Court Reaffirms Strength of Arizona Prompt Payment Law
Dissatisfaction with a contractor's non-invoiced work does not entitle an owner to withhold payment for other work
A 2007 Arizona Court of Appeals decision in
Stonecreek Bldg. Co., Inc. v. Shure provides a refresher course on the
state’s prompt payment law and the protections it offers contractors. The case
involves property owners – Mavis Shure and her husband, Lanny Hecker – who
wished to build a custom home. They hired Stonecreek Building Co. as their
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Arizona's Prompt Payment Law
During construction, the
owners complained to Stonecreek about defective workmanship, particularly in the
masonry work. When Stonecreek assured the owners that it would not pay the
masonry subcontractor until the work was corrected to their satisfaction, the
owners continued to make timely progress payments. The quality of the masonry
work continued to be an issue, to the point that the owners’ attorney sent a
letter to Stonecreek expressing their dissatisfaction. The letter also was
critical of the HVAC work that had been done.
A few days later,
Stonecreek sent the owners an invoice for $122,447. The invoice, which had been
approved by the architect, covered a variety of work, including the HVAC system.
The invoice did not include charges for masonry work.
The owners, alleging
deficiencies in the masonry and HVAC work, withheld $100,000 from their payment,
setting in motion a series of predictable consequences:
its work on the residence.
The owners, claiming
that Stonecreek failed to remedy deficiencies in construction, terminated
Stonecreek sued the
In its suit, Stonecreek
claimed that the owners violated Arizona’s prompt payment law (A.R.S. §§ 32-1129
to -1129.06) by withholding payment from an invoice because of dissatisfaction
with masonry work that was not covered by that invoice. The contractor also
claimed that the owners had approved its invoice, either because of the
architect’s approval or because it had been “deemed approved” because the owners
failed to file a timely written objection to the work that the invoice covered.
The owners, through their
attorney’s letter, had disputed the quality of both the HVAC and masonry work.
However, of those two issues, only the HVAC work (for which the owners were
billed $26,781) was included in the invoice. The masonry work was not.
Stonecreek filed a motion
for partial summary judgment, and the trial court granted it. In granting the
motion, the court ruled that, while the letter from the owners’ lawyer satisfied
the statutory requirement of a timely written objection, the prompt payment law
allows an owner to withhold payment only to the extent that the owner
disapproves work included in the invoice.
As damages for the
owners’ violation of the prompt payment law, the trial court awarded Stonecreek
$73,219 – the $100,000 that the owners withheld from their payment, minus the
$26,781 for the properly disputed HVAC work.
owners appealed the trial court’s award. The owners and Stonecreek agreed that
the only issue to be determined was whether the prompt payment law allows an
owner, when presented with an invoice, to withhold payment related to work that
is not included in that invoice.
It is the stated purpose
of the prompt payment law “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.”
According to A.R.S. §
32-1129.01(A), an owner must 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 thirty day billing cycle.” Those
payments are to be made within seven days after the date the billing or estimate
is certified and approved. The statute goes on to state:
“A billing or estimate shall be
deemed approved and certified fourteen days after the owner receives the
billing or estimate, 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.”
In their appeal, the
owners argued in part that they were entitled to withhold payments for work
other than that billed in the invoice, because some defects in workmanship may
become known only after payment has been made.
On that point the Court
was sympathetic but unswayed. The Court noted that, when it comes to latent
defects, withholding payment is not an owner’s only remedy:
“The owner retains all civil
remedies for breach of contract and tort claims against a contractor.
Certification of payment given during the course of construction is not
regarded as conclusive that the work was properly performed. … [And]
progress payments do not constitute acceptance of work that is not in
accordance with contract requirements.”
In the end, to the
question of whether the prompt payment law allows an owner to withhold payment
related to work that is not covered by the invoice, the Court of Appeals offered
a resounding “no,” ruling that, in keeping with the purpose of the law, “the
trial court correctly held that withholding funds for allegedly defective work
not covered in the invoice violated the Act.”