Section 4.3.4.5.3 Damages Recoverable Under Payment Bonds

• Library: Construction Law Practice Manual 3rd Edition 2016

§ 4.3.4.5.3 Damages Recoverable Under Payment Bonds

As a general rule, in the absence of fraud or overreaching, the measure of damages against the payment bond is the agreed value of the labor or materials furnished under the terms of the contract with the person with whom the claimant dealt.¹¹⁸ The claimant also can waive the agreed contract price and attempt to recover for the reasonable value of the labor performed and materials furnished. This measure of damages is called quantum meruit.¹¹⁹

While interest is recoverable on the claim, the time interest commences varies from state to state. The Arizona courts are split on whether interest commences when the principal’s obligation accrues¹²⁰ or from when the surety had sufficient information upon which to make payment.¹²¹

Under the Miller Act, and in Arizona and many other states, the American rule controls the award of attorneys’ fees. Under the American rule, attorneys’ fees are not allowed in the absence of an express statute or an enforceable contract providing for them.¹²² In suits brought in Arizona state courts on the payment bond under Arizona’s Little Miller Act, reasonable attorney’s fees will be allowed by statute to the prevailing party.¹²³ Interest and reasonable attorneys’ fees may also be permitted under the prompt payment penalty provisions applicable to private and public projects.¹²⁴

The Arizona courts have not addressed whether a surety on a payment bond may be held liable for tort damages for failing to act in good faith. The issue may arise out of failure to investigate a payment bond claim. Some courts have held sureties on statutory bonds, including statutory payment bonds, cannot be liable in tort for damages beyond those covered by the statute.¹²⁵ Under A.R.S. § 34-223, Arizona’s little Miller Act payment bond provisions, a claimant is given “the right to sue on such payment bond for the amount, or the balance thereof, unpaid at the time of institution of such suit and to prosecute such action to final judgment for the sum or sums justly due the claimant, and have execution thereon[.]” This statutory provision describes a payment bond claimant’s only right is to sue the surety, and execute on a judgment for the reasonable value of the work provided. This statutory language could allow for the conclusion that a payment bond surety is not required to investigate or settle payment bond claims prior to entry of judgment.

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Notes:

^118. Royal Indem. Co. v. Woodbury Granite Co....