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.
***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.
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.
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.
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.
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.
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:
The plaintiff, RSP Architects, Ltd. (“RSP”), sought to invoke the Prompt Payment Act because, on contracts to which the Act applies, it renders all billings for progress payments “certified and approved” unless the owner objects in writing within 14 days. With limited exceptions, the Act then requires owners to make progress payments within seven days after a bill is certified and approved. RSP attempted to use the Act to collect on a series of invoices to which the owner, Five Star Development Resort Communities, LLC (“Five Star”), failed to timely disapprove.
In addition to subcontractors and material suppliers, the Prompt Payment Act applies to “contractors,” which it defines as “any person, firm, partnership, corporation, association or other organization, or a combination of any of them, that has a direct contract with an owner to perform work under a construction contract.” The Act, in turn, defines a “construction contract” as:
a written or oral agreement relating to the construction, alteration, repair, maintenance, moving or demolition of any building, structure or improvement or relating to the excavation of or other development or improvement to land.
A.R.S. § 32-1129(A)(1). RSP argued that the Act applied to its architectural services contract with Five Star because the contract “relat[ed] to” the development or improvement of land, such that it was a “construction contract” and RSP was, therefore, a “contractor.”
The court, however, disagreed. First, the court noted that the Prompt Payment Act is located in Chapter 10 of Title 32 of Arizona Revised Statutes (which governs contractors), while Chapter 1 of Title 32 separately regulates architects. Second, the court pointed out that A.R.S. § 32-1159(D) “addresses architects…in a manner that demonstrates that the legislature likely did not intend to include architects within the Prompt Payment Act.”
A.R.S. § 32-1159 places limits on contractual indemnification provisions, and in doing so draws an express distinction between “construction contracts” and “architect-engineer professional service contracts.” Indeed, A.R.S. § 32-1159(D)(2) defines the latter as:
a written or oral agreement relating to the design, design-build, construction administration, study, evaluation or other professional services furnished in connection with any actual or proposed construction, alteration, repair, maintenance, moving, demolition or excavation of any structure, street or roadway, appurtenance or other development or improvement to land.