Prompt Pay

Prompt Payment Protections Expand to Private Projects in Arizona

Michael J. Holden
Originally published June 2000

The ground rules for payment on private construction projects in Arizona changed drastically with the recent enactment of new prompt pay legislation. For the first time, owners on private projects are subject to prompt payment requirements. The new law also gives contractors and subcontractors the right to stop work for non-payment, and makes a number of other significant changes improving payment rights.

The new legislation focuses primarily on three areas:

prompt payment on private construction projects;
allowing contractors and subcontractors to suspend or terminate a contract for untimely payment; and
voiding certain contract provisions as against public policy.

The effective date for the private sector prompt pay law depends, in part, on when the owner initially distributes any plans (including bid or construction plans), specifications or contract documents to the contractor or subcontractor. The new law applies to projects where: (a) the owner first distributes plans, specs or contracts after July 18, 2000; or (b) the parties sign a construction contract on or after January 1, 2001.

Private Sector Prompt Payment. The private sector prompt payment scheme is based on a 28-day standard industry payment cycle. The new law establishes "standard" statutory billing and payment cycles for all private construction projects in Arizona. These standard cycles and how owners may extend the billing and payment cycles are discussed in the Prompt Pay Timeline article on page two of this issue.

The new law does not require an owner to pay a general contractor if there are valid reasons to withhold payment. An owner has 14 days from receipt of a monthly billing or estimate to issue a written statement detailing those items that are not approved for payment. However, if the owner does not issue a written objection within 14 days, then the owner must make payment to the contractor for the full amount of the billing within seven days.

Sanctions for Prompt Pay Violations. Under Arizona's existing prompt pay laws, the only sanction for late payments is the recovery of interest at a rate of 1% per month. In most cases, the interest penalty has not served as a sufficient deterrent to prevent an owner or contractor from wrongfully withholding payment.

The new law increases the monthly interest rate to 1½% on late payments and allows for the recovery of attorneys' fees in any lawsuit or arbitration brought to collect amounts due under the prompt payment law.

However, the more extreme sanction under the new law, and one of its most controversial provisions, is that contractors and subcontractors now have the right by statute to suspend performance or terminate the contract for untimely payment or non-payment. In effect, these provisions codify the common law right to terminate a contract for the material breach of non-payment with two additional twists-express notice requirements (three or seven days depending on the specific circumstances) and the right to recover "any costs incurred for mobilization resulting from the shutdown or start-up" before recommencing work.

The following general rules apply to Arizona's new statutory right to suspend or terminate performance.

First, a contractor or subcontractor shall not be deemed in breach for suspending or terminating a construction contract.
Second, the time periods for contractors and subcontractors to suspend or terminate shall not be extended in the construction contract.
Third, the successful party in any litigation or arbitration shall be awarded costs and reasonable attorneys' fees.
Fourth, a contractor or subcontractor that has suspended work is "not required to furnish further labor, materials or services until the contractor or subcontractor is paid the amount that was certified and approved, together with any costs incurred for mobilization resulting from the shutdown or start-up of a project."

Provisions Against Public Policy. The new law also provides that the following contract clauses are void and against public policy in Arizona on both public and private projects:

A provision that makes the contract subject to the laws of another state or that requires any litigation, arbitration or other ADR proceeding "arising from the contract" to be conducted in another state.
A contractual clause that prohibits a party from suspending performance or terminate the contract if prompt payments are not made.

— Michael J. Holden