Strict Notice Provisions Kill Yet Another Claim
Too many valid claims get dismissed before the court even has a chance to look at their merits. The culprit is often the ubiquitous notice provisions in the construction contract. But sometimes the provisions are found in payment bonds. A recent case reminds contractors to be aware of those short notice periods as well.
Payment bonds can be a godsend for subcontractors and vendors. They provide a deep pocket to enforce claims for non-payment against deadbeat contractors. They provide such a valuable safety net that the legislature mandates their use on most public projects. But in order to benefit from them, however, one must bring suit within a shortened period of limitations (often one year, rather than the usual 6-year statute of limitations for breach of contract).
A bigger trap can be found in the notice requirements set forth in the bond. Counter-intuitively, there is no notice requirement if you are a subcontractor who contracted directly with the contractor furnishing the bond (referred to as the bond “principal”). The logic there is that the principal already knows the state of its own account, and the surety has the right to look over its principal’s shoulder to get that same information at any time. However, if you are a sub-subcontractor, or some other entity contracting not directly with the principal contractor, but only with a subcontractor, you must give notice within a fairly narrow window.
State Finance Law §137(3), the statute governing payment bonds on public works, provides that notice must be given within 120 days from the date the last material was furnished for which a claim is being made. It must contain all the details of the claim. The notice must be given to the principal either personally or by registered mail. As perhaps a sop to the unwary, it provides that if notice is given using another method but is “actually received” it shall be deemed sufficient.
In a recent case, the Supreme Court of New York County dismissed the claim of an asbestos abatement sub-subcontractor that was owed some $550,000 on two projects. It conceded that it hadn’t given notice within 120 days by personal service or certified mail. However, it argued that the issuance of a two-party check by the principal contractor reflected adequate notice; that it showed that notice was “actually received.”
The court did not buy that argument. The court held that the intent of the statute was that notice sent by other means, but actually received, would be good enough so long as it detailed the claim with substantial accuracy. Receipt of a $10,000 two-party check did not satisfy that requirement. Since notice was a “condition precedent” to any right of payment under the payment bond, the claim was dismissed as against both the principal and the bonding company.
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