ALJDEC

00F-G0269-ROC · Registrar of Contractors · 2000-06-05

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: This matter initially convened for hearing on May 9, 2000. However, the record was held open until May 24, 2000 to allow the parties time to file legal briefs on specified legal issues raised at the hearing. APPEARANCES: Complainant was represented by its attorney, Stephanie Monroe and Respondent was represented by its attorney, Joseph Kreamer. ADMINISTRATIVE LAW JUDGE: Mark A. Silver _____________________________________________________________________ Based upon the entire record in this matter, the following Findings of Fact, Conclusions of Law, and Recommended Order are made:

FINDINGS OF FACT

1. The facts of this matter are not in dispute. Pursuant to stipulation of record, the parties agreed to the following:

a. The parties entered into the applicable contract on October 5, 1998. Respondent was the general contractor on a new school construction project. Complainant was retained by Respondent for the purpose of providing the installation for the fire protection, intercom, security, and television distribution systems. b. The original contract price was for $167,937.00. A number of progress payments were made and it was undisputed that Complainant has received a total of $102,375.00 for its work on the project, leaving a balance of $65,562.00 on the contract price. c. It was not disputed that Complainant completed the contracted work on the project. d. Complainant also claims entitlement to an additional $3,040.00 for over-time work that was authorized by the owner of the project and not Respondent. Thus, Complainant’s total claim for non-payment is $68,602.00. e. All sums not paid to Complainant are for work that was performed after July 1, 1999. Respondent has not received any payments from the owner of the project (the school district) after July 1, 1999.

2. Respondent cites specific language in the contract as setting forth a “pay when paid” provision as a condition precedent to Complainant receiving payment for the sum claims herein. Complainant argues that the contract provision in question is not valid, in light of the applicability of the Little Miller Act, A.R.S. § 34-221, et seq, to public works projects. Complainant cites two cases from other jurisdictions to support its claim.

3. The contract between the parties provides, in pertinent part, “the contractor agrees to pay the subcontractor…and such payment shall only be made by the contractor to the subcontractor if the contractor is paid by the owner and payment by the owner to the contractor shall be a condition precedent to the requirement for the contractor to pay the subcontractor” (emphasis added). Moreover, there is evidence that Complainant was fully aware of this provision of the contract, in that same has been initialled by the parties after a handwritten change was made on the portion of the “pay when paid” clause regarding the time for payment when funds are received from the owner (the pre-printed provision for 30 days was crossed- out and replaced with 7).

4. It is important to note that Respondent has filed a lawsuit in Superior Court against the school district (owner) for its failure to pay under their contract and that a number of Respondent’s subcontractors have, in turn, filed against Respondent for Respondent’s failure to pay under the various subcontracts. According to Respondent, most of the subcontractor lawsuits involve the same “pay when paid” issue as presented in the instant Registrar of Contractors’ matter and that the issue has already been fully briefed in Superior Court, with oral argument on the issue set to proceed within a short period of time.

5. The evidence of record sufficiently establishes that, because of the contract language regarding “pay when paid” as a condition precedent to Respondent’s obligation to pay Complainant and the fact that there is no dispute that Respondent has not been paid by the owner for the balance of the work performed by Complainant after July 1, 1999, there exists a monetary dispute between the parties concerning whether payment to Complainant is properly due and owing, at this time. Respondent’s dispute of Complainant’s claim is found to be in good faith and, in light of the conclusions of law set forth below, therefore, precludes the finding, at this time, that a sum is past due and owing to Complainant in violation of the applicable charged section of the State’s Contracting laws.

CONCLUSIONS OF LAW

1. The instant citation only charged Respondent with violations of A.R.S. § 32-1154A (7) and (11). There is no charge in the Citation indicating that Respondent violated A.R.S. § 32-1129. Moreover, A.R.S. § 32-1129 (E) requires the posting of a $500.00 surety bond or cash deposit for any claim before the Registrar that a contractor violated the provisions of A.R.S. § 32-1129. There was no showing that such a bond or cash deposit was posted with the Registrar. Thus, contrary to Complainant’s argument, A.R.S. § 32-1129 has no applicability to the instant matter.

2. The instant matter is distinguishable from the facts presented in the case of J.W. Hancock Enterprises, Inc. v. Arizona State Registrar of Contractors, 142 Ariz. 400, 690 P.2nd 119 (App. 1984). Unlike the Hancock case, where there was no pending identical civil court action at the time of the entry of the administrative decision by the Registrar, Complainant has already filed a case in the Superior Court seeking a monetary award for the alleged failure of Respondent to pay for services rendered pursuant to contract. The court in Hancock, states at p. 406 “ that the construction of disputed contractual terms…may constitutionally be exercised by the Registrar ancillary to its regulatory function” (emphasis added).

3. The instant matter involves what is typically characterized by the Registrar of Contractors’ office as a “no-pay” complaint. The Registrar has a long-standing history of refusing to find violations of the State’s Contracting laws in those cases where there is an adequate showing of a good faith dispute regarding the complaining parties right to payment under the contract.

4. Under, the Hancock decision, it is concluded that the Registrar of Contractors has the discretionary power to interpret contract terms regarding the validity and enforceability of “pay when paid” clauses. Arizona courts have held that “pay when paid” clauses are valid and enforceable conditions precedent when the appropriate language is utilized, leaving no room for doubt regarding the parties intentions. L. Harvey Concrete v. Agro Const. & Supply, 189 Ariz. 178, 939 P.2d 811 (App. 1997).

5. Although the language utilized in the contract at issue herein, is determined to contain the appropriate language necessary to constitute a valid and enforceable “pay when paid” clause, there remains the issue of the effect, if any, of the Little Miller Act, on the validity of said “pay when paid” clause. The Arizona courts have never ruled on such an issue. However, it is interesting to note, that the facts in the Harvey case involved a project for the Arizona Department of Transportation (i.e. a public works project). The cases cited by Complainant, in regard to this issue, are from other jurisdictions and are not found to either be persuasive on this issue or binding upon this Tribunal.

6. The Registrar of Contractors should not be vested with primary jurisdiction to determine the issue of the applicability of Arizona’s Little Miller Act to “pay when paid” clauses. The primary jurisdiction to determine such an issue is found to be more appropriately vested in the Superior Court and, under all of the salient facts and circumstances presented herein, the Registrar should defer such a determination to the Court. Thus, until and unless any claimed obligation is reduced to judgment by a civil court of competent jurisdiction, no violation by Respondent of the provisions of A.R.S. § 32-1154A (11) or (7) can be supported. Complainant has not sustained the requisite burden of proving the existence of a debt properly due and owing by Respondent.

7. Based on the foregoing, this matter should be dismissed without prejudice. Nothing in this ruling should serve to prevent Complainant from re-filing the same complaint, in the event that it receives a favorable ruling from the courts on the issue of the applicability of the Little Miller Act to “pay when paid” clauses.

RECOMMENDED ORDER

In view of the foregoing, it is recommended that this Citation, together with the Complaint upon which it is based, shall be dismissed, without prejudice.

Done this day, June 5, 2000

______________________________________ Mark A. Silver Administrative Law Judge

Original transmitted by mail this ____ day of ____________, 2000, to:

Registrar of Contractors Michael P. Goldwater Attn: Joyce Armijo 800 West Washington, 6th Floor Phoenix, AZ 85007

By ___________________________

-----------------------

Office of Administrative Hearings 1400 West Washington, Suite 101 Phoenix, Arizona 85007 (602) 542-9826