January 2021

Offset and Recoupment Are Not Valid Defenses to Prompt Pay Proceedings Before the ROC

The Arizona Court of Appeals recently issued a memorandum decision that offset and recoupment are not valid defenses to a ROC Prompt Pay Act proceeding.

Shea-Connelly Development, LLC (“SCD”) and Revive Construction and Cleaning, LLC (“Revive”) entered into two separate subcontracts for two different construction projects. The first contract required Revive to frame a project in Glendale (“Glendale project”). The second contract required Revive to fix framing performed by a previous subcontractor on SCD's “Park Place project.” Prior to Revive performing any work on the Glendale project, SCD paid Revive $58,641.97. The Glendale project had a provision in the subcontract that Revive’s default on the Glendale project would be a default under the Park Place project.

The Park Place project had significant cost overruns. However, SCD continued to pay Revive until January, when Revive submitted an invoice for work that failed SCD’s inspection. SCD did not object to the invoice or subsequent invoices, but SCD considered Revive terminated on both the Park Place project and the Glendale project. Revive filed an ROC no-pay complaint against SCD for $68,783.25 for the unpaid Park Place invoices. SCD countered that it was owed the return of the $58,641.97 paid to Revive on the Glendale project as well as other offsets, since SCD had to hire another subcontractor to remedy Revive’s defective workmanship at the Park Place project.

The ROC case proceeded before an administrative law judge, who found in favor of Revive. SCD appealed. The Court of Appeals noted Arizona’s Prompt Pay Act requires a contractor to pay the full amount of an invoice for work done and materials supplied within seven days of the invoices being certified and approved unless the contractor prepares and issues a written statement within 14 days of receiving the invoices detailing the reasons for withholding payment. SCD issued no such written statement for Revive’s invoices.

The Court of Appeals dismissed SCD’s accord and satisfaction defense. The Court stated that recognizing an “accord and satisfaction” between SCD and Revive would impermissibly alter a subcontractor’s right to receive prompt payment under the Prompt Pay Act.

As to SCD’s claim for offset of the $58,641.97 paid to Revive on the Glendale project without any work being performed, the Court said neither offset nor recoupment apply in Prompt Pay Act proceedings before the ROC.

The Court noted that ROC proceedings are not venues for comprehensive litigation over contract rights and obligations.

“Allowing a contractor to bring a counterclaim or some right outside the Prompt Pay Act against a subcontractor or supplier to reduce the amount owed under certified invoices would inflate a simple prompt payment proceeding before an ALJ to full civil litigation better suited to the Superior Court.”

Accordingly, if a ROC Prompt Pay Act proceeding is brought, the contractor will not be able to claim offset or recoupment for any amount the contractor is owed from the subcontractor or supplier on current or other construction projects. The consequences of an ROC complaint can drastically impact a contractor. If served with a ROC complaint, contact a Sacks Tierney construction attorney to protect your rights.

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