New Arizona case serves as a note of caution to the subcontractors doing work on federal projects, even if not directly contracting with a federal agency. On November 16, 2017, the Arizona Court of Appeals, Division One, in Zumar Indus. Inc. v. Caymus Corp., 1 CA-CV 16-0423, 2017 WL 5491932 (App. Nov. 16, 2017) held that the superior court incorrectly applied the Arizona Prompt Pay Act to a contractor-subcontractor dispute on a federal work project and reversed the superior court’s grant of summary judgment in favor of the subcontractor.

Caymus was hired by the National Park Service (NPS), a bureau of the U.S. Department of the Interior, to provide and install road signs at the Grand Canyon National Park. Caymus hired Zumar to supply the sign panels. NPS brought up their concerns about defective and missing panels shortly after Zumar delivered sign panels to the job site. Thereafter, Caymus submitted a pay application to NPS, which paid the requested $98,800 for the sign panels scope of work. Caymus then paid Zumar $59,278.10, but withheld $35,632.33 pending Zumar’s satisfactory performance. Zumar brought a breach of contract action against Caymus, seeking damages of $35,632.33. Zumar prevailed in arbitration, and Caymus appealed. Zumar moved for summary judgment, arguing Caymus violated state and federal prompt pay laws, which constituted a material breach of the subcontract. The superior court agreed with Zumar.

The Court of Appeals reviewed the application of the Arizona Prompt Pay Act (“Act”) to the project and held that the Act’s payment scheme does not apply to this project and thus its provisions cannot be read into the contract dispute. The Court of Appeals reasoned that an “owner,” as defined in the Act, does not include the federal government or its agencies, and thus found the Act inapplicable when the contract at issue is a federal work project.

Key Takeaway

The case presents an important lesson. The Arizona Prompt Pay Act does not apply to a contractor-subcontractor dispute on a federal work project. Subcontractors working on federal projects must have an understanding of the applicable state and federal law. For subcontractors, and general contractors, with nationwide operations, that means understanding the challenges of applying state law to federal projects in various jurisdictions.