Category: Prompt Payment Act

Back in April of this year, I authored this post concerning the Arizona Court of Appeals’ recent decision in SK Builders, Inc. v. Smith. In SK Builders, the court held that Arizona’s Prompt Pay Act (the “PPA”) did not apply to billings containing work furnished outside the preceding 30 days because the PPA stated that “billing[s] or estimate[s]” must be based on “work performed and…materials supplied during the preceding thirty day billing cycle.” In other words, the court found that payment applications submitted at the end of a billing cycle were limited to work performed or materials furnished within the preceding 30 days. But, as I briefly noted in a July update to my earlier post, the sun set on SK Builders rather quickly. The decision was legislatively overruled by an amendment to the PPA and is no longer good law. read more

***UPDATE – 7/23/2019*** 

The Court of Appeals’ decision in SK Builders, Inc. v. Smith, which is the subject of this post from April 2019, will cease being good law on August 27, 2019. The case was legislatively overruled by SB 1397, which was signed into law by Governor Ducey in April 2019 and will become effective on August 27, 2019.  A post on the effects of SB 1397 and its overruling of the SK Builders decision will be forthcoming.

It is no secret that Arizona’s Prompt Pay Act (the “PPA”) is constructed around a 30-day billing cycle. Indeed, the PPA codified monthly progress billings as the standard payment arrangement on all Arizona construction projects.  It was not, however, the understanding or practice of those in the construction industry that payment applications submitted at the end of a billing cycle were limited to work performed or materials furnished in the preceding 30 days.  But this changed with the Arizona Court of Appeals’ recent decision in SK Builders, Inc. v. Smith.   In SK Builders, the court held that the PPA provision stating that “billing[s] or estimate[s]” be based on “work performed and…materials supplied during the preceding thirty day billing cycle” means that the PPA does not apply to general contractors’ billings or estimates that contain work furnished outside the past 30 days. read more

A decade ago, the Arizona Court of Appeals held that “the primary purpose of [Arizona’s Prompt Pay] Act is to establish a framework for ensuring timely payments from the owner to the contractor and down the line to the subcontractors and suppliers whose work has been approved.”  Stonecreek Bldg. Co., Inc. v. Shure, 216 Ariz. 36, 39 (App. 2007) (emphasis added).  But just recently in Zumar Industries, Inc. v. Caymus Corp., No. 1 CA-CV 16-0423, the Court of Appeals was tasked with deciding whether the Act still applied to a “down the line” relationship on a federal work project, where there was, by statute, no preceding “owner-contractor” relationship.  The Court held that the Act did not apply in these circumstances.

Background

The dispute in Zumar arose out of a road sign construction project at Grand Canyon National Park.  Defendant/Appellant Caymus Corporation (“Contractor”) entered into an agreement with the National Park Service (“NPS”) to provide and install the signs, and subsequently subcontracted with Plaintiff/Appellee Zumar Industries, Inc. (“Supplier”) to obtain the necessary sign panels.  Although, NPS immediately raised concerns about the quality and quantity of the sign panels furnished by Supplier, Contractor submitted a pay application to NPS, certifying that the sign panel line item of the prime contract was 100% completed.  In total, Contractor requested and received $98,800.00 for the panels.  Nevertheless, and despite Supplier having submitted invoices for the full amount of the sign panels, Contractor withheld $35,632.33 from Supplier pending “satisfactory performance” of the subcontract.  Contractor and Supplier were unable to resolve their dispute concerning the panels, and Contractor refused to release the amounts it was withholding.

Supplier filed suit for breach of contract and subsequently moved for summary judgment.  Supplier argued that Contractor “violated state and federal prompt pay laws, which constituted a material breach of the subcontract.”  The trial court agreed, granted the motion, and ultimately entered a final judgment.  Contractor appealed.

Discussion

On appeal, Contractor argued that Supplier failed to establish it was entitled judgment as a matter of law under Arizona’s Prompt Pay Act (the “Act”).  In particular, Contractor argued that “the Act does not apply to agencies of the federal government, as they cannot be ‘owners’ under the Act.”  Supplier countered that “the prompt pay provisions of the Act do not hinge upon the identity of the owner of the project, [but] the provisions apply to agreements between a contractor and a subcontractor in any context.”  The Court of Appeals agreed with Contractor, holding that “[t]he Act’s payment scheme does not apply to this federal project, and its provisions cannot be read into the contract dispute.”

In reaching its decision, the Court focused on the definitions contained within, and applying throughout, the Act.  The Court noted, among other things, that: (1) no government or governmental units are included within the definition of “owner” in A.R.S. § 32-1129(A)(4); (2) § 32-1129(A)(4) defines “contractors” as those having “a direct contract with an owner to perform work under a construction contract;” and (3) § 32-1129(A)(6) defines “subcontractors” as those having “a direct contract with a contractor…to perform a portion of the work under a construction contract.” (Emphasis added).  The Court reasoned that because the identity of parties as “contractors” or “subcontractors” for purposes of the Act was predicated on there being a statutorily defined “owner,” the prompt pay obligations of  contractors to subcontractors under§ 32-1129.02 turned on the same issue.  Stated differently, the Court found that “[t]he Act is framed around the central concept of ‘owner,’ as defined by the Act, and the flow of payments from owner to contractor and down the line; contractor-subcontractor disputes cannot be solely separated from that framework.”

Given that NPS is a bureau of the U.S. Department of the Interior and, therefore, a federal agency, the Court of Appeals concluded that NPS could not be an “owner” for purposes of the Act.  Accordingly, the Court held that the Act did not apply to the relationship between Contractor and Supplier, such that Contractor could not have breached the subcontract by failing to comply with the Act.  The Court of Appeals reversed the lower court’s grant of summary judgment and remanded the case for further proceedings.

Conclusion 

All contractors that perform work on federal projects in Arizona should be aware of Zumar’s holding that Arizona’s Prompt Pay Act does not apply to contractor-subcontractor relationships on such projects.  Armed with this knowledge, contractors can govern their conduct accordingly, whether they be general contractors or subs.

My very first post for this blog (which is nearly two years old) covered the Arizona Court of Appeals’ decision in RSP Architects, Ltd. v. Five Star Development Resort Communities, LLC, 306 P.3d 93, 232 Ariz. 436 (App. 2013).  In RSP Architects, the court held that Arizona’s private sector prompt payment laws  (A.R.S. § 32-1129 et seq.) do not apply to architectural service contracts.  While this remains the case,  Arizona design  professionals recently scored a victory on the prompt payment front.  The Arizona Design Professional Prompt Pay Act (the “Act”) was created earlier this year when Governor Ducey signed H.B. 2336 into law.  The Act, which went into effect on July 3, 2015, establishes requirements for promptly paying “design professionals” performing work on state, county, and municipal construction projects.  For purposes of the Act, “design professional services” are defined as “architect services, engineer services, land surveying services, geologist services or landscape architect services or any combination…” thereof.

Scope of the Act.

The Arizona Design Professional Prompt Pay Act is rather limited in scope.  First, as stated above, it does not apply to private projects.  Second, it does not apply in situations when the design professional has a direct contract with the project owner.  Rather, the Act only applies to public projects where the “design professional” is hired by a contractor.

Effect of the Act.

In those situations where the Act does apply, it affords design professionals many of the same protections that subcontractors and material suppliers have  enjoyed for years under Arizona’s existing prompt payment laws.  Among other things, the Act provides that:

contractors shall pay their design professionals within 7 days of each progress payment, unless agreed otherwise in writing (A.R.S. §§ 34-221(G) and 41-2577(B));

interest accrues at the rate of 1% per month on payments not made to design professionals within 7 days (A.R.S. §§ 34-221(K) and 41-2577(F));

design professionals can request progress payment notifications from the owner (A.R.S. §§ 34-221(H) and 41-2577(C)); and

provisions in “design professional service contracts” that (a) make the contract subject to the laws of another state or (b) require any litigation, arbitration, or other dispute resolution proceeding arising from the contract to be held outside Arizona are void and unenforceable.

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