Subcontractors Case Analysis

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Two questions regarding the notice of claim issue stand out immediately upon reading this decision.

The first is why the court wrote as if this were an issue of first impression, rather than simply stating that this issue was settled by the Wisconsin Supreme Court 34 years ago in Smith v. Town of Pershing, 10 Wis.2d 352, 102 N.W.2d 765 (1960).

The facts in Smith are identical to those in the case at bar: A town entered into a contract with a prime contractor, who then entered into a contract with a subcontractor. The town failed its statutory duty to require the prime contractor to furnish a bond. The town paid the prime contractor, but the subcontractor never got paid. Smith, 102 N.W. at 766.

However, the subcontractor was unable to collect from the municipality, even though it was undisputed that, pursuant to Cowin & Co., Inc. v. City of Merrill, 202 Wis. 614, 233 N.W. 561 (1930), the city was liable. The court held that, because the subcontractor brought suit against the town without first complying with the notice of claim procedure — then set forth in sec. 60.36, now in sec. 893.80 — the case must be dismissed.

The court held, “we can perceive of no reason why [sec. 60.36, predecessor to sec. 893.80] should not be applicable with respect to the plaintiff’s instant cause of action against the town. There is nothing in sec. 289.16(1), Stats. [predecessor to sec. 779.15] , which in any way conflicts with sec. 60.36. We deem that the circuit court properly determined that the plaintiff’s failure to file a statement of his claim with the town clerk bars his action against the town.” Smith, 102 N.W.2d at 167.

There is little doubt that, had the subcontractors in the case at bar actually brought suit within 20 days of the Jan. 24, 2002, letter, as the Village argued they should have, the Village would have moved to dismiss, doing nothing more than citing the Smith decision.

Ultimately, the answer to why the court of appeals in the case at bar failed to even cite Smith will likely remain a mystery. Nevertheless, attorneys facing this issue in the future should be aware that this was not an issue of first impression, but that the issue was decided by the Supreme Court long ago, and that decision should be cited.

The second question raised by the case is whether a subcontractor who actually did as the Village argued it should have — brought suit within 20 days of the letter — could get around the decision in Smith, and recover anyway.

There are two plausible end runs around Smith. The first is the actual notice exception. In this case, the “official” notice of claim that the subcontractors filed on May 2, 2002 was not the first actual notice that the village had; back in 2001, after the work was done, but Hardy failed to pay them, the subcontractors “submitted claims to the Village of $85,859.10 and $81,279.12, respectively.”

When the village discovered that they failed to ensure that Hardy had acquired the appropriate bond, they sent the Jan. 24, 2002 letters to the subcontractors, offering roughly half of he submitted claims.

Under these circumstances, the “official” notice of claim in May could be deemed unnecessary pursuant to sec. 893.80(1)(a), which provides, in relevant part, that a failure to give requisite notice will not bar a claim if the municipality had “actual notice of the claim and the claimant shows to the satisfaction of the court that the … failure to give the requisite notice has not been prejudicial to the [municipality].”

In the case at bar, the municipality was given notice that they owed the subcontractors money, knew they were at fault in not requiring the prime contractor to get the necessary bonding, reviewed the claim, and offered roughly 50 cents on the dollar, instead of paying the full amount owed.

Thus, they had actual notice, and would not have been prejudiced if the subcontractors had sued immediately, without going through the futile exercise of filing a notice of claim. Thus, the suit in the case at bar should be permitted, even if the subcontractors didn’t file the “official” notice of claim in May.

A second plausible, but unlikely, end run would be the doctrine of equitable estoppel. Municipalities are not wholly immune from the doctrine, but estoppel is not freely applied against them. Only if necessary to prevent fraud is the doctrine invoked against a municipality. City of Jefferson v. Eiffler, 16 Wis.2d 123, 133, 113 N.W.2d 834 (1962).

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In this case, the Jan. 24, 2002, letters that the Village sent to the subcontractors informed them that their “lien claims exceeded the sum remaining due the prime contractor.”

Section 799.15(4)(a) provides, “When the total of the lien claims exceeds the sum due the prime contractor…” the subcontractor has 20 days to sue.

However, as the court of appeals noted, sec. 799.15 does not apply to a municipality’s failure to ensure the contractor has a municipal bond. Subsection (1) of the statute limits its applicability to cases where the subcontractors give notice to the city of the amount owed them, prior to the prime contractor being paid, and the subcontractors’ claims exceed the amount the city has earmarked for payment.

It could be argued that, by tracking the language in sec. 799.15(4)(a), the Village was trying to bait the subcontractors into following the procedures of a patently inapplicable statute, and they should be equitably estopped from then relying on the notice of claim statute to bar the claim. However, the offending language could just as easily be the result of ignorance of the law, rather than the result of fraud, and so estoppel would be difficult to invoke in such circumstances.

– David Ziemer

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David Ziemer can be reached by email.