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Construction Law | December 2017

Michael W. Thal  
 

Prompt Payment Act Does Not Apply to Federal Projects, Court Rules

A payment dispute over the quality of road signs installed at the Grand Canyon ends in the Court of Appeals’ finding that a federal agency is not an “owner” under Arizona’s Prompt Payment Act.

In November 2017, the Arizona Court of Appeals ruled that the Arizona Prompt Payment Act does not protect the payment rights of contractors or subcontractors that provide labor or materials on federal projects in Arizona.

The case is Zumar Industries Inc. v. Caymus Corporation, and here is a summary of the issues, outcome and impact.

Background

In 2013, the National Park Service hired Caymus Corp. to provide and install road signs at Grand Canyon National Park. Caymus subcontracted with Zumar Industries to supply the sign panels.

 

This article appeared in the December 2017 issue of "The Construction Advisor" published by Lang & Klain, P.C.


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After Zumar delivered the sign panels to the job site, the Park Service raised concerns about defective and missing panels. With the quality issue unresolved, Zumar invoiced Caymus in full for the sign panels. Caymus sent a pay application to the Park Service, certifying that the sign panels line item was 100% completed, and the Park Service paid Caymus’s invoice in full. But Caymus made only a partial payment to Zumar, withholding $35,600 because of the outstanding quality issues.

Attempts by Zumar and the Park Service to resolve the quality and payment issues were unsuccessful, and in September 2014 Zumar sued Caymus for breach of contract, seeking payment of the withheld $35,600.

Zumar prevailed in arbitration, and Caymus appealed to Superior Court. Zumar moved for summary judgment, arguing that Caymus’s refusal to make full payment violated the Arizona Prompt Payment Act (among other protections). The Superior Court granted Zumar’s motion, and Caymus appealed to the Arizona Court of Appeals.

During the legal wrangling, Caymus completed the work, and the Park Service withheld from its final payment to Caymus roughly the same amount as Caymus withheld from Zumar.

Federal Agency Not an “Owner”

In its November 16, 2017, decision, the Court of Appeals noted that:

“[T]he primary purpose of the Act is to establish a framework for ensuring timely payments from the owner to the contractor and down the line to the subcontractors and suppliers whose work has been approved.”[1] (Emphasis added.)

Caymus argued that the Arizona Prompt Payment Act does not apply to agencies of the federal government, as federal agencies cannot be “owners” under the Act. Caymus cited A.R.S. § 32–1129(A)(4), which lists the entities included in the definition of owner: “... person, firm, partnership, corporation, association or other organization.”

Zumar countered that the Act’s prompt pay provisions do not depend on the identity of the owner of the project, and that the Act applies to agreements between a contractor and subcontractor in any context.

To the surprise of many, the Court of Appeals sided with Caymus and ruled that the Arizona Prompt Payment Act does not apply to a contractor-subcontractor dispute on a federal work project, even though the contractor-subcontractor relationship arises from a private contract between private entities. The Court of Appeals reversed the Superior Court's ruling, awarded Caymus its costs and attorneys' fees, and sent the case back to Superior Court.

In its ruling, the Court of Appeals found:

“The Act's payment scheme does not apply to this federal project, and its provisions cannot be read into the contract dispute. ... Zumar contends [the Act] regulates payment from a contractor to a subcontractor or material supplier in any context, even on a federal project. It does not.”

What This Means for Contractors and Subcontractors

If the Court of Appeals ruling spells the end of this case, contractors and subcontractors on federal projects should assume that the Arizona Prompt Payment Act will not apply to any payment disputes connected to that project.


[1] Citing to Stonecreek Bldg. Co., Inc. v. Shure, 216 Ariz. 36, 39, ¶ 16 (App. 2007)