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Subcontractors Beware: Notice Requirement May Result in a Dismissed Claim


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Murray

By Laura Murray

Background

The subcontractor entered into a contract with the general contractor to perform work on a public project.  As required by Minnesota law for work performed on public projects, the contractor obtained a payment bond, which ensures the payment to all persons furnishing materials or labor for the project.   The insurer providing the payment bond is known as a surety and agrees to be liable in the event the contractor defaults on his obligation and does not pay those furnishing labor or materials.  

 

The subcontractor’s work on the project was divided into two phases.  After the completion of the first phase, the contractor failed to pay the amount owed. In response, the subcontractor served a pre-suit notice of bond claim on both the contractor and surety, and shortly thereafter, the contractor paid the full amount owed for the completion of the first phase.  After the completion of the second phase, the contractor again failed to compensate the subcontractor.  The subcontractor again served notice of the bond claim on the contractor and surety. 

The certified letter containing the notice that was sent to the general contractor was returned to the subcontractor marked “Return to Sender -Unclaimed- Unable to Forward.” The surety, however, received the notice and informed the subcontractor that it would request the contractor’s position on the claim. The surety later denied the payment after receiving the contractor’s position that it disputed the claim. In response, the subcontractor filed a lawsuit against the surety and the contractor. The contractor did not file an answer to the subcontractor’s complaint, and a default judgment was entered against him. The surety argued that it did not have to pay the claim because the subcontractor did not comply with the statute by sending notice of the claim to the contractor’s address listed in the payment bond.

Strict compliance
The court found that, on both occasions, the subcontractor sent notice to the contractor’s address listed in its contract.  The court noted that even though the contractor and surety did not object the first time the contractor was served with notice; it argued that the subcontractor’s second claim must be dismissed as it failed to comply with the clear terms of the law.   The court found it undisputed that the contractor defaulted on its contract with the subcontractor. The question before the court was whether the subcontractor needed to strictly comply with the notice requirement in the statute. The court held the law is clear that in order for the notice requirement to be met, notice must be sent to the address of the contractor and surety listed in the bond.

The court analyzed the language of the statute and found that the language clearly mandates that notice will not be sufficient unless it is sent to the address that is listed on the payment bond.  The court stated the fact that a different address was listed on the bond did not impact its analysis even though the notice requirements create a “trap of unwary.” The court held the notice requirement was an unambiguous prerequisite to filing the lawsuit, and the subcontractor failed to meet the prerequisite by serving notice on the contractor at its address as stated in the bond. The court, therefore, dismissed the claim.

Takeaway
Subcontractors and the furnishers of materials should be aware of all statutory prerequisites, when pursuing such a claim against a surety. As seen in this case, if a state takes a strict approach to these requirements, failing to follow them may leave a subcontractor with a substantial loss.

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