April 2003

Court Holds Supplier's Notice Was Timely

By ALEXANDER A. MIUCCIO, CIC Legal Counsel

Section 137 of the State Finance Law of the State of New York requires labor and material payments bonds on most public improvement construction projects. The statute permits suits on the payment bond by any person or entity who performs labor for or furnishes material to a contractor, or a subcontractor of the contractor, on such projects and who has not been paid in full within 90 days after the last of the labor was performed, or after the last of the material was furnished.

For those subcontractors or material suppliers who do not have a contractual relationship with the contractor who furnished the payment bond, there is no right to commence an action on the bond unless written notice is given to the contractor within 120 days "from the date on which the last of the labor was performed or the last of the material was furnished" for which the claim is made. The statute also provides that all actions, whether or not notice is required, must be commenced within "one year from the date on which final payment under the claimant's subcontract became due."

The notice requirement, as it relates to suppliers who furnish materials on an open account pursuant to a series of separate purchase orders, has been the frequent subject of litigationÑwith conflicting interpretations. Some courts have held that because there were separate orders, billed separately, a separate notice must be given with respect to each purchase order within 120 days from the date of the last delivery under each purchase order. Other courts have held that since the materials were furnished pursuant to an entire contract or on a running account basis, only one notice is required within 120 days after the last of the materials were delivered. In the recent case of Specialty Products & Insulation Company v. St. Paul Fire & Marine Insurance Company, New York's highest court ruled definitively that only one notice of claim, measured from the last delivery of materials, is required.

Background

Specialty Products and Insulation Co. supplied materials on an open account basis to a subcontractor of Northland Associates, Inc., the general contractor on a public improvement project involving additions and alterations to the Broome County courts. The subcontractor placed separate purchase orders for each request for materials and the supplier submitted a separate invoice for each corresponding delivery. The supplier made eight separately invoiced deliveries between Oct. 15 and Dec. 17, 1998. On March 29, 1999 the supplier notified the general contractor that it had not been paid the amounts due on the invoices totaling $48,578.34.

Subsequently, the supplier delivered a notice of claim to the general contractor and the Broome County Commissioners, and filed a proof of claim with St. Paul Fire and Marine Insurance Company, the surety on the statutorily required payment bond. The supplier then commenced suit on the payment bond.

The New York Supreme Court granted the surety's motion for summary judgment dismissing the complaint as it related to deliveries made more than 120 days before notice was given to the general contractor, holding that each purchase order constituted a separate contract, requiring a separate notice of claim. The Appellate Division reversed, holding that only one notice, within 120 days of the final delivery, was required. After a judgment was entered in favor of the supplier, the case reached the New York State Court of Appeals.

Arguments

The surety argued that because there were separate orders, billed separately, each order and delivery was a separate contract. According to the surety, the parties treated each order as completely independent, having nothing to do with the other orders. The surety also argued that a separate notice was required for each purchase order because the notice provision was intended to assist contractors in investigating claims and withholding funds to pay those claims. Unless notices were to be given after each invoice, the general contractor would have no way of knowing that the supplier of a subcontractor was not being paid on time in order to do something about it. According to the surety, a one-notice rule would permit the revival of stale claims each time a new order was placed.

The supplier argued that requiring a separate notice for every purchase order, delivery or invoice would be unduly burdensome to suppliers using open accounts, particularly when there is a large volume of invoices, sometimes for small amounts. According to the supplier, it made no sense to give separate notices as to each separate order where the separate orders were all related to the prosecution of the work provided for in the project.

The supplier argued further that the language of the statute provided for notice within 120 days from the date on which the last of the labor was performed or the last of the material was furnished, for which claim is made. The statutory language contemplates only one date and the intent of the statute was to remove unnecessary obstacles and promote prompt payment to laborers and suppliers.

Decision

The court noted that "cogent arguments can be mustered" for and against both interpretations of the statute, as demonstrated by a division among the state and federal courts throughout the country. The court, with the intent to state with clarity and certainty as to what the statute required, held that one notice, measured from the final delivery of materials, was all that was required by the statute. The court reasoned that the one notice rule fits better with the words of the statute and the legislative intent to protect those who furnish labor or materials for public works. The court noted that its interpretation was consistent with most federal courts considering the same issue on federal projects under the Miller Act, upon which State Finance Law Section 137 is modeled. The court considered the protection of laborers and material suppliers to be more important than limiting the liability of general contractors and their sureties.

Accordingly, the notice given by the supplier with an open account arrangement was within 120 days of its last delivery and invoice, and was therefore timely. The judgment in favor of the supplier was affirmed.

Conclusion

By its decision in this case, the Court of Appeals has finally settled the issue in this state on notices, whether one or multiple notices are required by suppliers as a precondition to commencing an action against the payment bond provided under Section 137 of the State Finance Law. As long as the supplier gives written notice of its claim to the general contractor within 120 days of the final delivery of materials, the right to sue for all materials delivered to the project is preserved.

About the author: Mr. Miuccio is a partner in the New York City-based law firm Altieri, Kushner & Miuccio, P.C. and legal counsel to the Construction Industry Council of Westchester and Hudson Valley, Inc. Robert Mark Wasko, senior associate with the firm, assisted in the preparation of this article.