Payment Bond Claims on Private Projects
These instructions are designed to be used with the
Private
Payment Bond Worksheet, which you may wish to attach to each of your private
construction job files. As your work progresses, track the steps completed and
calendar the upcoming deadlines to preserve your right to recover against the
payment bond.
A surety bond is a
specialized, three-party contract by which the surety company guarantees the
owner that the contractor, who is the principal on the bond, will perform a
particular contract. Surety bonds that protect the owner against the risk that
the general contractor may default and fail to perform its obligations are an
integral part of the construction process.
A performance bond
protects the owner from financial loss in case the contractor fails to perform
its construction contract. A payment bond, or labor and material bond,
guarantees the owner that the contractor will pay subcontractors, suppliers, and
workers. The subcontractors, suppliers and workers are beneficiaries of the
payment bond.
In Arizona a private
project owner can prevent lien claimants from recording liens on his property by
recording the general contract and a payment bond. Once those documents are
recorded, only persons who contract directly with the owner have lien rights (A.R.S.
§ 33-1003). Therefore it is very important to find out whether there is a
payment bond in effect on your project and meet its requirements for payment.
There
are no statutes governing the terms of private payment bonds in Arizona. Private
owners and general contractors are free to privately negotiate terms tailored to
their particular requirements. Private bonds can contain extra “hurdles” for a
claimant that cannot be anticipated without reading the bond. Therefore, if
there is a payment bond on your project, the earlier you get a copy, the better
prepared you are.
The general
contractor is not required to advertise the fact that the project is bonded.
Subcontractors and suppliers may not even know they have rights under a payment
bond. This has been called “the most expensive question that was never asked.”
Do not wait until payment problems arise. Find out early whether the job is bonded and
get a
copy of the bond.
Until you ascertain whether a payment bond has been posted and obtain a copy of
it for your lawyer’s review, we recommend that you do the following:
-
Immediately upon
contracting, serve a Preliminary 20-Day Notice. Request the information
necessary for the Notice, prepare it, and serve it in the same manner as
described in the discussion of
mechanics' liens,
by either first-class mail with a certificate of mailing, registered mail, or
certified mail, postage prepaid, and addressed to the business or residence of
the party served. Serve (a) the owner or reputed owner, (b) the
original contractor or reputed contractor, (c) the construction lender
or reputed construction lender, and (d) the person with whom you
contracted. If you know the payment bond surety, serve the surety as well.
-
See Form A,
"Written Request to Owner for Information for Preliminary 20-Day Notice,"
available in PDF
and edit-ready Word
formats
-
See Form B
(Part 1), "Preliminary 20-Day Lien Notice" (PDF
• Word)
-
Prepare an Affidavit
of Service. Prepare your Affidavit of Service and keep it in a safe place
with a copy of the Notice and the U. S. Postal Service certificate of mailing.
If the materials and services you provide exceed the Preliminary 20-Day Notice
estimate by more than 20%, serve a supplemental Preliminary 20-Day Notice.
-
Record the last date
when you provide labor or materials to the project. This date is critical
because it determines the deadlines for serving your 90-day post-completion
notice and for filing a lawsuit on the bond. Work done solely to effect
repairs, make corrections, or complete a final inspection usually do not
extend the deadline. Make certain that you have completely performed your
contract and that you have documented proof of your last day (e.g., using time
sheets or photos).
-
Serve your
post-completion notice upon completion of your work. Serve the
post-completion notice to the same people and in the same manner as provided
for Preliminary 20-Day Notices (see step 1 above). A private payment
bond may have a shorter claim deadline than the 90 days provided for public
works, so serve this notice right away.
-
File an action on
the payment bond within one year. The time for filing a lawsuit on a
private payment bond will be governed by the terms of the bond. Private
payment bonds commonly provide that the time for filing an action expires one
year after the last day on which you perform work under your contract. If you
do not receive timely payment, do not delay in seeking advice of legal
counsel.
Back to Lien, Prompt Pay and Stop Notice Handbook
