Prompt Pay Act Lessons from The Arizona Court of Appeals

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Snell & WilmerLast November, Arizona’s Court of Appeals issued a memorandum decision analyzing Arizona’s Prompt Pay Act. Though the decision was not published and is not binding authority, it does guide the construction industry and practitioners as to how this court analyzed Prompt Pay Act enforcement.

To set the table, Shea Connelly Dev. LLC v. Ariz. Registrar of Contrs. was limited to a payment dispute between the general contractor Shea Connelly, and its subcontractor, Revive. The project owners effectively had no role in the dispute.

Critically for Shea Connelly’s arguments, Revive was hired to provide framing work on two separate Arizona projects, one in Glendale, and one in Fountain Hills called Park Place. The Glendale subcontract included a cross-default term providing that if Revive defaulted on any subcontract with Shea Connelly, it would be deemed to have defaulted on all of its subcontracts with Shea Connelly.

On the Glendale project, Revive never did any work. It’s not clear from the record why, but it appears that Revive was paid nearly $60,000 without doing any work on the Glendale Project. However unfair it may be, this fact had no impact on the court’s Prompt Pay Act analysis.

On the other project, Revive did perform work on Park Place and submitted invoices to Shea Connelly for the work. However, Revive had initially bid $300,000 for its work on the project, but ended up submitting invoices totaling approximately $800,000. Even more problematic, Revive’s work did not pass inspections at Park Place.

Ultimately, things came to a head when Revive submitted an invoice for this Park Place work that had failed inspections. Shea Connelly determined that, because of the cross-default provision, both contracts were terminated. Shea Connelly did not pay the outstanding invoices for the Park Place Project, nor did it object in writing explaining why it was not doing so. Revive responded by filing a complaint with the ROC regarding the outstanding Park Place invoices.

During the ensuing proceedings, including before the Administrative Law Judge and Court of Appeals, Shea Connelly raised defenses based on contract law and due process. Shea Connelly argued that the amount Revive received on the Glendale Project, where it did not work, could be an accord and satisfaction. Additionally, Shea Connelly argued that it had to hire another subcontractor to fix Revive’s work on the Park Place Project (which was the project at the heart of the Prompt Pay Act claim), and that amount should have been an offset. But instead of rebutting either theory, Revive focused on a single issue, specifically, that Shea Connelly did not provide a written explanation for why it was not paying the final Park Place invoices.

The Administrative law judge determined that Shea Connelly did not provide written evidence that the Park Place invoices were paid, and did not present any authority that the Administrative Law Judge must consider offset when determining whether a contractor has violated the Prompt Pay Act, and A.R.S. § 32-1154(A)(10). The Registrar subsequently adopted the Administrative Law Judge’s recommendation and suspended Shea Connelly’s contractor’s license until it paid the Park Place invoices.

Eventually, the Court of Appeals found that the Administrative Law Judge did not need to consider the accord and satisfaction or offset arguments. Among other reasons, the court explained that an accord and satisfaction alters the subcontractor’s statutory right to receive prompt payment, under the Prompt Pay Act, which is not permitted pursuant to A.R.S. § 32-1182(P).

With that background, there are several takeaways for the construction industry and its attorneys to consider. Number one, Prompt Pay Act claims may be distinct from contract claims. Previously, also in a memorandum decision, the court of appeals explained “a successful Prompt Pay claim requires a contractor to prove that an owner failed to make timely payments for approved invoices, . . . whereas ‘[t]o bring an action for the breach of the contract, the plaintiff has the burden of proving the existence of the contract, its breach and the resulting damages,’ . . .” Masaryk v. Mendelsohn Const. LLC, No. 1 CA-CV 13-0085, 2015 WL 1456636, at ¶12 (Ariz. Ct. App. Mar. 31, 2015). As the Masaryk court decided, and as was re-emphasized in Shea Connelly, the elements may be distinct, and attorneys should consider these decisions when crafting their arguments.

A second related point is that practitioners should be careful with the arguments they raise before an Administrative Law Judge. The Shea Connelly court warned readers that full bore litigation belongs in trial court, not in an administrative proceeding. In light of this case, attorneys should consider raising the issue with the Administrative Law Judge well in advance of the hearing, so that they know what the scope of the hearing will be, and what to expect at the hearing.

Third, just because the general contractor, or owner, considers a contract terminated, there may still be an obligation under the Prompt Pay Act to pay for work already performed. This was an issue in both Masaryk and Shea Connelly. This leads us to the fourth point, which is that general contractors and upstream subcontractors should keep A.R.S. § 32-1183(E) in mind. The statute requires the general contractor and upstream subcontractor to “prepare and issue a written statement within fourteen days to the applicable subcontractors or material suppliers stating in reasonable detail the contractor's or subcontractor's reasons for withholding the application or certification from the owner or contractor.” If the general contractor or subcontractor is not going to pay its subcontractor or downstream subcontractor for certain work, it should consider not requesting payment for that work when submitting its pay application upstream. This statute, if complied with, could give the general contractor or subcontractor a good argument if defending against a Prompt Pay Act claim from a lower tier subcontractor or supplier.

Shea Connelly offers several lessons and reminders for the industry about the nuances of the Prompt Pay Act. Though the unpublished case may not be binding, it is worth reviewing and considering these issues in the future.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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