No contractor as defined in section 32-1101 shall act as agent or commence or maintain any action in any court of the state for which 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.
Wednesday, September 9, 2015
Contractor Payment Pitfalls: No Right to Payment for Work Performed Outside License Scope
Contractors, owners and sureties issuing contractor license bonds in the State of Arizona should be aware of a new opinion recently issued by the Arizona Court of Appeals (Division One): Chavira v. Armor Designs of Delaware, Inc., 719 Ariz. Adv. Rep. 33. The opinion addresses the issue of whether a licensed contractor should be precluded from recovering monies due for work falling within the scope of the contractor’s license when the contractor likewise performed work falling outside the scope of the contractor’s license.
The basic facts of the case are as follows: Plaintiff Marco Antonio Chavira (“Plaintiff”), a licensed and bonded electrical contractor registered with the Arizona Registrar of Contractors, entered into a contract with Armor Designs of Delaware, Inc. and Armor Designs, LLC (collectively “Armor”) pursuant to which Plaintiff agreed to disassemble equipment located at Armor’s Phoenix manufacturing plant. Armor paid Plaintiff for this work. Thereafter, Armor hired Plaintiff to reinstall the same equipment at its new manufacturing facility. Plaintiff performed the reinstallation work, but Armor refused to pay Plaintiff for any of the reinstallation work. Consequently, Plaintiff sued Armor alleging claims for breach of contract, quantum meruit, negligent representation, and bad faith. Following discovery, Armor moved for summary judgment, arguing that Arizona Revised Statutes (“A.R.S.”) section 32-1153 barred Plaintiff’s recovery because he had performed “significant work for which [he] had no license.” The crux of Armor’s argument was that the Plaintiff held a K-11 Electrical license, which “allows the scope of work permitted by the commercial L-11 Electrical and residential C-11 Electrical licenses, but Plaintiff performed work outside the scope of his license, thereby precluding any recovery.
The Arizona Court of Appeals framed the issue on appeal as whether section 32-1153 barred Plaintiff from maintaining an action to recover for any payment for work he performed if some of the work fell outside the scope of his license. Section 32-1153 provides that:
The Arizona Court of Appeal interpreted section 32-1153 as prohibiting an unlicensed contractor from bringing an action to recover payment for an unlicensed act; however, it also noted that “we have also stated that the plain language of the status allowed a licensed contractor, or one who has substantially complied with the licensing requirements, to sue for payment for work performed under the license.” (citations omitted). The court also recognized that “we have long held that if the contract value can be apportioned between licensed and unlicensed work, then each item of a contract will be treated as a separate unit.” (citations omitted). In vacating and remanding the trial court’s grant of summary judgment in favor of Armor, the Arizona Court of Appeals cited to a Hawaii Court of Appeals decision, Schultz v. Lujan, 948 P.2d 558 (Haw. Ct. App. 1997). In that case, the Hawaii Court of Appeals interpreted a Hawaiian statute similar to A.R.S. section 32-1153 and held that a licensed contractor is entitled to bring a civil action to recover payment for licensed work he has done, but the contractor may not recover for any unlicensed work. Id. at 563. Following the reasoning of this case, the Arizona Court of Appeals held that Plaintiff can pursue his breach of contract claim against Armor for the value of the work that was completed under his license, but not the value of the work falling outside the scope of his license. The court remanded the case back to the trial court where the Plaintiff would have the opportunity to prove as a factual matter that the licensed work can be bifurcated from the unlicensed work, and determine the value of the licensed work.
From the contractor’s perspective, this case is important because it emphasizes that contractors are only entitled to be paid for work falling within the scope of their license. Moreover, the case highlights the importance for contractors to itemize their bids/estimates/proposals/billings to ensure maximum recovery for licensed work in the event a dispute arises where the adverse party alleges the contractor performed work outside the scope of its license. From the owner’s perspective, the importance of the case is that an owner may refuse payment for unlicensed work performed by a contractor licensed for other construction categories. From the license bond surety’s perspective, this case reinforces the viability of a longstanding surety defense to a contractor license bond claim – work performed by a licensed contractor falling outside the scope of the contractor’s license is not covered by a contractor’s license bond. If an owner seeks to recover damages caused by a licensed contractor performing work falling outside the scope of the contractor’s license, a surety may properly deny the owner’s bond claim.
Patrick F. Welch focuses his practice in the areas of general and complex commercial litigation, construction litigation, and fidelity and surety litigation. Mr. Welch is licensed in the States of Arizona and Nevada, and the Commonwealth of Massachusetts. Based in Arizona, Mr. Welch regularly assists surety and fidelity clients with all facets of Arizona and Nevada claim investigations, litigation, trial, arbitration, mediation and appeals.