Arizona’s Prompt Payment Act (“the Act”) gives specific statutory remedies to a contractor when a landowner refuses to pay. The Act also establishes deadlines and guidelines for submitting invoices, and the landowner’s obligation to either approve the invoice or make specific objections to the work in writing. If a land owner does not make a timely and specific objection to an item in writing, then they must pay for it promptly, or risk violating the Act.
First, it is important to note that the Act, codified in A.R.S §32-1129.01 to §32-1129.06, only applies to private construction projects. There are similar statutes that lay out the prompt payment obligations for public projects, and there are also several differences between the various prompt payment statutes.
A.R.S.§32-1129.01 requires an owner to promptly pay a contractor. Typically, an owner must make monthly progress payments based on the contractor’s billing or estimate of work completed during the previous billing cycle. This time period can be altered if it is noted conspicuously in the contract and project plans.
Once they receive an invoice, the owner has 14 days to either approve the invoice or provide a written objection that specifically notifies the contractor which items in the invoice are not approved. The statute provides the following list of reasons that an owner may decline to approve an item in the invoice:
- Unsatisfactory job progress.
- Defective construction work or materials not remedied.
- Disputed work or materials.
- Failure to comply with other material provisions of the construction contract.
- Third party claims filed or reasonable evidence that a claim will be filed.
- Failure of the contractor or a subcontractor to make timely payments for labor, equipment and materials.
- Damage to the owner.
- Reasonable evidence that the construction contract cannot be completed for the unpaid balance of the construction contract sum.
If the owner does nothing, then the invoice is deemed approved 14 days after receipt. The owner then has seven days to make the progress payment. Late payments will be charged interest at 18% per annum.
A.R.S. §32-1129.04 provides the remedy for a contractor who has not been paid on time by an owner. The contractor may suspend performance or terminate the construction contract by providing seven days written notice. The contractor cannot be deemed to be in breach of the contract for suspending performance pursuant to this provision.
The contractor does not have to provide further labor or materials until the owner pays the amount that has been previously approved. This section also states that the successful party in any action or arbitration under this section will be awarded reasonable costs and attorney fees.
What happens if an owner discovers a defect after they have already approved the defective item? In Stonecreek Bldg. Co. v. Shure, 162 P.3d 675, 216 Ariz. 36, 2007 Ariz. App. LEXIS 139, 509 Ariz. Adv. Rep. 13 (Ariz. Ct. App. 2007), the owners complained of defective workmanship to the contractor, particularly defective masonry work. The contractor assured the owner that the masonry contractor would not receive payment until the work was corrected, and the owner continued to make progress payments.
The owner later gave written notice that they were withholding payment of $100,000 on an invoice based on alleged deficiencies in masonry work and the HVAC system. However, the invoice did not list the masonry work as an item.
The trail court found that the Act only permits an owner to withhold payment to the extent that it disapproves of work included in the invoice. Because the masonry work was not included in the invoice, the owner could not withhold payment. The owner argued that some construction defects may not be detected until after a progress payment is made, and that they should be permitted to withhold progress payments after the defect was found.
The Arizona Court of Appeals disagreed, noting that the owner could still use civil remedies, such as breach of contract or tort claims, to receive restitution for latent construction defects. The purpose of the Prompt Payment Act was to require an owner to identify and disapprove of items that need to be corrected early in the process so that contractors receive prompt payment for their work. Withholding payment for work that is not included in an invoice violated this purpose.
Contractors-and owners-must carefully comply with the Act, and be aware when the other party has violated the Act. Even if an item of work may be defective, an owner must make their objection in writing and in a timely fashion, or they will have effectively waived their right to object under the Act. They may still have civil remedies, but those may be more costly and time-consuming to pursue.
Chernoff Law handles real estate litigation and construction disputes throughout Arizona. Contact us by calling 480-719-7307 to for assistance with your real estate matters.