Richard Erickson and Amanda Weaver | Snell & Wilmer | July 15, 2019
Contractors and suppliers are sometimes challenged to secure a claim for past due payment with a lien on the project, all subject to lien laws that vary throughout the United States. In Arizona, as in most states, the contractor must have a sound legal basis to record a lien. More specifically, the contractor cannot record a lien while “knowing or having reason to know that the document is forged, groundless, contains a material misstatement or false claim or is otherwise invalid.” A.R.S. § 33-420(A).
From this sensible premise governing lawful liens, a question often arises concerning what amounts the contractor can include in the total lien amount. In particular, a lien is usually necessitated by a dispute over what the contractor is actually owed, even when there may be no dispute over the work actually completed. In some cases, this dispute may center upon change order work that the contractor completed, but without first obtaining proper written approval as required by the contract. In other words, the issue often arises regarding whether a contractor can include extra-contractual, additional and unapproved change work in the lien.
No published Arizona case has expressly addressed this issue. However, a combination of the lien statutes and cases interpreting lien law may be used to argue that a contractor cannot legally encumber the project with amounts it has billed for change order work that has not yet been approved. On the other hand, because lien statutes are liberally construed to favor contractors and suppliers broadly including “materials furnished or value provided,” sufficient backup for the change order claim may prove that the corresponding lien was legally valid and reasonable despite the owner’s refusal to pay. See, e.g., Allstate Utility Constr., LLC v. Town Bank of Ariz., 228 Ariz. 145, 149 ¶ 21 (App. 2011) (“We have repeatedly held that the mechanics’ and materialmen’s lien statutes are remedial and are to be liberally construed in favor of materialmen.” (internal quotation marks and citation omitted)).
There is, nonetheless, an argument that only approved written change orders can form the basis of a lien. For example, A.R.S. § 33-981(A) states that each person providing labor, materials, etc., has lien rights “whether the work was done or the articles were furnished at the instance of the owner of the building, structure or improvement, or his agent.” Under rules of statutory interpretation, this arguably means lien rights should be defined by the work specified in the governing contracts and what has been approved. A contractor or supplier cannot simply lien for any materials or work furnished, even if the owner or agent did not approve the work. Furthermore, A.R.S. § 33-993(A)(3) focuses on the terms and conditions of the contract, and unapproved change orders are not part of the contract. See also Tech. Constr., Inc. v. City of Kingman, 229 Ariz. 564, 569 ¶ 14 (App. 2012) (recognizing that, based on a contract providing for changes to the contract price, change orders modify the contract amount). However, the sticky issue is where the owner or his agent has orally approved the work, but a change order required by the contract has not been executed.
In one unpublished Arizona case, a trial court found “expressly disapproved” change orders were not owed. Farwest Dev. & Constr. of the SW, LLC v. St. Joseph Realty, LLC, 2009 WL 838262, at *2 ¶ 11 (Ariz. App. Mar. 31, 2009). However, the appellate court reversed the trial court on other grounds, specifically concerning remaining factual issues on a grant of summary judgment regarding whether the parties waived the contractual requirement to sign change orders. Id. at *4-5 ¶¶ 19-20. Other jurisdictions have more expressly ruled that the contractor or supplier risks recording a wrongful or invalid lien when including unapproved change orders. See, e.g., Roy Zenere Trucking & Excavating, Inc. v. Build Tech, Inc., 65 N.E.3d 340, 349 (Ill. App. Ct. 2016); Stroud-Hopler, Inc. v. Farm Harvesting Co., Inc., 2005 WL 3693342, at *9 (N.J. Super. Ct. App. Div. Jan. 24, 2006) (relying on the New Jersey lien statute’s definition of a “contract” and allowing liens only for work or materials furnished “in accordance with the contract.”)
Therefore, without any Arizona case law directly on point, contractors and suppliers have risks when recording liens that include amounts for unapproved change orders. While the lien statutes will be liberally construed in favor of the lienholder, there may be consequences including treble damages and attorneys’ fees unless the lienholder can show by credible testimony or evidence that the change order was approved and, therefore, amended the contract which would buttress the lien’s validity.