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Construction Law

Getting Paid Can Depend on Proper Licensing

In a split decision, the Arizona Court of Appeals blocks the collection efforts of a contractor who wasn’t licensed at the time he signed the contract

 

A 2002 Arizona Court of Appeals ruling in Crowe v. Hickman’s Egg Ranch, Inc. sends a subtle yet stern warning to Arizona contractors: Be properly licensed, or lose your right to payment.

 

This article appeared in the May 2002 issue of "The Construction Advisor" published by Lang & Klain, P.C.


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Background

In 1997, Hickman’s Egg Ranch sought the services of a Mississippi contractor, Richard Crowe Construction Company, which specializes in building commercial hen houses.

At the time the two parties entered into the $2.1 million construction contract, and for a time after Crowe commenced work on the project, Crowe was not licensed in Arizona. Hickman’s was aware of Crowe’s lack of license and helped Crowe gather the documentation needed for licensing. (Crowe became licensed and bonded in February 1998.)

Hickman’s paid Crowe more than $2 million for Crowe’s services, but Hickman’s allegedly failed to pay about $105,000 for work performed by Crowe between February 1998 and February 1999, a time during which Crowe was a licensed and bonded Arizona contractor. Crowe sued in Superior Court to collect the unpaid $105,000.

In a dubious decision, the trial court dismissed Crowe’s suit on the grounds that Crowe was not a licensed Arizona contractor when the contract was entered into. The court cited A.R.S. § 32-1153, which states:

“No contractor … shall act as agent or commence or maintain any action in any court of the state for collection of compensation for the performance of any act for which a license is required by this chapter without alleging and proving that the contracting party whose contract gives rise to the claim was a duly licensed contractor when the contract sued upon was entered into and when the alleged cause of action arose.” (Emphasis added.)

Crowe appealed, and the Arizona Court of Appeals upheld the dismissal of Crowe’s suit, thus dashing Crowe’s hopes of collecting the final $105,000 on the contract.

In reaching its decision, the majority of the three-judge panel raised some issues of which Arizona contractors and owners should take note.

While the statutory language quoted above seems final, the judges cited the 1995 Aesthetic decision in which the Arizona Supreme Court offered contractors some wiggle room, i.e., that “substantial compliance” with the contractor licensing statute was sufficient to satisfy the licensing prerequisite. Thus, the question that the judges sought to answer was whether Crowe “substantially complied” with A.R.S. § 32-1153 and whether the trial court’s summary judgment against Crowe’s suit was appropriate.

Unfortunately for Crowe, the majority ruled that Crowe failed the “substantial compliance test” contained in Aesthetic. Among their findings were these:

  • By not maintaining liability insurance, a surety bond, and workers compensation, Crowe did not meet his burden of proof as to financial responsibility.

  • Crowe was aware of the licensing requirement but did not immediately attempt to comply.

Crowe argued (convincingly, in our view) that, since the work for which he had not been paid was performed after he became licensed, and since he met the licensing and the substantial compliance requirements during that time, he should not be barred from suing to collect.

Crowe also argued that, since Hickman’s knew that Crowe was not licensed, contracted with Crowe anyway, requested services from Crowe, and paid Crowe over $2 million, Hickman’s repeatedly ratified the contract and shouldn’t be allowed to escape responsibility for payment. But the majority said no, essentially telling Crowe that he should have been licensed at the time he entered into the contract.

The dissenting opinion in this case casts Crowe’s and Hickman’s respective positions in, we believe, a more realistic and common sense light:

“The ‘policy or purpose [of the statute] is to protect the public from unscrupulous, unqualified, and financially irresponsible contractors.’ … The public did not need protection from Crowe for any of the above. Indeed, the word unscrupulous only comes to mind when one considers Hickman’s involvement in this matter. Again, Hickman sought out Crowe, entered into a contract with him, although he knew he was not licensed, sent Crowe materials to help him obtain a license, let Crowe on the property to do the work, paid him millions of dollars on the contract, accepted the project, and, if you believe Crowe’s allegation, then refused to pay over $105,000 for work done. The first, and only time Crowe heard about his lack of a license ‘at the time he entered into the contract’ is when Hickman filed his answer and motion to dismiss. “[T]he majority is wrongfully allowing the statute to be used as a sword to punish Crowe for acting in a fashion invited by Hickman.”

Warning to All Contractors

The obvious warning here is that an unlicensed contractor had better obtain his license and have it in hand before he contracts for work.

The Crowe case includes a warning for licensed contractors, too: A license to do one specific kind of work does not authorize you to contract for services outside the scope of your license, even if you are competent to do the additional work. In other words, a license to install drywall does not authorize you to paint, even if you get a painting license before you begin painting but after you enter into the contract. You will not be entitled to enforce the painting portion of the contract.

The bottom line: If you want to be able to sue for payment in an Arizona court, you must hold the required license before you enter into the contract.