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Village liable for unbonded contractor

Dykman

“Municipal liability for failure to ensure that a contractor furnishes a proper bond protects subcontractors, taxpayers and the municipality itself.”

Hon. Charles P. Dykman
Wisconsin Court of Appeals

A municipality is liable to a subcontractor for its failure to ensure that a prime contractor obtained a payment bond, the Wisconsin Court of Appeals held on July 29.

The court also held that the 20-day statute of limitations in sec. 779.15(4)(a) is inapplicable to a suit against a municipality for failing to ensure the acquisition of a bond.

In 2001, the Village of Readstown contracted with Hardy Construction Company to be the prime contractor on a construction project. The contract required Hardy to obtain a payment and performance bond.

Hardy subcontracted with Holmen Concrete Products Company to provide materials, and with Iverson Construction Company to provide materials and labor on the project. Holmen and Iverson performed their obligations under the agreement, but Hardy failed to pay them.

Holmen and Iverson then submitted claims to the Village of $85,859.10 and $81,279.12, respectively, for unpaid materials and labor.

After discovering that it had failed to ensure that Hardy had acquired an appropriate payment and performance bond, the village sent letters to Holmen and Iverson, dated Jan. 24, 2002, informing them that a bond may not have been issued to Hardy.

The letter also outlined the partial payments the Village determined would be paid to each subcontractor, and on Feb. 25, 2002, the Village made partial payments of $44,295 to Holmen and $41,932 to Iverson.

On May 2, 2002, Holmen and Iverson served notices of claim on the Village for the unpaid sums, and on Aug. 30, 2002, they sued Hardy and the Village to recover the unpaid portion of the contracts.

The contractors asserted breach of contract against Hardy, sought to enforce their respective liens against public funds under sec. 779.15, and sought damages stemming from the Village’s failure to require Hardy to furnish a payment and performance bond as required by sec. 779.14(1m).

The Village moved for summary judgment, claiming that the claims against it were barred by sec. 779.15(4)(a). Vernon County Circuit Court Judge Michael J. Rosborough denied the motion, and granted summary judgment to Holmen and Iverson.

The Village appealed, but the court of appeals affirmed in a decision by Judge Charles P. Dykman.

Municipal Liability

The court first held that a municipality is liable to a subcontractor if the municipality fails to require a prime contractor to furnish the municipality with a bond required by statute.

The Wisconsin Supreme Court laid down this rule in Cowin & Co., Inc., v. City of Merrill, 202 Wis. 614, 233 N.W. 561 (1930). In Cowin, a firm that had contracted for road construction with the City of Merrill became insolvent and failed to pay its subcontractors. The City had neglected to obtain a bond from the prime contractor to ensure the payment of labor and materials to subcontractors, as required by former sec. 289.16.

The Village argued that Cowin was no longer valid law in light of subsequent amendments to that statute.

In 1979, the statute was renumbered sec. 779.14(1m), and, as amended, read in pertinent part: “(a) All contracts with the state involving $2,500 or more and all other contracts involving $500 or more for the performance of labor or furnishing materials when the same pertains to any public improvement or public work shall contain a provision for the payment by the prime contractor of all claims …. (b)1. A contract under par. (a) shall not be made unless the prime contractor gives a bond.”

A 1998 revision of sec. 779.14 deleted section (1m)(b)1.

The Village argued that this deletion relieved municipalities of the duty to ensure that contractors obtain a bond, effectively repealing Cowin and placing the risk upon the subcontractors, rather than the municipality.

The Village argued that the revised statute mandates only that a municipality ensure that the contract provide that a prime contractor obtain a payment and performance bond, but overruled Cowin to the extent it made the municipality liable for failing to ensure compliance.

What the court held

Case: Holmen Concrete Products Co. v. Hardy Construction Co., No. 03-3335.

Issue: Is a municipality liable to a subcontractor for its failure to ensure that a prime contractor obtained a payment bond?

Is the 20-day statute of limitations in sec. 779.15(4)(a) applicable to a suit against a municipality for failing to ensure the acquisition of a bond?

Holding: Yes. Subsequent amendments to the statute do not effectively repeal the holding in Cowin & Co. v. City of Merrill that a municipality is liable.

No. The notice of claim procedure in sec. 893.80 governs the timing of suits against a municipality.

Counsel: David L. Jenkins, Viroqua, for appellant; Mark O. Anderson, Minneapolis, MN., for resp
ondent.

The court rejected this interpretation, however, noting that nothing in the analysis by the Legislative Reference Bureau suggested that the deletion’s purpose was to remove the duty of a municipality to require a proper bond.

In addition, the revision preserved the provision that any bond “shall be approved” by an appropriate government official identified by the statute, in this case “a village by its president.” The court concluded, “For this provision to have meaning, a municipality’s duty in this context must extend beyond merely the drawing up of proper contract language.”

The court added, “Plainly, a local government official cannot approve a non-existent bond. In addition, failure to impose liability where no bond is provided would render the approval requirement ineffectual.”

The Village also argued that subsec. (1m)(d)2.b shows that the Legislature no longer finds the ensuring of a proper bond mandatory. That subsection provides that, for contracts between $50,000 and $100,000, a substitute payment or performance assurance may be permitted “only after the contract has been awarded.”

The Village contended that, by permitting, in some cases, performance assurance after contract approval, the Legislature intended to relax the obligation of municipalities to ensure that contractors obtain payment or performance assurances for other contracts.

Rejecting the argument, the court stated that it would not overturn Cowin based on an inference drawn from an inoperative statute, stating, “When a legislative act has been construed by an appellate court, the legislature is presumed to know that without an explicit change in the law, the court’s interpretation will remain un-changed.”

Turning to policy, the court found that the reasons underlying the decision in Cowin remain just as pertinent today, concluding, “Municipal liability for failure to ensure that a contractor furnishes a proper bond protects subcontractors, taxpayers and the municipality itself.”

Limitations

The court next held that the suit was not time-barred.

The Village argued that sec. 779.15(4)(a), barred the suit. The statute provides: “When the total of the lien claims exceeds the sum due the prime contractor and where the prime contractor has not disputed the amounts of the claims filed, the debtor … municipality, through the officer, board, department or commission with whom the claims are filed, shall determine who is entitled to the money and shall notify all claimants and the prime contractor in writing of the determination. Unless an action is commenced by a claimant or by the prime contractor within 20 days after the mailing of the notice, the money shall be paid out in accordance with the determination and the liability of the … municipality to any lien claimant shall cease.”

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Case Analysis

The Village argued that, pursuant to the statute, any suit against it had to be filed within 20 days of its Jan. 24, 2002, letter that informed Holmen and Iverson that their lien claims exceeded the sum remaining due the prime contractor.

However, the court found the statute inapposite, reasoning, “A claim against a municipality for failure to ensure that a contractor obtains a payment and performance bond is distinct from a construction lien claim brought under Wis. Stat. Sec. 779.15(4)(a). In contrast, sec. 779.15(4)(a) applies to lien claims that can be asserted against funds held by a public owner on a public project. The lien claims statute does not apply to claims arising from the breach of a municipality’s duty to require a payment and performance bond. In their complaint, Holmen and Iverson appropriately stated these two distinct claims as separate causes of action.”

Instead, the court found that sec. 893.80 governs the time and filing requirements applicable to the claims. The statute provides that any plaintiff bringing an action against a municipality must provide written notice of the claim within 120 days after the happening of the event giving rise to the claim, unless the governmental party had actual notice of the claim and was not prejudiced by any delay in notification. The municipality may then respond with a notice of disallowance of the claim. The plaintiff then has six months from the date of disallowance to sue.

Because Holmen and Iverson filed notices of claim within 120 days of the Jan. 24, 2002, letter, the village disallowed the claims in July, and Holmen and Iverson sued in August, the court found that they complied with the statute. Accordingly, the court affirmed the grant of summary judgment to Holmen and Iverson.

Click here for Case Analysis.

David Ziemer can be reached by email.

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