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Howrey LLP
Arizona
recently enacted legislation that significantly broadens
the rights of contractors and subcontractors to prompt payment
on construction projects. Previously, such prompt payment
protections applied only to contractors and subcontractors
on public works projects (Arizona Statutes §34-221)
and to subcontractors on private projects (Arizona Statutes
§32-1129).
Under
the former law, on public projects contractors and subcontractors
that were not paid in a timely manner as required by the
statute were entitled to interest on the unpaid amount at
a rate of 1 percent per month, but there was no entitlement
to recover attorney fees. On private projects, subcontractors
were entitled to identical remedies.
The
new prompt payment laws (Arizona Statutes §§32-1129
to 1129.6) apply only to private works of improvement. The
public works statute was not changed. Besides providing
prompt payment protections to general contractors on private
works, the new statute effectively rewrites the prior law.
Under
the new law, unless the owner and contractor agree, payments
on all private construction projects are to be made "on
the basis of a duly certified and approved billing or estimate
of the work performed… during the preceding thirty
day billing cycle." Payments are to be certified and
approved within 14 days after submission, and payments are
to be issued within 7 days after certification. If payment
is to be based on other than a 30-day cycle or if certifications
or payments are to be made or issued over a period longer
than the 14- and 7-day periods, "the construction contract
and each page of the plans" must "specifically
identify such other billing cycle in a clear and conspicuous
manner" and special notices regarding the extended
periods also must appear on "each page of the plans."
Given the burden of inserting such information on every
page of the drawings, it appears that a 30-day billing cycle
with a 14-day certification period followed by a 7-day payment
period is likely to become the norm on private construction
projects in Arizona.
The
new law requires general contractors to make progress payments
to subcontractors within 7 days of receiving payment from
owners, a reduction from the 14-day period under prior law.
The legislation also provides that subcontractors are entitled
to be informed by the owner of progress payments to the
prime contractor within 5 days of payment, provided the
subcontractor makes a written request for this information.
Other
provisions of the new law include:
- The
level of retainage withheld from a subcontractor cannot
exceed the percentage withheld by the owner from the general
contractor.
- Subcontractors
and prime contractors are entitled to suspend performance
or terminate their contracts (after supplying proper notice)
when payments are late.
- Subcontractors
and prime contractors that have suspended work in compliance
with the law are entitled to recover payment for demobilization
and remobilization costs.
- Subcontractors
and prime contractors are not required to recommence work
after a non-payment suspension until they have actually
received past due payments plus payment for their demobilization
and remobilization costs.
- A
monthly interest rate of 1.5 percent (an increase from
the prior 1 percent rate) is applicable to late payments.
- By
law, the venue for disputes concerning Arizona construction
is Arizona.
- The
prevailing party in a civil dispute or arbitration involving
late payment is entitled to recover its reasonable attorney
fees and costs (something still not provided for on public
works projects).
Since
the early 1990s, prompt payment legislation has been adopted
by a number of states, and new, more detailed and complex
prompt payment laws are enacted on a regular basis. For
example, see California Public Contract Code §§7107,
10261.5, 10262 and 10262.5; Business and Professions Code
§7108.5; and Civil Code §§3260 and 3260.1).
Prudent owners, contractors and subcontractors must keep
abreast of these common changes in prompt payment laws.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2001 Howrey LLP
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