Arizona Court of Appeals Interprets Stricter Requirements for Payment Bond Claimants

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Arizona has long protected the rights of subcontractors and material suppliers to seek recovery from the payment bond surety on public bonded projects. Arizona’s Little Miller Act, A.R.S. § 34-223, provides that claimants have up to one year following the last provision of labor or materials to sue the bond principal and surety for payment. However, the statute requires that any such claimant having a direct relationship, not with the bond principal (typically the general contractor), but rather with a subcontractor of the contractor furnishing the payment bond, must provide two notices to protect its bond rights. First, the claimant must serve the bond principal a written preliminary 20-day notice as provided for in A.R.S. § 33-992.01 (in other words, the same preliminary notice the claimant would serve on the contractor, owner and perhaps lender to protect its mechanics’ lien rights). Second, the claimant must provide a notice to the bond principal within 90 days from the date on which the claimant performed the last of the claimant’s labor or furnished or supplied the last of the material for which such claim is made, stating with substantial accuracy the amount claimed and the name of the party to whom the material was furnished or supplied or for whom the labor was done or performed.

No controversy exists regarding what the notices must state or to whom they need to be delivered. However, in the April 30, 2015 decision of Cemex Construction Materials South, LLC v. Falcone Brothers & Associates, Inc., the Arizona Court of Appeals addressed the statutory requirement of method of delivery. The statute states, after the description of the second notice, that “such notice shall be served by registered or certified mail, postage prepaid.” In this case, the bonding company argued that the registered or certified mail requirement applied to both notices, the preliminary 20-day notice and the post 90-day notice. The supplier Cemex, on the other hand, argued that because the preliminary notice requirement followed A.R.S. § 32-992.01, that the same statute should apply to the delivery method, which, for lien notices, can also be sent by first-class mail with a certificate of mailing, in lieu of registered or certified mail. The Court interpreted A.R.S. § 34-223 to require both notices to be served by registered or certified mail in order for the payment bond claim to be effective.

This decision shocked many subcontractors, suppliers and lien services that historically have sent all preliminary notices only by first-class mail, regardless of whether it applied to a licensed project or a bonded project. Indeed, a brief by Amicus Curiae (Friend of the Court) Arizona Rock Products Association in the case argued that the “industry has relied upon first class mail in conjunction with sending all preliminary 20-day notices for more than 30 years, since 1984, [and] the Court’s ruling could undermine all of the notices that have been sent in reliance upon this industry practice that are currently pending.” The Court stated “[w]e acknowledge that this opinion may have a negative practice on an apparently longstanding industry practice. But it is well-settled that we cannot legislate, and that our province is to construe the law as written.”

Since this above provision of the Little Miller Act is incorporated in Title 41 (state projects) and into A.R.S. § 33-1003 (payment bond in lieu of lien rights), the Cemex decision calls into question the enforceability of every such pending payment bond claim (in Arizona) in which service of the preliminary notice was not by registered or certified mail. However, all hope is not lost. The Court recognized that proof of actual receipt by the bond principal may overcome the failure of proper mailing. However, as that proof is very likely to be contested, the best practice for all contractors, subcontractors and suppliers on any Arizona projects in which they may want to pursue a bond claim is to serve preliminary notices by registered or certified mail, and not by first-class mail.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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