Caveat Contractor: Arizona Court Of Appeals Interprets Prompt Pay Act As “Prompt Billing Act” To Deny Relief To Unpaid Contractor

Todd A. Baxter | Dickinson Wright | March 5, 2019

The Arizona Court of Appeals recently denied a contractor’s claim that the owner had violated Arizona’s prompt pay act (“Prompt Pay”) despite the owner’s admission that it had not paid the contractor or objected to the payment application within the statutory time.1 The court’s reason for denying the claim? The payment application included items not supplied within “the preceding thirty day billing cycle.”2 That’s it.

The contractor explained that imposing a strict thirty-day billing cycle would up-end the usual dealings between contractors and subcontractors and create problematic situations regarding materials that are often acquired, stored, and installed during different billing cycles.3 The court did not disagree, but stated that such a potential impact made no difference to its ruling. Instead, it noted that if a statute’s “plain language” “results in awkward procedures, or leads to a harsh result” (as it seemed to acknowledge happened here)4, it is up to the legislature to correct the language, not the court.

Most surprising, though, is not that the court found the owner had a right to object to being billed for labor and materials supplied more than thirty days ago (which might be justified), but that it found the owner was not obligated to object or explain its reasons for withholding payment. Despite paying lip service to Prompt Pay’s primary purpose of requiring owners to object to problems early so that those involved in the work (contractors, subcontractors, and suppliers) receive, yes, “prompt payment,”5 the court concluded that the thirty-day billing cycle referenced in the statute imposes an obligation on the contractor in order to “benefit from” Prompt Pay.6If labor or materials are supplied, but are not billed until after the next regular billing or estimate, the owner may withhold payment for those items – without objecting to them – and not violate Prompt Pay.7

A billing cycle that requires owners to either make payment or state objections within a specified time after each billing is in keeping with Prompt Pay’s purpose; depriving contractors entirely of Prompt Pay’s protections – 18% interest and attorneys’ fees – for work not billed within thirty days of performance, is not.

The court may be right that the legislature needs to revise the language of Prompt Pay to avoid the potential for awkward procedures and harsh results. Until that happens (and don’t hold your breath), contractors should be careful to include in every “billing or estimate” 8 all work performed and materials supplied during any given thirty-day billing cycle, and shift the burden to the owner to object to any items it believes should not have been included.

Footnotes

1. SK Builders, Inc. v. Smith, Ariz. Adv. Rep. 15 (App. 2019).

2. Id. at 16, ¶ 12-14.

3. Id. at 16-17, ¶ 15.

4. Id. at 17, ¶ 18.

5. Id. Quoting Stonecreek Bldg. Co. v. Shure, 216 Ariz. 36, ¶ 16 (App. 2007) (quotation and internal citation omitted).

6. Id. at 16-17.

7. An owner would still be required to pay for non-defective work, and potentially be exposed to contract rate interest, but the contractor’s leverage under Prompt Pay is removed.

8. Id. At 16, ¶ 12 (quoting Prompt Pay)

When is a “Willful” Violation Willful (or Not) Under California’s Contractor Enforcement Statutes?

Garret Murai | California Construction Law Blog | March 4, 2019

The enforcement statutes applicable to the California Contractors’ State License Board aren’t exactly models in clarity. A few examples:

  1. Business and Professions Code Section 7107:  Abandonment without legal excuse of any construction project or operation engaged in or undertaken by the license as a contractor constitutes a cause for disciplinary action.
  2. Business and Professions Code Section 7109: A willful departure in any material respect from accepted trade standards for good and workmanlike construction constitutes a cause for disciplinary action, unless the departure was in accordance with plans and specifications prepared by or under the direct supervision of an architect.
  3. Business and Professions Code Section 7110: Willful or deliberate disregard and violation of the building laws of the state, or any political subdivision thereof, . . . or of the safety or labor laws or compensation insurance laws or Unemployment Insurance Code of the State, or of the Subletting and Subcontracting Fair Practice Act, or violation by any licensee of any provision of the Health and Safety Code or Water Code, relating to the digging, boring, or drilling of water wells, constitutes a cause for disciplinary action.

We’ve had lively, late-evening debates in my office over what constitutes “abandonment without legal excuse” under Business and Professions Code Section 7107, what a “willful departure” and  “in any material respect” under Business and Professions Code Section 7109 are, and what “willful or deliberate disregard” under Business and Professions Code Section 7110 really means.

The exciting lives of construction attorneys. At least, on occasion, it’s followed by a beer.

While it’s the job of a lawyer to argue over what a statute means and how it should be applied, it’s the judiciary’s job to play referee and actually make those calls. And the judiciary has made a call, at least with respect to one of these code sections.

In ACCO Engineered Systems, Inc. v. Contractors State License Board, 2nd District Court of Appeals, Case No. B282944 (Nov 15, 2018), the Court of Appeal wrestled with the meaning and intent of the term “willful” under  Business and Professions Code Section 7110 and whether a violation required “specific” or “general” intent.

ACCO Engineered Systems, Inc. v. Contractors State License Board

In 2014, ACCO Engineered Systems, Inc. received notification of a complaint filed with the California Contractors State License Board alleging that ACCO had replaced a boiler at a commercial building in Los Angeles, California without obtaining the required permits. Upon receiving notification of the complaint, ACCO conducted its own investigation and determined that permits should have been obtained for the boiler under Los Angeles’ municipal building code, belatedly obtained the necessary permits in July 2014, and informed the CSLB that the failure to obtain the necessary permits was due to the inadvertence of a lower-level employee.

The CSLB later issued a citation imposing a $500 civil penalty against ACCO for violating Business and Professions Code Section 7110, which provides, in pertinent part, that the “[w]illful or deliberate disregard and violation of the building laws . . . constitutes a cause for disciplinary action.” ACCO appealed the decision and an administrative hearing was held in September 2015.

Following the administrative hearing, the administrative law judge issued his decision finding that ACCO’s failure to obtain a permit before replacing the boiler was not “deliberate” within the meaning of Business and Professions Code Section 7110, but that ACCO’s conduct was “willful” under the statute, notwithstanding ACCO’s argument that its failure to obtain necessary permits was an inadvertent mistake. Noting that ACCO took efforts to immediately remedy the situation, however, the administrative law judge reduced the penalty from $500 to $200.

Legal fees apparently being no impediment, ACCO filed a petition for writ of administrative mandamus, appealing the decision to the Superior Court. ACCO’s petition, however, didn’t fall on kind ears. The Superior Court denied the petition finding that the term “willful” as used in Business and Professions Code Section 7110 only requires a showing of “general,” not “specific,” intent and that when ACCO’s project manager made the decision to proceed without a permit without first consulting with ACCO’s in-house permitting coordinator, as company policy required, he acted with general intent.

ACCO appealed.

The Appeal

The 2nd District Court of Appeal, while noting that the term “willful” is not defined in Business in Professions Code Section 7110, explained that it must be construed in harmony with similar statutes and the intent of those statutes, which with respect to the enforcement statutes applicable to the CSLB is to “protect the public against dishonesty and incompetency in the administration of the contracting business.”

Under a similar statute, Business and Professions Code Section 7109, which provides that a “willful” departure in any material respect from accepted trade standards for good and workmanlike construction constitutes a cause for disciplinary action, earlier cases have “require[d] only a general intent to perform an act, not a specific intent to violate a law,” explained the Court of Appeal.

Further, rejecting ACCO’s argument that such an application turns the statute into a strict liability statute, the Court of Appeal stated that it does not:

We can imagine the absence of willful or deliberate disregard of building laws occurring in the following scenario: A contractor attempts to obtain a building permit but is unable to obtain one because the local permitting authority incorrectly believes no permit is required. Even if it is later established that the permit should have been issued, the contractor’s failure to obtain the required permit cannot be considered a “willful’ violation of the applicable laws, and therefore discipline under section 7110 would not be warranted. We can also imagine the absence of willful or deliberate disregard of building laws where a city’s permitting requirements are ambiguous or subject to interpretation.

Finally, the Court of Appeal rejected ACCO’s argument that by interpreting the term “willful” under Business and Professions Code Section 7110 to encompass even actions involving general intent it precludes a contractor from being able to show that it acted in good faith. The Court held that unlike under criminal statutes “moral blameworthiness is not a necessary element of willful misconduct” under Section 7110, since the purpose of the law is not to punish but rather “toprotect the public against dishonesty and incompetency in the administration of the contracting business.”

Conclusion

So there you have it. Except in very limited circumstances, a contractor’s actions will be considered “willful” under the enforcement statutes of the CSLB irrespective of whether the contractor intended the result or not. I think someone owes me a beer.

But What About My Machines Just Sitting There? Fed Court Rules Only Some Idle Equipment Costs are Allowable in a Payment Bond Claim

Brendan Carter | The Dispute Resolver | March 1, 2019

In 2010, the United States Army Corps of Engineers (USACE) entered into an agreement with Hirani Engineering & Land Surveying, PC (Hirani) for the construction of a levee wall on the National Mall to prevent the Potomac River from flooding into Downtown Washington. Hirani in turn then subcontracted out most of the work to a single firm, American Civil Construction (ACC).  For the next two plus years, the project was plagued with delays, changes, and disputes and consequently USACE terminated Hirani in April of 2013.  ACC then vacated the work site in the days following the termination.  USACE made a claim on Hirani’s Performance Bond and its surety Colonial Surety Company (Colonial) hired a contractor team to complete the project.

ACC filed suit against Hirani and Colonial in April of 2014 in the United States District Court for the District of Columbia for $2,172,285.23 in damages, prejudgment interest, attorney’s fees, and costs.  In turn, Colonial counter-sued in the amount of $723,049.14 for work ACC had failed to complete. The bulk of ACC’s requested damages fell under at Miller Act-Payment Bond claim against Colonial for work ACC claimed was performed but not paid for by Hirani.

In its bond suit, ACC claimed quantum meruit damages which contained $138,135.34 for costs related to idle equipment.  ACC identified the idle equipment costs as, “the standby costs of having its owned equipment idling at the site as part of the reasonable value of ACC’s owned equipment furnished in connection with the Project.”  ACC asserted the figure did not represent rental values or other profit opportunities the equipment could have been used for.

The Court began its analysis by stating the Miller Act allows a contractor who “furnish[es] labor or material in carrying out work provided for in a contract” to make payment bond claim.  The court then goes on to state that idle equipment costs “cannot be viewed as an indivisible whole.” The Court presented two scenarios to exemplify this.  The first is when a contractor brings machines to a site and uses them over the course of weeks, but not every day.  The second scenario is one in which a contractor brings equipment to a job sixty days before it is ultimately used in the execution of contract work.   

The Court differentiated the two scenarios by stating in the first, a contractor cannot be expected to remove equipment from a work site every time it is not used so long as there are other activities that require its use, but in the second, a contractor cannot claim equipment is “furnished” for “carrying out work” if the equipment is not used absent a reasonable explanation.  The Court drew examples from the claim pointing to a skid steer that was brought to the job site early and used throughout the course of the project, but not every day, and compared it to an excavator brought in December of 2011, used a few times in January of 2012, and then used only one more time while sitting onsite for the duration of the project.
In its decision, the Court examined a submitted schedule of equipment utilized and determined ACC was entitled to $38,897.62 for standby expenses for idle equipment.

Three Reasons Lean Construction Principles Are Still Valid

Kevin Clary | Construction Executive | January 23, 2019

When lean principles were first introduced to the construction industry five years ago, project managers raced to implement the production method. The internet was rife with content about how to easily overhaul a jobsite and transform it into the picture of efficiency.

However, the number of lean construction critics have multiplied significantly in recent months. They claim concepts are near impossible to implement or, even worse, automation eliminates the need for deliberate human processes. These ideas are misleading. Lean principles are still valid for a few key reasons.

1. LEAN INVOLVES SEEING THINGS FROM THE CUSTOMER’S POINT OF VIEW

One of the defining principles of lean construction is understanding value from the customer’s point of view. The concept encourages stakeholders, including the owner, contractor and supplier, to come together during the early planning stage of the project. The significant level of trust created from this exercise can’t be replicated by machinery. It involves compassion, collaboration and a sense of creativity that artificial intelligence is yet to possess. Moreover, the rapport gained through this service-oriented exercise is worth the time investment.

2. LEAN USES PULL PLANNING AND SCHEDULING

Creating a reliable workflow is best determined by those downstream—who are typically contractors. They communicate with each other to determine the schedule of tasks, and the best ways to eliminate waste. Many project managers are hesitant to involve contractors in decision making. This presents a challenge when attempting to implement the lean principle. Using smart machinery or the internet of things takes some responsibility away from the individual and allows for constant monitoring. However, training employees to think proactively and honing leadership skills is essential for business development.

3. LEAN IS DEPENDENT ON CONTINUOUS IMPROVEMENT

The jobsite is constantly evolving because of the belief that it’s possible and necessary to improve processes and eliminate waste. Opportunities for advancement are identified throughout the project, and are applied to future work. This commitment requires a keen eye for detail and a determined individual. Key performance indicators and analytics are now readily available, but change is dependent on a committed project manager. 

Effectively implementing lean construction principles requires a great deal of patience and creativity. Furthermore, the concepts are used across many industries, which means the variation of processes that works for one organization might fail in others. Perhaps the individuals who are critical of lean principles haven’t discovered the right production method; or, critics are looking for a quick fix to their jobsite woes. Though lean construction is hardly a quick fix, the concepts are not only valid, but can create dramatic improvements in scheduling, budget and delivery when implemented correctly.

Illinois Supreme Court Limits Reach of Implied Warranty Claims Against Contractors

Thomas G. Cronin | Gordon Rees Scully Mansukhani | February 25, 2019

In a recent decision, the Illinois Supreme Court held that a purchaser of a newly constructed home could not assert a claim for breach of the implied warranty of habitability against a subcontractor where the subcontractor had no contractual relationship with the purchaser. Sienna Court Condo. Ass’n v. Champion Aluminum Corp., 2018 IL 122022, ¶ 1. The decision overruled Minton v. The Richards Group of Chicago, which held that a purchaser who “has no recourse to the builder-vendor and has sustained loss due to the faulty and latent defect in their new home caused by the subcontractor” could assert a claim of a breach of the warranty of habitability against the subcontractor. 116 Ill. App. 3d 852, 855 (1983).

In Sienna Court Condo. Ass’n, the plaintiff alleged that the condo building had several latent defects which made individual units and common areas unfit for habitation. 2008 IL 122022 at ¶ 3. The Court rejected the plaintiff’s argument that privity should not be a factor in determining whether a claim for a breach of the warranty of habitability can be asserted. Id. at ¶ 19. The Court also rejected the plaintiff’s argument that claims for a breach warranty of habitability should not be governed by contract law but should instead be governed by tort law analogous to application of strict liability. Id.

The Court reasoned that the economic loss rule, as articulated in Moorman Manufacturing Co. v. National Tank Co., 91 Ill. 2d 69, 91 (1982), refuted the plaintiff’s argument that the implied warranty of habitability should be covered by tort law. 2008 IL 122022 at ¶ 20. Under the economic loss rule, a plaintiff “cannot recover for solely economic loss under the tort theories of strict liability, negligence, and innocent misrepresentation.” National Tank Co., 91 Ill. 2d at 91. The Court explained that the rule prevented plaintiffs from turning a contractual claim into a tort claim. 2008 IL 122022 at ¶ 21. The Court further noted that contractual privity is required for a claim of economic loss, and an economic loss claim is not limited to strict liability claims. Id. Because the plaintiff’s claim was solely for an economic loss, it was a contractual claim in nature; therefore, the Court concluded that “the implied warranty of habitability cannot be characterized as a tort.” Id. at ¶ 22.

The Court also rejected the plaintiff’s argument that warranty of habitability should be governed by tort law because it involves a duty imposed by the courts. Id. at ¶ 23. It reasoned that “an implied term in a contract is no less contractual in nature simply because it is implied by the courts . . . .” Id. The Court noted that the warranty of habitability can be waived under Illinois law, but individuals are not able to waive duties imposed upon them by the courts. Id. If the warranty of habitability was a tort claim, it would “raise[] significant practical problems, particularly for subcontractors” given that they “depend upon contract law and contracts with the general contractor to protect and define their risks and economic expectations.” Id. at ¶ 24. Because a subcontractor’s fees, costs, and liability are controlled by his contracts, turning an implied warranty of habitability claim into a tort would make those contracts pointless. Id.

The Court’s decision to overrule Minton rested on three primary reasons: (1) Minton failed to discuss why the economic loss rule did not apply; (2) Minton did not address what effect its holding would have on the contractual relationships of subcontractors and general contractors; and (3) there is “no authority for the idea that a tort duty comes into and out of existence depending on whether another entity is bankrupt.” Id. at ¶ 25. In light of the opinion, a home purchaser’s remedy where there is economic loss is now limited to those parties with whom it has a direct contractual relationship.