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Trust, but verify when making a payment bond claim

The Minnesota Court of Appeal’s decision in Safety Signs, LLC v. Niles-Wiese Const. Co., Inc., serves as a cautionary tale to any subcontractor or material supplier when a general contractor’s does not pay for work or materials contributed to a public project.  The Public Contractors’ Performance and Payment Bond Act (“the Act”), Minn. Stat. §§ 574.26 to 574.32, provides the remedy sought:  payment for the contribution to the public work.  However, to get paid under the Act, the subcontractor must first strictly follow the notice requirements by delivering personally or by certified mail notice of a payment bond claim to both the contractor and the surety at the address of each listed on the bond within 120 days of the subcontractor’s last day of work or supplying materials.  This seems simple enough, yet any mistake made here could potentially bar a recovery.

In this case the City of Owatonna (“the City”) hired the general contractor, Niles-Weise Construction Company (“Niles-Weise”) to build an airport runway and taxiway.  Niles-Weise, in turn, entered into a subcontract with Safety Signs, LLC (“Safety Signs”) to perform some of the work.  Because this was a public project, Niles-Weise was required to provide a payment bond to the City.  Niles-Weise obtained the bond from Westfield Insurance Company (“Westfield”), acting as the surety.  Niles-Weise did not pay Safety Signs for its work.  As a result, Safety Signs sent notice of a payment bond claim to both Niles-Weise and Westfield.  Niles-Weise then paid Safety Signs.

Subsequently, Safety Signs sent notice of a second payment bond claim for additional work for which it had not been paid.  The notice to Niles-Weise was returned as undeliverable.  Westfield received notice but refused to pay the claim even though Safety Signs had completed its work and Niles-Weise failed to pay the amount due Safety Signs.  The court of appeals agreed with Westfield.  Both times, the subcontractor took the same steps to enforce its payment bond claim.  Why did the same process yield different results—namely, the subcontractor getting paid in one instance but not the next?

Simply put, the subcontractor’s notice did not satisfy the statutory requirements.  The court ruled the notice was provided in time even though the contractor and surety received the payment bond claim outside the 120-day window of the subcontractor’s last day of work on the project.  The court stressed that the 120-day deadline is strictly enforced.  However, since the subcontractor mailed the notice within the 120-day period, service was timely and effective upon mailing.  Ultimately, the subcontractor’s claim failed because it sent notice to the wrong address for the general contractor.  Safety Signs sent the notice to Niles-Weise’s primary business address, which seems tobe a logical place to send such a notice.  However, the Act requires the notice be sent to the address listed on the bond.  Here, Niles-Weise listed an address on the bond different from its primary business address.  As a result, Safety Signs’ defective notice left it unable to enforce a bond claim and receive payment for the work it performed.

Here are some takeaways from this decision:  1) Make sure you provide notice of a payment bond claim within the 120-day window—sending via certified mail is effective once the notice is placed in the mail.  2) The harder lesson is that the address on the general contractor’s business card, on the side of their truck, or their offices where you meet to discuss projects might not be the same one that will be listed on a payment bond.  If asking the general contractor is not an option, the Act requires the public body (i.e. the city, state, county, school district or other public board) to make the payment bond available for inspection and copying upon request.

The Public Contractors’ Performance and Payment Bond Act (“the Act”), Minn. Stat. § 574.26 to 574.32: An Overview

The Act requires contractors to obtain payment bonds for public-works contracts (Minn. Stat. § 574.26, subd. 2(2)) and protects laborers and material suppliers who perform labor or furnish material for the execution of a public work to which the mechanics’ lien statute does not apply.  The payment bond serves as a contract under which a third party, the surety, agrees to pay a fixed amount if the general contractor fails to pay its subcontractors and material suppliers.  If the general contractor fails to perform its obligations as stated in the bond, both the general contractor and surety are liable.  Recovery on a payment bond is conditioned upon the subcontractor or material supplier providing timely notice of its claim to both the contractor and the surety. Minn. Stat. § 574.31, subd. 2(a).  Safety Signs, LLC v. Niles-Wiese Const. Co., Inc. shows that defective notice leaves a subcontractor unable to recover.

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