites—most notably the notice requirements. Don't be one of the unwary souls! Don't assume that you have submitted a sufficient claim notice just because the surety itself has received the claim and has sent you a proof of claim form to fill out and return. The notice of claim will only be sufficient if timely delivered to both the contractor and the surety at their addresses listed in the payment bond itself. If you do not have a copy of the bond, you may demand a copy from the public owner—Minn. Stat. § 574.28 requires a public owner to make bonds available for inspection and copying on request.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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