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Arizona
Court of Appeals Says Licensing Statute
Still Has Teeth
Barry
A. Willits
Originally published June 2002
A 2002
decision by the Arizona Court of Appeals makes clear that the failure to
be properly licensed at all times throughout a project will bar
subsequent claims by the unlicensed contractor except in rare cases. The
owner's full knowledge of the contractor's licensing situation does not
matter.
The
Substantial Compliance Test. By statute, Arizona does not allow
unlicensed contractors to bring actions for unpaid work. A.R.S. §
32-1153. The legislature enacted the bar "to protect the public
from unscrupulous, unqualified, and financially irresponsible
contractors." Aesthetic Property Maintenance, Inc. v. Capitol
Indemnity Corp., 183 Ariz. 74, 900 P.2d 1210 (1995). Over the years,
Arizona courts have required strict compliance with the licensing
statutes, and even minor lapses have caused unlicensed contractors to
forfeit claims for payment no matter how harsh the result.
The
Arizona Supreme Court, however, appeared to soften the rule in 1995 with
the Aesthetic Property case. There, the Court allowed an
unlicensed contractor to maintain a claim for payment because the
contractor (a) lost his license temporarily through no fault of his own
(the Registrar had sent his license renewal notice to the wrong
address); (b) immediately moved to rectify the problem once it was
discovered; and (c) was financially responsible while unlicensed. The
court concluded that the contractor had "substantially
complied" with the licensing statutes, and that was good enough to
maintain its claim.
Substantial
Compliance Exception Is A Narrow One. If a temporary license lapse
caused by the Registrar can be substantial compliance, what about a
contractor that obtained its license shortly after a project had begun,
but the owner knew the contractor was unlicensed and the contractor was
suing only for work done while properly licensed?
That
was issue recently addressed by the Court of Appeals in Crowe v.
Hickman's Egg Ranch, Inc., 369 Ariz. Adv. Rep. 3, 41 P.3d 651 (App.
2002). Crowe was an out-of-state builder of commercial hen houses. It
was licensed in Mississippi only, a fact known by the owner, who
encouraged Crowe to build in Arizona. Crowe applied for an Arizona
license before the project started and obtained it long before the
project finished. It also sued only for payment for work completed while
it was properly licensed.
The
court held that these extenuating circumstances did not constitute
substantial compliance and barred the claim. The court noted that unlike
the contractor in the Aesthetic Property case, Crowe's lack of
licensing was not contributed to by the Registrar of Contractors. More
importantly, Crowe failed to present evidence that it was financially
responsible during the unlicensed period. Although no one was claiming
that Crowe was financially irresponsible, it was his burden to show that
he had maintained "his liability insurance, surety bond, and
workman's compensation during the unlicensed period; 'failing that,
there can be no substantial compliance.'"
The Crowe
decision thus makes clear that only in rare instances will unlicensed
contractors be able to avoid the absolute bar of A.R.S. § 32-1153. The
contractor must be unlicensed through no fault of his own; immediately
act to rectify the problem; and maintain its financial responsibility
while unlicensed.
What
About Crowe's Subcontractors? Although not a part of the Crowe case,
would Crowe's lack of a license affect its subcontractors' ability to
sue for payment? Could those subcontractors bring lien foreclosure
actions, for example, against the owner?
Surprisingly,
that issue was considered nearly 70 years ago in Hunt v. Douglas
Lumber, 41 Ariz. 276, 17 P.2d 815 (1933). The court framed the
question as follows: "what, if any, effect does the failure of the
[general] contractor to secure a license have upon the rights of [its
subcontractors and suppliers]?"
The Hunt
court answered that if the down-the-chain contractors and suppliers knew
the general was unlicensed, then their suits would be barred. If those
subcontractors and suppliers provided labor and materials to the project
in good faith without such knowledge, then the general's lack of a
license was no obstacle to their suits.
Having
the Wrong Type of License Is Equally Fatal. A contractor also cannot
sue if he has the wrong kind of license. In Sanders v. Foley, 190
Ariz. 182, 945 P.2d 1313 (1997), the court held that a B-1 General
Commercial license did not permit the contractor to sue — either under
its contract or by foreclosing on its lien — for compensation for
remodeling work done on a residence.
Practical
Advice. Although obvious to most contractors, the statutes and case
law make clear that contractors:
If a
subcontractor or supplier discovers that the party with whom it has
contracted is not properly licensed, then that subcontractor or supplier
needs to understand that its lien rights could be in jeopardy. — Barry
A. Willits
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