“Did you send your statutory notices?” This question should be familiar to any firm seeking help in pursuing a bond or lien claim for nonpayment. Seasoned contractors also know that it is just the beginning of the inquisition. “When did you serve the notices?” “How did you serve hem?” “Where did you send them to?” “Do you have proof of delivery?” “When was your last date of work?” “Was it contract work or punch list work?” The questions may appear intolerably nitpicky, honing in on very specific and seemingly arcane details. But rest assured that there may be a very good reason for these questions. When it comes to bond and lien claim enforcement, the details matter. They really matter. Contractors, subcontractors, and suppliers that miss the details can pay a severe price.
The Compliance Trap
Lien and bond laws vary from state to state and can be complex and technical. One common characteristic they all generally share is that they mandate strict compliance in order to trigger a surety’s obligation to pay on the bond or the lienor’s right to foreclose on the property. Any deviance from the specific statutory requirements laid out by the state legislatures, however minor, can be fatal to bond and lien claims. Claimants that are not careful risk losing their bond and lien rights in their entirety. Every year, general contractors, subcontractors, and suppliers across the country fall victim to the strict compliance trap when trying to get paid for their work by making simple—and avoidable—mistakes. The Minnesota Supreme Court’s decision in Safety Signs, LLC v. Niles-Wise Construction Co., 840 N.W.2d 34 (Minn. 2013), is a reminder of what can happen to general contractors, subcontractors, and suppliers who do not strictly follow the bond and lien laws.
Safety Signs, LLC v. Niles-Wise Construction Co.
The Safety Signs case involved this construction scenario: the general contractor receives payment from a public owner but fails to pay its subcontractor. The City of Owatonna, Minnesota “(City”) entered into a contract with Niles-Wiese Construction Co. (“Niles-Wiese”) to construct a new runway and taxiway. Because it was a public project, Niles-Wiese had procured a payment bond from Westfield Insurance Co. (“Westfield”) in which Westfield agreed to be liable if Niles-Wiese failed to pay its suppliers or subcontractors. The City paid Niles-Wiese but Niles-Wiese defaulted in paying its pavement-marking subcontractor, Safety Signs. Minnesota law requires an unpaid subcontractor to give written notice to the general contractor and its surety before commencing a lawsuit asserting a payment bond claim, so Safety Signs served its notice on both Niles-Wiese and Westfield. When Westfield rejected the claim, Safety Signs commenced litigation.
Unfortunately, Safety Signs made a crucial mistake when it served its notices. Its notice to Westfield was fine, but it mailed the notice to Niles-Wiese’s address listed on the subcontract rather than the address on the payment bond. The two addresses were not the same. This was a problem because the applicable Minnesota statute specifically required bond claimants to serve their notices on the surety and general contractor “at their addresses as stated in the bond.” Minn. Stat. § 574.31, subd. 2(a). There was no question that Safety Sign used the incorrect address. Safety Signs argued that it should be allowed to prosecute its claim because it substantially complied with the law. The Minnesota Supreme Court, therefore, had to decide whether bond claimants were required to strictly follow the statutory directive to serve notice on the surety and general contractor “at their addresses as stated in the bond,” or whether substantial compliance with the statutory notice requirement was sufficient.
After examining the statutory language, the court concluded that it left no room for judicial interpretation. The right to sue on a payment bond was granted by statute, and the language of the statute granting that right required that the claimant take certain steps for the right to accrue. One of the required steps was to give proper notice to the general contractor. Minnesota’s statutory notice requirements were unambiguous and required service at the address listed in the bond as a condition precedent to filing suit. Thus, allowing anything less than strict compliance with the statute would thwart the clear scheme for bringing an action on a public payment bond imposed by the Minnesota Legislature.
What Safety Signs Really Means
The practical outcome of the Safety Signs decision is very harsh. In sending its general contractor notice to the wrong address, Safety Signs forfeited its entire bond claim even though it had correctly notified the surety. Safety Signs had no cause of action against the payment bond to remedy NilesWiese’s nonpayment and was left pursuing NilesWiese for payment.
Payment bonds and liens are valuable remedies for parties on construction projects. Aside from offering another avenue for payment, bond and lien statutes often provide for successful claimants and lienors to recover their attorneys’ fees and costs. The loss of a surety bond—or an interest in the owner’s property in the case of a lien—can be devastating for a general contractor, subcontractor, or supplier trying to receive payment. One pocket is worse than two, especially if the owner or general contractor is experiencing cash flow problems and is unable to pay its subcontractors and suppliers. Indeed, the Minnesota Supreme Court recognized that meritorious claims may sometimes be lost as a consequence of its strict interpretation of Minnesota’s public payment bond statute. Nonetheless, strict compliance remains the law in Minnesota, and may be the result in other jurisdictions in the United States.
Avoiding the Strict Compliance Trap
Cases like Safety Signs are a reminder that, when it comes to bond and lien claims, preparation and vigilance are critical. Prior to starting work, contractors, subcontractors, and suppliers need to have a plan for (a) tracking the current statutory lien and bond requirements in all of the jurisdictions in which they work, and (b) making sure they actually strictly follow the then current requirements on every project. This plan should cover all pre-performance and pre-suit notice obligations, the requirements for preparing the actual bond claim and lien, and all deadlines for sending the notices, making the bond claim, or recording the lien. If you do not have qualified in-house personnel to do this, you need to find competent and reputable outside assistance. Failure to do so may leave you without lien or bond rights; two powerful avenues for recovery that you cannot afford to lose.