Arizona legislature corrects a key provision of the Prompt Pay Act

In January 2019, the Arizona Court of Appeals issued a ruling in SK Builders, Inc., v. Smith that weakened a valuable protection to contractors that has traditionally been afforded by the state's Prompt Payment Act. The issue pertained to invoices for materials or labor provided before the 30-day billing cycle preceding a payment application.

After an effective lobbying effort by construction industry leaders, the Arizona legislature recognized the court's error and in April restored order by passing S.B. 1397. The new law's stated purpose is "to make the legislative original intent clear and to overrule legislatively the S.K. Builders decision."

As of August 27, 2019, contractors can again assert Prompt Payment Act claims for invoices for work that falls outside the preceding 30-day billing cycle.

Background

In September 2010, Mr. & Mrs. Smith hired SK Builders Inc. as the general contractor for the construction of their new home. The contract included a price of approximately $1.63 million and called for the Smiths to make progress payments in response to SK's periodic payment applications.

By the time the home was completed in March 2012, the Smiths had made $1.5 million in progress payments, leaving about $126,500 to be paid under the contract. Shortly after completion, the Smiths' contract administrator advised SK Builders that there were some outstanding construction issues, that the Smiths would not make any further payments until those issues were corrected, and that SK actually owed money to the Smiths.

The construction issues consisted of an interior concrete crack and the absence of wire mesh in the concrete that formed the back patio. Prior to the contract administrator's letter, SK had repaired the crack by injecting epoxy. As for the patio, the engineer that SK hired to test it concluded that, while the concrete deviated from the plans, it was stronger than the plans specified.

The Smiths moved into the house and did not replace the back patio.

Payment Application. On May 1, 2012, the Smiths received from SK a payment application for approximately $180,300. The application did not contain a request for payment related to the concrete work, as the Smiths had already paid for it without objection. However, the requested amount did include work performed prior to the preceding 30-day billing cycle. In fact, at trial the contract administrator testified that none of the items billed in SK's final payment application occurred during the preceding 30-day cycle.

The Smiths did not respond to SK's payment application and, four days later, they terminated their contract with SK, leaving unpaid the requested $180,300.

SK sued the Smiths for the unpaid amount plus $10,200 for interest and attorney fees, claiming violation of the Prompt Payment Act, breach of contract, and unjust enrichment.

At trial, the court ruled for SK on its Prompt Payment Act claim but dismissed SK's claims for breach of contract and unjust enrichment. The court awarded SK $50,000 in attorney fees and the $180,300 requested in the final payment application.

The Smiths appealed, resulting in a nightmarish reversal suffered by SK.

Timely Billing

For the focus of this article, the key issue in this case was whether SK was entitled to Prompt Payment Act protection for items not falling within the 30-day billing cycle that preceded their final payment application.

The court focused on the Prompt Payment Act's language requiring an owner to make progress payments to a contractor "on the basis of a duly certified and approved billing or estimate of the work performed and the materials supplied during the preceding 30-day billing cycle. " [Emphasis added.]

SK had argued that, because the cost of some of the items was not known until after the earlier 30-day billing cycle had passed, it should be entitled to payment. However, the Court noted that the Prompt Payment Act provides for such situations by allowing a contractor to include in its payment application an " estimate of the work performed and the materials supplied." [Emphasis added.]

In the end, the contract administrator's trial testimony, in which he stated that all of the work billed in SK's final payment application was performed prior to the preceding 30-day billing period, combined with the failure of SK to refute that testimony, proved to be SK's undoing.

The Court of Appeals reversed the trial court's judgment allowing SK's Prompt Payment Act claim. Since the trial court's judgment on that claim provided the basis of SK's attorney fee award, that too was reversed, and SK ultimately was ordered to pay reasonable attorney fees to the Smiths.

Reminders for Contractors

In addressing the parties' claims and arguments, the Arizona Court of Appeals provided some useful reminders concerning Arizona's Prompt Payment Act:

• Payment is not required pursuant to the Prompt Payment Act "unless the contractor provides the owner with a billing or estimate for the work performed or the material supplied in accordance with the terms of the construction contract between the parties."

• Payment must be made within seven days after the billing or estimate is certified and approved. The "billing or estimate shall be deemed approved and certified fourteen days after the owner receives [it] unless before that time the owner or the owner's agent prepares and issues a written statement detailing those items in the billing or estimate that are not approved and certified."

• An owner may object to "a billing or estimate or portion of a billing or estimate for unsatisfactory job progress, defective construction work or materials not remedied, disputed work or materials, [or] failure to comply with other material provisions of the construction contract[.]"

• A construction contract cannot alter the rights of any contractor, subcontractor or material supplier to receive prompt and timely progress payments.

• The Prompt Payment Act links the owner's progress payments to work done by subcontractors billed in the contractor's payment application.

• A subcontractor is not obligated to provide the contractor with payment applications limited to the preceding 30-day billing cycle. Therefore, the burden is on the contractor either to (a) estimate the work performed and materials supplied by subcontractors during each 30-day cycle, or (b) contractually obligate its subcontractors to submit their respective billings and estimates on time.