Stonecreek Building Company, Inc. v. Shure – 7/26/2007

July 31, 2007

Arizona Appeals Court, Division One, Holds That “Prompt Pay Act” Prohibits Owners From Withholding Payment On An Invoice For Allegedly Defective Work That Does Not Actually Appear On Such Invoice.

Appellants (“Owners”) entered into a contract with Stonecreek to construct a custom residence. During construction, Owners complained of defective workmanship, particularly with the masonry work. In April 2004, Owners’ attorney sent a letter to Stonecreek expressing dissatisfaction with the masonry work as well as the HVAC system. Two days later, Owners received Pay Application No. 8 (“the invoice”) from Stonecreek, which was approved by the architect and billed $122,447 for a variety of work, including the HVAC system, but not masonry. Owners withheld $100,000 of the invoice based on alleged deficiencies in masonry work and the HVAC. Stonecreek suspended performance, and Owners terminated the contract alleging Stonecreek failed to remedy deficiencies in construction.

The parties sued each other, and the trial court granted Stonecreek summary judgment, finding that under the Prompt Pay Act, A.R.S. §§ 32-11291129.06, an owner can withhold payment only to the extent that it disapproves work included in the invoice on which the owner is withholding payment.

Division One affirmed, rejecting Owners’ argument that they were entitled to withhold payments for work other than that billed in the invoice. The Court noted that on this point, the Act contains arguably conflicting provisions. Compare § 32-1129.01(D) (providing that a billing is deemed approved unless the owner issues a written statement “detailing those items in the billing” that are not approved) with § 32-1129.01(E) (providing that an owner “may withhold from a progress payment only an amount that is sufficient to pay the direct expenses the owner reasonably expects to incur to correct any items set forth in the writing in subsection D”) (emphasis added). Finding no guidance in the legislative history of the Act, the court looked to other provisions of the Act to conclude that “the primary purpose of the Act is 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.” Thus, the statute links progress payments from the owner to work done by subcontractors and suppliers, whose particular work or supplies are billed in the contractor’s application for that progress payment.

The Court concluded that if owners can simply wait until a later billing statement to disapprove and withhold payment for work already completed and deemed approved, the time limits in the Act within which payments must be made become ineffective. Although Owners argued that some defects are latent and may not reveal themselves within the time limits to disapprove work and withhold payments, the Court found that this does not “deprive the owner of a remedy for latent defects” because “the owner retains all civil remedies for breach of contract and tort claims against a contractor.”

Judge Portley, Presiding Judge, authored the opinion, with Judge Kessler and Judge Irvine concurring.