The operation and applicability of prompt pay acts in various states is something that contractors ignore to their detriment. A recent Tennessee case drives home the importance of understanding the applicability of any prompt pay act to a particular project and the scope of a contractor’s responsibilities thereunder.

In Eagle Supply and Manufacturing Co. v. Bechtel Jacobs Co., LLC., a contractor sought dismissal of a subcontractor’s breach of contract claim for nonpayment by alleging that (1) the Tennessee Prompt Pay Act (the “Act”) did not apply to a subcontract on a federal project, and (2) even if the Act applied, the terms of the subcontract barred relief. Disagreeing with the contractor, the U.S. District Court found that the Act did apply to subcontracts entered into between private parties on a federal project and that waiver of the Act’s requirements was forbidden by the express language of the Act.

The dispute at issue in Eagle Supply arose out of a subcontract entered into by a contractor and subcontractor for performance of decontamination and demolition work on a federal project. Once the subcontractor’s work began, the subcontractor alleged that the scope of work to be performed had been grossly underreported by the contractor, causing the subcontractor to incur increased costs to complete its work. After the completion of the subcontract work, the subcontractor claimed that the contractor improperly withheld some payments as retainage that should have been returned per the requirements of the Act. The contractor denied any wrongdoing and refused to release any retained funds.

The court in Eagle Supply found that the Act applied to “all private contracts and all construction contracts within the State of Tennessee.” Because the subcontract was for work performed on a federal project, the contractor argued that the subcontract should be treated as a federal contract rather than a private contract and, thus, the Act would not apply. The court disagreed, noting that the subcontract did not identify the federal government as a party to the subcontract. Instead, the language in the contract explicitly stated that the agreement was between two private parties: “This Subcontract embodies the entire agreement between the Contractor and Subcontractor.” Without some indication of an agreement between the subcontractor and the federal government, the court refused to treat the subcontract as a federal contract.

The court also rejected the contractor’s second argument that the subcontractor had waived its right to assert the Act as grounds for payment under the terms of its subcontract. The court noted that language in the Act provided that compliance with the Act could not be waived by contract or agreement between two parties. Since the protections of the Act could not be waived by agreement, the contractor’s argument could not prevail.

When negotiating subcontracts on federal projects, subcontractors and contractors should be aware of the varying state and federal statutory obligations to which they may be subject. Federal law may not always govern subcontracts on federal projects. Subcontractors and contractors should attempt to understand how state law variances from federal law can impact the allocation of cost and risk under a subcontract. A party that assumes either federal law or state law applies to a subcontract without a proper understanding of the applicability of those laws risks unanticipated impacts.