Expert Commentary

The Letter—Not Spirit—of Law Must Be Applied

Surety is a type of insurance in which the surety agrees to step into the shoes of a contractor to guarantee payments to subcontractors and material suppliers for any work done pursuant to the general contract. It is a contract usually controlled by statute in which, because of the intricacies of a general construction contract, the terms and conditions of the surety agreement are usually strictly construed.


Claims Practices
February 2013

In Minnesota, a surety, Westfield Insurance Company, challenged the trial court's denial of summary judgment to Westfield and grant of summary judgment to the respondent subcontractor on the respondent's payment-bond claim in Safety Signs LLC v. Niles-Wiese Constr. Co., Inc., No. A12–0370, 2012 Minn. LEXIS 674 (Minn. App. Sept. 17, 2012).

Facts of the Case

The City of Owatonna hired Niles-Wiese Construction as the general contractor for the construction of an airport runway and taxiway. Pursuant to Minnesota law, Niles-Wiese obtained a payment bond from Westfield. The payment bond—a contract between Westfield and the city—required Westfield to pay subcontractors and material suppliers for any work done pursuant to the general contract for which Niles-Wiese did not pay.

After Westfield issued the payment bond, Niles-Wiese entered into a subcontract with Safety Signs LLC to perform traffic-control and pavement-marking work on the airport project. In February 2009, Safety Signs sent a notice of payment-bond claim (notice) to Niles-Wiese and Westfield by certified mail. Safety Signs sent the notice to Niles-Wiese's primary business address rather than the address listed on the payment bond, as required by the Minnesota statutes. Despite this failure to comply with the statute, both Niles-Wiese and Westfield acknowledged receipt of the notice, and Niles-Wiese paid the requested amount.

On January 7, 2010, Safety Signs sent notice of another payment-bond claim to Niles-Wiese and Westfield by certified mail. As it did in February 2009, Safety Signs sent notice to Niles-Wiese's primary business address. This time, the notice was returned as undeliverable. Westfield received its notice on January 11, 2010, and acknowledged receipt thereof.

Although it was undisputed that Safety Signs satisfactorily completed its work, and Niles-Wiese failed to pay, Westfield refused to pay the claim. Safety Signs commenced this action seeking to recover the amount due under the subcontract, plus interest.

Westfield moved for summary judgment, asserting that the payment-bond claim failed because the notice was untimely and was not served on Niles-Wiese at the address listed on the payment bond. The district court denied this motion, reasoning that the notice was timely because it was mailed within the statutory notice period and failure to serve Niles-Wiese at the address listed on the payment bond was not fatal to Safety Signs' claim. Safety Signs subsequently moved for summary judgment, which the district court granted, ordering Westfield to pay the amount due under the subcontract along with penalty interest, attorneys' fees, costs, and disbursements.

Issues on Appeal

The following issues were addressed on appeal:

  1. Was Safety Signs' notice timely because it was mailed, though not received, within the 120-day statutory period?

  2. Was Safety Signs' service of notice fatally defective because the notice was sent to Niles-Wiese's primary business address rather than the address listed on the payment bond?

Analysis of the Case

The Public Contractors' Performance and Payment Bond Act (the bond statute) requires contractors to obtain payment bonds for public-works contracts. The purpose of the bond statute "is to protect laborers and materialmen who perform labor or furnish material for the execution of a public work to which the mechanics' lien statute does not apply." Recovery on a payment bond is conditioned on the claimant providing timely notice of its claim to both the contractor and the surety.

A payment-bond claim may not be maintained unless, within 120 days after completion, 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. The 120-day deadline is strictly enforced. One case held that notice mailed 122 days after completion of work was untimely.

The appellate court concluded that service of notice of a payment-bond claim is effective upon mailing. Because Safety Signs mailed the notice within 120 days after it completed its work, the notice was timely. However, to recover on a payment bond, the claimant must provide notice of the claim to the surety and the contractor at the addresses listed on the payment bond. The parties agreed that Safety Signs did not comply with the statute because it mailed the notice to Niles-Wiese's primary business address rather than the address listed on the payment bond.

Generally, a party may challenge a failure to comply with statutory notice requirements if the notice statute is designed to protect that party. Since a payment-bond claim is only recoverable against a surety, all of the statutory notice requirements are for the benefit of the surety. The requirement that notice be sent to the contractor benefits the surety by encouraging the contractor to pay the claim, eliminating the surety's obligation to pay it, and enabling the contractor to inform the surety of inaccuracies in the claim, preventing the surety from paying an invalid claim.

Condition Precedent

Compliance with the notice requirements is a "condition precedent" to a payment-bond claim. The general rule is that if a condition precedent prevents the accrual of a right, performance of the condition precedent may not be waived by a defendant to an action. As a result, sureties have repeatedly prevailed on the argument that a payment-bond claim failed for lack of notice upon another required party.

Westfield argued that substantial compliance with the notice requirements is insufficient to sustain a payment-bond claim. A materialman's right to bring an action on the bond is nonexistent in the absence of strict compliance with the statutory requirement of filing notice. The bond statute requires strict observance on the claimant's part of the filing of such notice with the proper officer.

The remedial purpose of the statute answers the question. 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. If the legislature had merely intended to require that notice be sent to an address where it would likely be received by the contractor, it could have said so. It did not. Instead, it laid out clear notice requirements that Safety Signs did not meet. The Minnesota Court of Appeal concluded that it was required to uphold the clear language set forth by the legislature.

The general rule in Minnesota is that if a condition precedent prevents the accrual of a right, performance of the condition precedent may not be waived by the defendant to an action. Since strict compliance with the entire notice provision in the bond statute is a condition precedent to a payment-bond claim, any defect in the notice or service thereof could not be waived.

Because the service defect was fatal to Safety Signs' payment-bond claim, the appellate court reversed the district court's summary judgment in favor of Safety Signs.

Because strict compliance with the notice requirements of the bond statute is a condition precedent to a payment-bond claim, and because failure to strictly comply with the statutory notice requirements results in a defect that cannot be waived, the district court erred in denying summary judgment to Westfield and granting summary judgment to Safety Signs.

Conclusion

I have preached until I am blue in the face that parties to insurance or surety contracts must read and understand the contract before making claim or filing suit. The surety agreement, by statute, made notice to both the surety and the contractor at the addresses stated in the agreement a condition precedent to recovery of payment from the surety if the contractor fails to pay. The claimant, Safety Signs, mailed its claim on the last possible day and failed to mail it to the proper address. It convinced the court that its notice was timely but—since facts are stubborn things—could not change the fact of the address to which the notice was sent.

A claimant against a surety in Minnesota must read the surety agreement, send its claim immediately upon completing the work, and always send the claim to the address listed on the surety contract. This is such simple advice that it is a wonder that Safety Signs did not comply and even more of a wonder that the trial court ruled in its favor. A condition precedent must be fulfilled in any contract before seeking the benefits of the contract, whether a surety agreement or a policy of insurance.


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