A case that made it all the way up to the Minnesota Supreme Court has clarified a potential trap for subcontractors working on public projects. The outcome of which, in our opinion and the opinion of the American Subcontractors Association, is clearly wrong. Minnesota notices of bond claims must be sent to the addresses listed on the payment bond. Even if the address provided in the subcontract is still the contractor’s primary business address and they’ve acknowledged notices sent to that address previously!
While this case should’ve been overturned – if for no other reason but it being grossly inequitable – it is nevertheless another reminder that mechanics lien and bond claim laws are hyper-technical that sometimes require strict compliance.
Notice of bond claim sent to primary business address of contractor instead of the address listed on the bond
The case in question: Safety Signs LLC v. Niles-Wiese Construction Co.
Project Snapshot
- Owner: City of Owatonna (City)
- Surety: Westfield Insurance Co. (Westfield)
- General contractor: Niles-Wiese Construction Co. (Niles-Wiese)
- Subcontractor: Safety Signs, LLC (Safety)
Safety Signs was hired as a subcontractor by Niles-Wiese for the construction of an airport runway and taxiway commissioned by the City. Niles-Wiese had posted a payment bond on the project pursuant to Minnesota law. The project was a two-phase project. At the end of both phases, Safety Signs has experienced payment issues and filed two successive MN bond claims.
Phase I: Notice of bond claim
Once the first phase was completed, the contractor failed to pay Safety Signs. Accordingly, Safety Signs sent a notice of bond claim to the Niles-Wiese and Westfield by certified mail and within the proper deadlines. The notice to Niles-Wiese was sent to the company’s primary business address, as opposed to the address listed on the bond claim. Regardless, both the contractor and the surety acknowledged receiving the notice and the bond claim was paid out.
Phase II: Notice of bond claim
After phase 2 had completed, Safety Signs ran into the same problem. So Safety Signs followed the same procedure they did previously. Again, the bond claim document was compliant with the statute and sent in the method required. Again, the document was sent to Niles-Weise’s principal place of business. But this time around, the notice to Niles-Wiese was returned as undeliverable. Shortly thereafter, the claim was denied so Safety Signs filed suit against the payment bond.
District court allows the claim because the sub substantially complied with the notice requirements
At trial, Westfield moved for summary judgment to dismiss the bond claim. The reason being that the notice wasn’t properly served on Niles-Wiese at the address listed on the payment bond. The court denied the motion and stated that the failure to send the notice to the address listed on the bond isn’t fatal to bond claim rights. Declaring that Safety Signs had substantially complied with the statutory requirements. The notice was still sent to an address where Niles-Wiese received mail, and it was where the previous claim was received and honored the first time around. So the district court ruled in favor of Safety Signs, and awarded them interest, costs, and attorney’s fees. Westfield appealed.
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Appeals Court reverses decision stating notice was not compliant and therefore invalid
The appeals court reversed, however, holding that strict compliance was required and missing. The court relied on Minnesota Statute § 574.31(2)(a):
No action shall be maintained on a payment bond unless…the [claimant] serves written notice of claim under the payment bond personally or by certified mail upon the surety that issued the bond and the contractor on whose behalf the bond was issued at their address as stated in the bond specifying the nature and amount of the claim and the date the claimant furnished its last item of labor and materials for the public work.
The Minnesota Statute clearly provides that the notice of claim must be mailed to the contractor “at their address as stated in the bond,” and it is based on this clear statutory instruction that the appeals court holds that the bonds notice to the contractor’s principal place of business address was insufficient.
The appeals court addressed the “substantial compliance” argument, but dismiss it because “Minnesota courts have repeatedly held that ‘strict compliance with Section 574.31 is a condition precedent to the brining of an action against a surety on a contractor bond.'”
The appeals court also addressed the argument that the intent and purpose of the statute is to protect laborers and materialmen saying that “although the remedial intent of legislation may be considered, the clear language of a statute cannot be disregarded in the name of pursuing the spirit rather than the letter of the law.”
Case reaches the MN Supreme Court with help from the American Subcontractor Association
The case eventually reached the MN Supreme Court. In fact, the American Subcontractor Association filed an Application to submit an Amicus Curiae with the Minnesota Supreme Court. In addition to justifying why the organization should be allowed to file the Amicus Curiae brief, it also explains why the Supreme Court should intervene. Citing a quote from a decision cited by the appeals court in the Safety Signs case used to justify rejecting the “substantial compliance” plea:
In Spetz [& Berg, Inc. v. Luckie Construction Co. Inc.], it had “reluctantly” held that strict compliance was necessary after noting that “although it appears that substantial compliance doctrine should be extended to Section 574.31 and public project bonds, that is for the Minnesota Supreme Court to decide...”
The public policy implications caused by the Decision contravenes the intent of the act, affects the small and mid-sized businesses that will suffer severe harm and prejudice from such an interpretation…, and would create an incentive for collusion between the surety and the contractor to (as occurred here) list different notice addresses for the contractor in the subcontract and bond, and then refuse to accept certified mail service of claims.
MN Supreme Court affirms substantial compliance is not enough
Safety Signs continued to plead their argument that substantial compliance was enough. Even looking to the language of the statute, which states that “notice is sufficient if served personally or mailed via certified mail to the addresses of the contractor and the surety listed on the bond.” (emphasis added)
However, the Court disagreed, stating that the “notice is sufficient” language aimed to address constructive notice scenarios. That it is meant to preclude defenses such as lack of actual notice; such as the certified mail failed because lost, never arrived, etc. The Court didn’t come to this decision lightly. Even going so far as to state:
We acknowledge that the address requirement in Minn.Stat. § 574.31, subd. 2(a), as written, creates a trap for the unwary. This trap is exacerbated by the fact that the statute provides a template for claimants to use when giving notice, but that template does not direct claimants, as the statute does, to use a particular address.
Accordingly, the Supreme Court held that even an otherwise valid claim may be lost due to this interpretation; it isn’t enough to overcome the plain, and unambiguous language of the statute. The Appeals Court decision was therefore affirmed.
Why this decision is wrong
Seems like a pretty grim decision, right? It also seems unfair to Safety Signs who did almost everything right, and their mistake of sending it to one correct address instead of another equally correct address is understandable. But when it comes to lien and bond rights, there’s little room for error.
Substantial compliance should be enough, the point of the statute is to notify the contractor
Legally speaking, the substantial compliance doctrine should be extended to these types of arguments. The purpose of the act is to protect contractors and suppliers, and the purpose of the notice is to provide notice. The legislature clearly was not trying to make contractors and suppliers push a camel through the eye of a needle to get a claim filed; to the contrary, they just were interested in making sure the contractor and surety got proper notice. Sending the claim to the contractor at their ordinary business address, where they can and do receive mail, should be sufficient and substantially compliant.
Risk of abuse by contractors and sureties
Practically speaking, however, the American Subcontractors Association is right to be concerned about collusion between the sureties and contractors. These parties will do everything they can to trip up contractors and suppliers in the filing of these claims, and they are typically the more sophisticated parties on a project.
More than collusion, the courts should also consider just how accessible the payment bond is on a construction project. We’ve filed a lot of bond claims and we’ve made a lot of requests (on behalf of suppliers and subcontractors) to obtain a copy of the payment bond on a project. A ton of these requests go unanswered. It is sometimes very, very difficult to get a copy of the payment bond despite laws requiring this information be easily obtained.
A savvy surety and contractor would simply drag their feet in providing a copy of the payment bond, which is another form of collusion and another way that a decision like Safety Signs could carry unfortunate public policy implications.
Lesson learned: Always get a copy of the payment bond
We’ve been writing about bond and lien laws for a while now, one sentiment which we repeat ad nauseam is be sure to strictly comply with the statutory requirements. These rights are granted by statute, and statutes are typically strictly construed to secure these rights. Even so far as to create these “traps for the unwary.” However, harsh this result may be, the lessons learned from the case can’t be stressed enough.
Yes strict compliance, but more importantly, always get a copy of the payment bond. It’s unclear from the case whether the wrong address stemmed from the lack of a copy of the payment bond, or just a mere oversight. But heck, it worked the first time, why not the second?!
Either way, this decision establish beyond a doubt that any misstep in the notice procedure (or entire bond claim process in general), however minor, can lead to some dire consequences. Claimants should take extra special care to ensure they’ve complied with every requirement to a T.