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This is the fifth in our series of webinars on lien and bond claim laws, and general construction law in Arizona. So now let us take a step back and go through what has been covered already.
This is part five in our Arizona lien law series:
- Dealing with Bonded Liens in AZ And How to Get Paid on Public Project Bond Claims in AZ
In the first article of the series ‘Arizona Preliminary 20-Day Notices, Lien and Bond Claim Refresher,’ a refresher and pro-tips were discussed. In this article, more about bond claims will be discussed.
In ‘What Happens After I Record My Mechanic’s Lien in Arizona? How Do I Get Paid?’ the steps after you get a lien recorded were discussed, like when to serve it and foreclose on it within a certain amount of time.
In the third webinar ‘Lien Waivers in Arizona – Be Careful What You Sign’ lien waivers in Arizona were discussed. Being very careful when you sign lien waivers was discussed. If you read that article, there are statutory forms provided and four lien waivers were discussed, as were progress waivers, both conditional and unconditional. Then final waivers both conditional and unconditional were explored.
The big takeaway was to not sign an unconditional waiver until you have the payment that the waiver corresponds to in your hand, and that has cleared the bank upon which it is drawn.
Then ‘Bad Checks and Credit Card Chargebacks – How to Deal with Them in the Context of Construction Debts’ was done.
Arizona Preliminary 20-Day Notices
That brings us back to one of the most important parts of all the articles and a recurring theme that we will continue to make clear is that in Arizona it is extremely important that you serve a Preliminary 20-Day Notice on the construction projects on which you furnished labor and materials. Or if you are a supplier, you furnish materials.
Because that opens up your ability to (i) Record a lien on a project, and (ii) Pursue bond claims in most respects. The statute that governs is § 33-992-01, and it says:
a. Not serving a 20-Day Notice is to forfeit all lien rights/bond claim
Again, you can serve a Preliminary 20-Day Notice later in a project. But it only catches back 20 days, so if it is November 20th or November 21st and you serve a 20-day notice on a project that started on September 1st, it would catch back 20 days to November 1st and then you would have lien, and potentially bond rights on claims for your materials and labor that you furnished after November 1st.
But that period from September 1st until November 1st would not be covered for purposes of lien rights and potentially, bond claims.
a. Not serving a timely notice is to forfeit a portion of lien rights/bond claim
If you do not serve a 20-Day Notice, you will potentially forfeit all your lien rights and maybe your bond claim rights. So again, if we can emphasize anything, it is to make sure that you are serving 20-Day Notices for projects in Arizona.
Discharge Bonds
The Arizona statutes provide that after a Notice and Claim of Lien is recorded, a property owner has the option of posting a statutory lien discharge bond. That is essentially a payment bond that is for 150 percent of the lien.
a. Must be recorded in the county where project is located and served
It must be recorded in the county where the project is located and served on the lienholder.
b. Discharges the lien on the property
Once that lien is recorded or the bond is recorded, it discharges the effectiveness of the lien on the property. If the lawsuit foreclosed on the lien, maybe hopefully as you work through these things, once a lien is recorded, you are working towards a resolution to get things resolved.
If unfortunately, it does not make it to that point, and it does not look like things are going to get resolved, and a bond is recorded after the lien has already been recorded before you file suit, then you will have to file suit on the bond as opposed making a claim on the bond and principal on the bond who is the contractor posting the bond.
You would do that instead of suing to foreclose on the lien, but as the last point here, you are still going to have to file that lawsuit within the time you have to foreclose on the lien.
c. If lawsuit is pending, lien claimant must amend suit to add claim on the bond
As talked about in previous articles, once a lien is recorded in Arizona, you have six months to sue to foreclose if a lawsuit is already pending.
So if you file suit to foreclose on your lien and at that point, the owner or the upstream party posts the discharge bond then you need to amend your suit. You have 90 days to amend that suit to bring a claim on the bond, and the principal on the bond.
That is basically how lien discharge bonds work in Arizona depending on the project. But depending on the owner, or the upstream parties involved, there are certain strategic reasons that they are employed. You just need to be aware of them and know that that is an option you may have to deal with or a strategy you may have to deal with as a lien claimant in Arizona., and be prepared to react.
But even if a discharge bond is posted, it has to be served, and it does not elongate your time to sue to foreclose. That can be somewhat confusing because the deadline to sue to collect on a payment bond in Arizona, on a public project which would be a Little Miller Act bond, is a year from the time that you last furnished labor or materials to the project.
So, you potentially have more time to sue on a payment bond versus your ability to foreclose on a mechanic’s lien. That depends on what stage of the project you are working on, because lien rights expire, or the ability to record a lien is 120 days from the completion of the project.
The completion of the project can be defined in a variety of ways. But you have six months from when the lien is recorded to file suit. So do not let that trip you up with respect to timelines.
Public Project Payment Bond Claims
Now we move on to public project payment bond claims.
a. Mechanic’s liens apply only on private projects
Mechanic's liens apply only on private projects. That is simply for the reason that public projects and the public property on which they apply cannot be liened. So federal and state law require payment bonds on projects of certain sizes and types.
b. Qualified subcontractors and materialmen may have claims against bond
Qualified subcontractors and materialmen may have claims against the bond if they satisfy certain notice requirements.
Miller Act and Little Miller Act Payment Bonds on Public Projects
Now we will discuss the Miller Act and Little Miller Act payment bonds on public projects.
a. Federal project bonds are governed by the Federal Miller Act
The payment bonds on federal projects are governed by the Federal Miller Act which can be found in 40 U.S.C. § 3101 et seq.
b. Arizona public payment bonds are governed by the Little Miller Act
Arizona’s public payment bonds are governed by the ‘Little Miller’ Act which is very similar to the Federal Miller Act. It can be found in A.R.S. Title 34, Uniform Procurement Code, E.R.S. Title 41.
c. Federal and state notice requirements differ
Federal and state notice requirements differ and depend on contract tiers.
Subcontractors and Suppliers Protected by Miller Act & Arizona Little Miller Act Payment Bonds
First we will talk about who is protected by the Miller Act and Little Miller Act payment bonds under both federal and state projects.
Typically, you have the general contractor posting the bond. If that is the case, the first-tier subcontractor, first-tier supplier, and second-tier subcontractor and supplier are also protected. Second-tier suppliers, third-tier suppliers and third-tier subcontractors are not protected.
Payment Bond Claim Notice Requirements
That now brings us to notice under the Federal Miller Act.
a. Federal Miller Act
Laborers and materialmen with no direct relationship to the general contractor furnishing the payment bond, (must) give written notice to the contractor within 90 days from the date on which the person did or performed the last of the labor or furnished or supplied the last of the material for which the claim is made.
So on federal projects, you have to give this 90-day post-completion to trigger your ability to file suit on the bond.
b. Arizona Little Miller Act
Arizona is a little bit different.
c. Any claimant who has a direct contractual relationship with subcontractor of the contractor
In the state, a claimant who has a direct contractual relationship with a subcontractor of the contractor furnishing the payment bond, but not a contractual relationship express or implied with the contractor has a right of action on the payment bond on giving the contractor the following notices:
- A written Preliminary 20-Day Notice pursuant to A.R.S. § 33-992-.01
- A written 90-Day Notice given within 90 days after the claimant last performed work or furnished material stating the:
- amount claimed, and
- the party to or for whom the material was supplied, or the labor was performed.
The written preliminary notice can affect your ability to have a bond claim on a public project. Then you have to give a written 90-Day Notice, and this is similar to the requirements under the Federal Miller Act.
One of the key things you will notice about the constructs of Arizona’s Little Miller Act statute is that if you have a direct relationship with the contractor furnishing the bond, you do not need to provide these types of notices. It is not a bad practice to provide the notice anyway.
There is no harm in providing them but you do not need to, and the reason for that is presumably if you have a direct relationship with the contractor furnishing the payment bond. They are going to know that you are out there.
The notice requirements for both the Preliminary 20-Day Notice and the 90-Day Notice are to protect the contractor furnishing the bond from claims that they may not know about, and from parties that they do not have direct contractual relationships with.
So, if you have a relationship with the subcontractor of the contractor furnishing the bond, then you are going to have to go ahead and furnish these notices.
Payment Bond Claim Deadlines
Now we will discuss payment bond claim deadlines.
a. Must wait 90 days
Under both the Federal Miller Act and the Little Miller Act, claimants may not bring suit to recover on the bond until 90 days after the last labor was furnished or materials were supplied. So, you have to provide that 90-day post completion notice if you are required, within 90 days of when you last furnished material or supplied labor. But you cannot sue before the expiration of that 90 days.
b. Statute of limitations for filing suit on bond claim expires
The statute of limitation for filing suit on a bond claim expires one year after the date to claim it after last performed labor or supplied material. So if you really think about it, it seems like you have a year, but the first three months you cannot sue on the bond. You have to wait for those 90 days to lapse and then you have nine months to file your suit if things are not resolved.
This is different from lien statutes where you have 120 days after completion to record your lien. You are talking about completion there, on the entire project. Here, everything is being measured from the day on which you last performed labor or supplied materials. So, that is a different standard.
