Prompt payment laws are a common topic on the blog, and for good reason. They serve an integral role on construction projects – where prompt payment laws apply, payments must make their way down the chain at a certain pace or else penalties (typically in the form of interest) will come into play. A recent case for work completed at the Grand Canyon helps show the interplay between state prompt payment laws and federal projects. Ultimately, the court found that Arizona’s prompt payment laws won’t apply when the federal government owns the project property in question.
Arizona Prompt Payment Laws and Federal Projects
Zumar Industries, Inc. v. Caymus Corporation can be read in full here.
First, a little background information. The National Park Service (“NPS”), a federal agency, hired Caymus (“the GC)”) to provide and install road signs at the Grand Canyon (having driven there, I can attest to the fact that more signage was needed. But I digress…). Though the GC was prepared to bond the project, NPS informed them that no bonds were necessary – NPS stated that bonds were unnecessary because this was a service contract, rather than a construction contract.
Anyway, the GC hired Zumar (“the Supplier”) as its supplier. After one of the Supplier’s deliveries, NPS expressed concerns to the GC about defective panels and some that were missing altogether. Despite the issue, NPS paid the GC in full. When the Supplier invoiced the GC, the GC withheld over one-third of the funds in anticipation of curing the issues mentioned above. Ultimately, this dispute resulted in the Supplier filing suit against the GC. Among other claims, the Supplier alleged that the GC was in violation of the Arizona Prompt Payment Act (which we’ve broken down into easy FAQs here).
While the trial court found in favor of the Supplier, the GC appealed and the appellate court was less hospitable. This court found that the GC was not bound by the Arizona Prompt Payment Act for the above project. The court noted that Arizona’s Prompt Payment Act does not apply wholesale to public projects. Rather, it controls progress payments made from owner to contractor, contractor to subcontractor, etc. The court noted: “The Act is framed around the central concept of “owner,” as defined by the Act, and the flow of payments from owner to contractor and down the line…”
This created a problem for the Supplier (as it will create a problem for all subs and suppliers who work on federal projects located in Arizona). Specifically, the Arizona Prompt Payment Act defines an owner as
…any person, firm, partnership, corporation, association or other organization, or a combination of any of them, that causes a building, structure or improvement to be constructed, altered, repaired, maintained, moved or demolished or that causes land to be excavated or otherwise developed or improved, whether the interest or estate of the person is in fee, as vendee under a contract to purchase, as lessee or another interest or estate less than fee.
As you might have noticed, no governmental entity is included in that definition. On that basis, the court found that the Arizona Prompt Payment Act was not intended to provide for prompt payment coverage on federal projects. It found that to ignore the definitions would be to abandon the act’s central framework.
Federal Prompt Payment Act
The court did not stop there – as mentioned earlier in the post, there were other issues at hand. The Supplier also called for a violation of the Federal Prompt Pay Act (“FPPA”). According to the Supplier, under the FPPA, the GC was required to pay within 7 days of receiving payment from the governmental agency- NPS.
The court disagreed, noting that the Supplier failed to show that this was a construction contract rather than a service contract (under which the FPPA would not apply). The court even cited the fact that NPS did not require bonding, as required for construction contracts under the Miller Act, as supporting the idea that it contract was not for construction.
It’s important to note that this decision was not based on any conflict between the Arizona Prompt Payment Act and the Federal Prompt Pay Act – the court made it a point to explain that the federal does not preempt the Arizona one, and also that the federal act “does not otherwise limit or impair any administrative, judicial, or contractual remedies available to a contractor or subcontractor in the event of a dispute.” Those working on federal projects in Arizona need not worry too much – while the Arizona Prompt Payment Act won’t apply to federal projects in Arizona, as long as the project is for construction, the project will still be protected by the Federal Prompt Pay Act.
Still, Arizona contractors, subs, and suppliers should pay careful attention at the start of a project. Knowing which protections are available is crucial, and if a project is categorized as service instead of construction, many protections will fall by the wayside. For contractors in other states, this case won’t be controlling precedent but it should definitely be on your radar if you work on federal projects. Depending on the wording of your state’s prompt payment statute, it could be held inapplicable for federal projects.
Check out our Arizona Construction Payment Resources where we have FAQ’s on mechanics liens, lien waivers, retainage and prompt payment (and more!). Not in Arizona? We’ve got you covered – just select your state!