CONSTRUCTION LAW-PUBLIC WORKS PROJECTS-PAYMENT BONDS.  THE LITTLE MILLER ACT IS THE REMEDY.  COURT REFUSES TO RECOGNIZE A COMMON-LAW BAD FAITH CLAIM AGAINST SURETY ON PAYMENT BOND. 

The Arizona Court of Appeals recently affirmed the decision of a superior court dismissing a subcontractor’s claim against the surety on a payment bond, holding that the statutory scheme under the “Little Miller Act” provided the complete and exclusive remedy and that a surety cannot be sued for common-law bad faith.  S&S Paving and Construction, Inc. v. Berkley Regional Insurance Company, 738 Ariz. Adv. Rep. 16 (App. 2016).

The City of Prescott retained a general contractor for a public works project in the city.  The general contractor entered into a subcontract with S&S Paving and Construction, Inc. (“S&S”).   Berkley Regional Insurance Company (“Berkley”) issued a payment bond for the project.  In October 2011, S&S sent a demand letter to Berkley, stating that S&S had performed paving work for the project pursuant to its subcontract and had not been paid.  Berkley acknowledged the claim, and requested additional information.  S&S provided the additional information in December 2011.  Berkley acknowledged receipt of the additional documentation and notified S&S that it would investigate the claim, address issues with the general contractor, after which it would get back to S&S.  No further communication occurred between the parties until May 2013, when S&S sent another demand letter.  Based on A.R.S. § 34-224(B)(one-year statute of limitations for public works payment bonds),  Berkley responded that S&S’s claim was untimely and barred by the applicable one year statute of limitations.

S& S sued Berkley for breach of contract and bad faith.   Berkley moved for summary judgment on both claims.  The superior court ruled that the breach of contract claim was barred by the statute of limitations.  The court also dismissed S&S’s bad faith claim concluding that there was no contractual, statutory or special relationship for the claim to survive.  S&S appealed to the Court of Appeals the question of whether Berkley could be sued for bad faith in its delay in evaluating the claim until after the statute of limitations had run.

On appeal S&S contended that the superior court erred in dismissing its bad faith claim because sureties issuing payment bonds under the Little Miller Act have a duty to “undertake an investigation adequate to determine whether a claimant’s claim is tenable or valid.”  The Court of Appeals recited cases recognizing that when a surety undertakes an obligation on a bond pursuant to a specified statutory requirement, its liabilities are measured by the terms of that statute.  The Court also pointed out that the Little Miller Act dictates the procedures that claimants must follow in order to recover against payment bonds, and that S&S simply failed to follow the procedures:

“But for its failure to timely file suit, S&S had a ‘complete and valid remedy’ under the Act.  Because a payment bond is sufficient to pay all claims, and is the sole source from which laborers and materialmen are to be paid, it necessarily follows that laborers and materialmen who do not timely avail themselves of this remedy fall into the category of general creditors of the contractor.”

The Court then stated that when a statutory scheme creates a right and also provides a complete and valid remedy for the right created, the statutory remedy thereby given is exclusive.  Concluding that a common law bad faith remedy would be inconsistent with both the Little Miller Act’s defined liability for sureties and exclusive remedy available to claimants, the Court affirmed the decision of the superior court dismissing S&S’s claims for bad faith.

The lesson to the construction community on government projects: docket your calendars as to when you finish your work on a project; if you have not been paid on a timely basis, make your claim to the payment bond surety; if you still have not been paid, file your lawsuit on the payment bond before the one year statute of limitations.  Do not rely on the surety to timely investigate your claim.

 

This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice regarding Little Miller Act Is the Remedy, or any other litigation matters,  please feel free to contact Roger C. Decker at  480.461.5343, log on to udallshumway.com,  or contact an attorney in your area. Udall Shumway PLC is located in Mesa, Arizona and is a full service law firm. We assist Individuals, families, businesses, schools and municipalities in Mesa and the Phoenix/East Valley.