How to Get the Bonding Company to Pay in Arizona - Arizona Webinar

In this blog, presented by SunRay Construction Solutions and Kevin Estevez Member, Holden Willits PLC, we will explore two common types of bonds frequently encountered in construction projects: lien discharge bonds and payment bonds under the Federal Miller Act and Arizona’s Little Miller Act. While other bonds, such as license bonds and private project bonds, exist, this discussion will focus on these two critical bond issues that subcontractors, contractors, and suppliers often face.

The Importance of Preliminary 20-Day Notices

One of the foundational aspects of protecting payment rights in Arizona construction law is the timely service of a preliminary 20-day notice. This requirement applies to nearly every lien claimant and to certain claimants under Arizona’s Little Miller Act, with the exception of laborers seeking wages. The preliminary notice serves as a formal notification to project stakeholders, such as property owners and general contractors, that a subcontractor or supplier is involved in the project and expects to be paid for their contributions.

Failure to serve a preliminary 20-day notice can have dire consequences. For lien claims, neglecting to serve the notice within the prescribed timeframe results in the forfeiture of lien rights. Similarly, for Little Miller Act bond claims, failure to serve a timely preliminary notice can jeopardize the claimant’s ability to recover payment. It is crucial to understand that late notices are only effective for labor or materials provided within the 20 days preceding the notice and any work performed thereafter. Earlier work or materials furnished before this period will not be protected.

To ensure full coverage, subcontractors and suppliers must serve the preliminary 20-day notice at the outset of the project and monitor it throughout the project’s duration. If the total value of labor or materials furnished exceeds the amount stated in the original notice by more than 30%, Arizona law requires a supplemental notice to be served. This law provides protection up to 130% of the stated value, emphasizing the importance of accuracy and vigilance when managing preliminary notices. For both lien claims and bond claims, the preliminary 20-day notice is a critical procedural step that cannot be overlooked.

Lien Discharge Bonds

The first type of bond discussed in the webinar is the lien discharge bond. Governed by Arizona Revised Statute (ARS) 33-1004, lien discharge bonds provide a mechanism for property owners, contractors, or other stakeholders to remove a lien from a property while a payment dispute is resolved. These bonds allow construction projects to proceed without interruption while ensuring that lien claimants retain a path to recovery.

Key Requirements for Lien Discharge Bonds

Lien discharge bonds must meet specific statutory requirements to be valid and enforceable:

1. Recording and Notification: The bond must be recorded in the county where the project is located. Additionally, it must be served on the lienholder to notify them of its existence.

2. Execution: The bond must be executed by the party seeking to discharge the lien and a surety authorized to operate in Arizona.

3. Claimant Protection: The lien claimant must be explicitly named as the obligee under the bond, ensuring that their rights are protected.

4. Bond Amount: The bond must be for an amount equal to 150% of the lien’s claim. For instance, a $100,000 lien would require a $150,000 bond.

Important Considerations

Before assuming that a lien discharge bond is valid, it is critical to verify compliance with these statutory requirements. Errors such as incorrect bond amounts or misidentified obligees can render the bond invalid, leaving the property owner or contractor vulnerable to ongoing lien claims.

From the perspective of a lien claimant, if a discharge bond meets the statutory requirements, the lien on the property is released. However, the claimant must then pursue their payment claim against the bond. In many cases, this can simplify legal proceedings. Unlike lien foreclosure lawsuits, which require the involvement of all parties with an interest in the property, a lawsuit involving a discharge bond typically targets only the bond principal and surety. This focused approach reduces complexity and expedites resolution.

Public Project Payment Bonds

On public construction projects, lien rights do not apply because public property cannot be encumbered by a lien. Instead, subcontractors and suppliers are protected by payment bonds, which are required under both federal and state law. These bonds ensure that those furnishing labor and materials to public projects are paid, even if the general contractor fails to meet their obligations.

Federal and State Laws

Public project payment bonds are governed by two primary legal frameworks:

1. Federal Miller Act: This law applies to payment bonds on federal construction projects. It protects contractors, subcontractors, and suppliers who furnish labor and materials.

2. Arizona’s Little Miller Act: This state law governs payment bonds on qualifying state and local public projects in Arizona. It provides similar protections to those outlined in the Federal Miller Act.

Who Can Make Claims?

Under both the Federal Miller Act and Arizona’s Little Miller Act, the following parties are eligible to make claims against payment bonds:

• Protected Parties:

• First-tier subcontractors (those contracting directly with the general contractor).

• First-tier suppliers.

• Second-tier subcontractors and suppliers (those contracting with first-tier entities).

• Unprotected Parties:

• Third-tier subcontractors and suppliers (those contracting with second-tier entities).

Notice Requirements

Notice requirements for payment bond claims differ between federal and state laws:

• Federal Miller Act:

• Second-tier subcontractors and suppliers must provide a 90-day notice to the general contractor after completing their work or furnishing their materials.

• Arizona’s Little Miller Act:

• Second-tier subcontractors and suppliers must serve a preliminary 20-day notice at the outset of the project.

• They must also provide 90-day notice after completing their work or furnishing their materials.

Adhering to these notice requirements is essential for preserving bond claims. Additionally, both laws impose strict deadlines for filing lawsuits. Claimants must initiate a lawsuit within one year of the last furnishing labor or materials. However, lawsuits cannot be filed until the 90-day notice period has elapsed. Understanding and meeting these deadlines is critical to successfully recovering payment.

Deadlines and Differences from Lien Claims

It is important to note the differences between lien claims and bond claims when it comes to deadlines. Lien claim deadlines are typically measured from the date of project completion, while bond claim deadlines are measured from the date the claimant last furnished labor or materials. This distinction can result in shorter timelines for pursuing bond claims, underscoring the need for prompt action.

Practical Insights

The following practical insights can help subcontractors, contractors, and suppliers navigate the complexities of bond claims:

1. Issuing Notices: Even if you have a direct contract with the bondholder, issuing a preliminary 20-day notice is a best practice. This proactive step ensures that your payment rights are protected in the event of a dispute.

2. Multiple Bonds: In some cases, both a subcontractor bond and a general contractor bond may be available. Subcontractors and suppliers can pursue claims against both bonds, though the specific requirements for each bond may differ. Reviewing the terms of each bond is essential to understanding your rights.

3. Simplifying Disputes: Payment bonds can simplify payment disputes by eliminating the need to involve multiple parties with competing interests in the property. Instead, disputes are resolved through claims against the bond principal and surety.

Key Summary

Navigating bond claims requires careful adherence to statutory requirements and deadlines. Whether dealing with lien discharge bonds or payment bonds under the Federal Miller Act or Arizona’s Little Miller Act, attention to detail is crucial. Always consult a qualified attorney to ensure compliance and maximize your rights.

Disclaimer: This webinar provides a general overview of construction law in Arizona. It should not substitute for legal advice. If you have questions about payment bonds or lien discharge bonds, consult an attorney.

Common Questions Contractors Ask

1. Can a subcontractor working for a general contractor preserve bond claim rights without a 20-day preliminary notice?

Yes, if the subcontractor has a direct contract with the general contractor furnishing the bond. Notice requirements apply only to parties one step removed from the bondholder.

2. Can a sub-subcontractor claim against both a subcontractor’s bond and a general contractor’s bond?

Yes, provided both bonds exist. Requirements may differ, especially if the subcontractor’s bond is not governed by statutory terms. Review both bonds carefully.

3. What happens if a lien discharge bond is invalid due to errors in its execution?

If a lien discharge bond is invalid (e.g., due to an incorrect bond amount or misidentified obligee), the lien remains enforceable against the property. The claimant may pursue lien foreclosure unless the issues with the bond are corrected.

4. Can a claimant recover attorney’s fees when pursuing a bond claim?

Yes, in many cases, Arizona law allows claimants to recover attorney’s fees if they prevail in a bond claim lawsuit. However, the terms of the bond and applicable statutes should be reviewed to confirm eligibility.

5. Do payment bonds on federal projects cover delays or other non-performance claims?

No, payment bonds typically only cover unpaid labor and materials. Claims for project delays or other non-performance issues must generally be addressed through the contract or other legal remedies.