While surety bonds are meant to offer financial security for contractors and suppliers, surety providers often try to avoid making payments at all costs. This tactic was on display when a Michigan supplier had to fight the surety and general contractor all the way to the Supreme Court of Michigan. Ultimately, the supplier prevailed – despite the surety and general contractor’s argument that the general contractor never received notice that the supplier was on the job.
Bond claims, like mechanics liens, are invaluable when settling payment disputes in construction. By establishing a payment bond, as required by the Miller Act and Little Miller Acts, a general contractor provides recourse for subcontractors and suppliers down the chain who are not paid in full. With the flawed design of the construction payment chain, this serves a much needed purpose.
The Case: A Michigan surety denies a claim over lack of notice to the GC
The facts of Wyandotte Electric Supply Company v. Electrical Technology Systems, Inc. are as follows:
KEO was hired as general contractor to renovate part of the Detroit Public Library. KEO subcontracted with Electrical Technology Systems (ETS) for its electrical work. ETS, in turn, hired Wyandotte to supply materials for the project. When Wyandotte began work on the project, the supplier sent notice of furnishing to KEO, ETS, and Westfield Insurance Company, who was KEO’s surety provider on the project. This notice reached all parties but KEO.
Surety: Westfield Insurance Company (Westfield)
General Contractor: KEO
Subcontractor: Electrical Technology Systems (ETS)
Supplier: Wyandotte Electric Supply Company (Wyandotte)
Throughout the project, KEO made proper payments to ETS, but ETS had not been passing payment down the chain to Wyandotte. As Wyandotte neared the end of its work on the project, the supplier sent a timely notice of final furnishing (notice of completion) to the same parties who received the original notice of furnishing. This notice marks the first time that KEO actually became aware that Wyandotte had been working on the project. After KEO became aware of Wyandotte’s presence on the project and learned of ETS’ failure to fully pay Wyandotte’s invoices, the general contractor fired ETS from the project.
Still unpaid, and with ETS no longer in the picture, Wyandotte filed a claim against Westfield Insurance Company, KEO’s surety. Westfield denied the supplier’s claim, leaving Wyandotte with little other choice than to sue. Wyandotte filed suit against ETS, KEO, and Westfield.
At that point, however, ETS had gone out of business.
General Contractor and Surety’s Argument
As mentioned above, KEO did not receive Wyandotte’s original notice of furnishing. However, the notice was actually sent by Wyandotte to KEO via certified mail. All other parties received the notice – the Detroit Public Library, Westfield, and ETS. Because KEO did not actually receive notice of Wyandotte’s participation on the project, KEO and the surety argued that the supplier could not make a bond claim.
Further, KEO and Westfield argued that they should not be liable for extra sums that were included in the contract between Wyandotte and ETS (the parties agreed that ETS would pay for time price differential and ETS would pay for attorney fees if a dispute arose). They claimed that KEO did not agree to these terms, thus, their surety should not be bound by them.
The Courts Side with Wyandotte
The trial court found for Wyandotte, holding that the supplier had complied with its duties under Michigan’s Little Miller Act. The appellate court upheld this decision. In a last ditch effort, KEO and Westfield appealed to the Supreme Court of Michigan. Again, the decision was upheld.
While KEO did not actually receive Wyandotte’s original notice of furnishing, a general contractor’s actual notice is not required by statute. Rather, a party sending notice of furnishing must send it via certified mail. The statute does not require actual receipt of the notice (however, if certified mail is not used, a party’s actual notice will fulfill the notice requirement). Because Wyandotte complied with its statutory duties, the supplier preserved its right to file a claim against the bond.
Regarding the time price differential and attorney fees, the Supreme Court of Michigan again found for Wyandotte. The Court reasoned that finding for KEO and Westfield would undermine the entire purpose of the state’s Little Miller Act.
One of the main purposes Little Miller Acts across the country is to provide parties down the chain recourse in the event that they are failed by the construction payment chain. These statues specifically contemplate instances where a claimant has no contractual relationship with a general contractor. To rewrite a party’s contract to reflect a general contractor’s preferred terms would go against the very purpose of the legislation. The extra sums due to Wyandotte resulting from its contract with ETS were not excluded.
Michigan Bond Claims and Notice of Furnishing
According to the state’s Little Miller Act, parties not directly in contract with a general contractor must send notice of furnishing (preliminary notice) in order to preserve the right to file Michigan bond claims. This notice must be sent within 30 days via certified mail to the general contractor and the contracting public entity. However, if a claimant can prove that the other parties actually received notice sent by some other method, that notice will suffice.
Takeaway: Attention to detail gets you paid
This case is an excellent example of how paying attention to detail can get you paid. Wyandotte operated by the book throughout the whole project. By sending proper notices in the correct manner, the supplier was able to get paid despite incompetence by ETS. The Supreme Court of Michigan came to the correct decision.
Subcontractors and suppliers on public projects can rest assured knowing that courts will enforce Michigan bond claims when made properly.