Arizona Court of Appeals, Division One, holds that the voluntary-payment doctrine does not override a party’s contractual audit rights.

A subcontractor, Raba, entered a multi-year agreement with Connect to provide quality assurance services relating to a major Arizona Department of Transportation highway project. Under the agreement, Connect would pay Raba a labor multiplier of 2.21 for the first 40 hours an employee worked each week; the multiplier expressly did not apply to overtime hours. The agreement also gave Connect the right to audit Raba’s billing records during the contract’s term and for five years after “for the purpose of verifying costs incurred.”

Beginning with the seventh monthly invoice, Raba applied the labor multiplier to overtime hours in violation of the agreement’s express terms. Connect representatives approved and paid these invoices. About two years into the agreement, Connect audited Raba’s past invoices and discovered the overbilling. Connect ultimately clawed back approximately $1,950,000 in overpayments by reducing its later payments to Raba.

Raba sued, arguing that even if it overbilled Connect, the voluntary-payment doctrine entitled it to keep the overpayments. Under that doctrine, a party generally cannot recover money voluntarily paid with full knowledge of all the facts absent fraud, duress, or extortion, although no obligation to make such payment existed. The superior court agreed, ruling that because the overbilling “could have easily been identified” from the face of Raba’s invoices, Connect waived its audit rights and could not recover the payments.

The Arizona Court of Appeals reversed. The Court emphasized Arizona’s commitment to freedom of contract, which holds parties to their bargains absent significant overriding public policy considerations. The Court specifically rejected the voluntary-payment doctrine as a potential public-policy consideration, noting the doctrine’s equitable roots require a case-by-case analysis. The contract did not entitle Raba to be paid the labor multiplier on overtime hours, and entitled Connect to audit and recover any overpayments.

The Court distinguished Wood v. Northwest Hospital, LLC, in which the voluntary-payment doctrine barred recovery, based on several critical differences, including that the hospital in Wood maintained the records and calculated its own payments; overpaid for two consecutive one-year terms; and allowed its audit rights to lapse before seeking recovery.

The Court held that the agreement’s audit rights, when timely exercised, “implicitly and necessarily empower Connect to correct payment errors during the Agreement’s term.” The Court declined to adopt a rule that would moot Connect’s audit rights simply because the overbilling “could have easily been identified” on the face of an invoice. The Court also affirmed the superior court’s grant of summary judgment against Raba’s equitable estoppel claim, finding that Raba could not show it changed its position or suffered harm in reliance on Connect’s earlier overpayments.

Judge Gass authored the opinion, in which Judge Furuya and Chief Judge Howe joined.

Posted by: Andrew Haynes