Subcontractor’s ‘Substantial Compliance’ with Bond Statute Is Sufficient to Preserve Valid Bond Claim, ASA Tells Minnesota Supreme Court

ALEXANDRIA, Va., Nov. 6 -- The American Subcontractors Association issued the following news release:

If the Supreme Court of Minnesota does not reverse an appeals court's decision holding construction subcontractors to strict compliance with the state's payment bond law, subcontractors could lose valid claims based on technicalities, even when those claims notices are actually received by both the general contractor and the surety company.

The American Subcontractors Association on Oct. 31 asked the Minnesota Supreme Court for permission to file an amicus curiae briefhttps://www.asaonline.com/eweb/upload/Amicus%20Brief%20Application%20-%20Safety%20Signs,%20LLC,%20v.%20Westfield%20Insurance%20Co.pdf in the case of Safety Signs, LLC, v. Westfield Insurance Co., stating that "substantial compliance with notice requirements is sufficient to preserve a bond claim."

The Minnesota Appeals Court dismissed Safety Sign's payment bond claim because the subcontractor sent the notice to the general contractor's principal address, not the address listed on the payment bond, as required under Minnesota's Public Contractors Performance and Payment Bond Act.

"The public policy implications of not granting review, the uncertainty that currently exists, and the troubling legal and equitable issues that would result if this Court does not clarify whether substantial compliance with notice requirements is sufficient to preserve a bond claim under the notice provisions of [the payment bond law] ... all support granting the current Petition for Review," ASA wrote. "There is no compelling legal or equitable reason why, given the remedial purposes of the statute, the doctrine of substantial compliance should not be extended to the Act."

Safety Signs subcontracted with Nile-Wiese Construction to perform traffic control and pavement marking work on the "Owatonna Degner Regional Airport Construct Runway 5/23 and Taxiway B project," owned by the City of Owatonna.

Safety Signs properly performed its scope of work without complaint, but was not paid after the city paid the contractor. Safety Signs sent its notice to the surety company, Westfield Insurance, and the contractor, but sent the notice to the contractor's principal place of business listed in the subcontract and on the contractor's Web site, not the address listed on the payment bond. The surety and contractor acknowledged receipt of the claim and the contractor paid the requested amount.

Safety Signs commenced with the second phase of the project work, but again, was not paid for its work. In January 2010, Safety Signs served the contractor and surety with a second payment bond claim, and again, sent it to the contractor's principal place of business. Nile-Wiese and Westfield refused to pay, based on the technicality that the notice of claim was not sent to the contractor's address listed on the bond as required under Minnesota's bond statute. Safety Signs sued. The trial court found substantial compliance with the statute and awarded Safety Signs 100 percent of its claim, plus attorney fees, costs and 18 percent interest under the state's prompt pay law.

The surety appealed, and the appeals court reversed the trial court decision, stating that strict compliance with the notice requirements of the bond statute was a condition precedent to a payment bond claim.

ASA reminded the Minnesota Supreme Court that the primary purpose of the bond statute is to protect those who perform labor or furnish material to public projects. "Yet in the Decision the [appeals] court held that substantial compliance with the Act -- through serving notice on the surety and attempted service on the bond principal at its regular business address -- was insufficient to preserve otherwise valid bond claims," ASA wrote.

The appeals court's decision, ASA also noted, "would create an incentive for collusion between the surety and 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.

"ASA is concerned about maintaining consistency and integrity in Minnesota case law since there are already cases applying the substantial compliance doctrine to the Act, which the Minnesota Court of Appeals dismissed as implicitly overruled," ASA said. "As an amici participant ASA could provide valuable perspective and information on the use of payment bonds on construction projects, the importance of such bonds to subcontractors, the practical concerns regarding payment on construction projects, and the risks of nonpayment to subcontractors."

If the court accepts the application, ASA would tap its Subcontractors Legal Defense Fund (www.sldf.net) to finance the brief in this case.

TNS CT21CT-121107-4097529 61ChengTacorda