ALJDEC

01F-M0722-ROC · Registrar of Contractors · 2001-06-11

STATE OF ARIZONA IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: May 31, 2001.

APPEARANCES: The Complainant, Fortress Framing, was represented by its attorney, Harold D. Burr, Jr., Esq. The Respondent, Apollo General Contracting, Inc., appeared through its project manager/authorized employee, Ron Bailey.

ADMINISTRATIVE LAW JUDGE: Robert I. Worth _____________________________________________________________________

Evidence and testimony were presented, and based upon the entire record, the following Findings of Fact, Conclusions of Law and Recommended Order are made.

FINDINGS OF FACT

1. Pursuant to a proposal and subcontract agreement, Complainant agreed to and did perform certain specified framing work on a commercial project on which Respondent was serving as general contractor.

2. The original scope of Complainant’s work and the stated subcontract price was subsequently modified so as to include extra work described in several change orders. The last formal change order resulted in a revised total contractual cost price of $86,870.00 and also contained an express limitation of $55,000.00 for the amount attributable to that portion of the additional work which was the subject of such change order.

3. A further invoice was transmitted by Complainant to Respondent after some additional work, credibly shown not to have been embraced within either the originally specified work or either of the change order modifications, became necessary. Complainant had commenced a portion of such additional work before a personal meeting had taken place which was attended by both parties to this administrative action as well as by the property Owner for whom Respondent was the prime contractor. Such meeting culminated in the unanimous giving of an express authorization or ratification with respect to the propriety of the identified extra work, and to the ultimate financial responsibility for payment of the appropriate costs, thereby serving as a specific and material inducement, jointly from both the Owner and Respondent, for Complainant to properly complete such added work. The $12,645.00 amount of the invoice for the subsequently completed additional work was not shown to have been excessive, inaccurate or otherwise unreasonable.

4. The underlying subcontract agreement between the parties did contain a pre-printed “pay-when-paid” clause, stating that Respondent’s obligation to pay Complainant would be conditioned upon the receipt of funds from the project Owner. The applicable provision stated as follows:

“28. Payments (a) It is agreed that progress payments shall only be made with funds received by (Respondent) from the Owner for work performed by (Complainant) as

reflected in (Respondent’s) Application for Payment and only when and if such funds are received by (Respondent) from the Owner. Approval of (Respondent’s) Application for Payment and payment for the work reflected therein shall be a condition precedent which must occur before (Respondent) will be obligated to pay (Complainant)……(Respondent) may retain as part security for (Complainant’s) fulfillment of this Contract and (sic) amount equal to ten (10%) percent of the value of the work completed by (Complainant)….. Final payment to (Respondent) by the Owner shall be a condition precedent which must occur before (Respondent) will be obligated to make final payment to (Complainant).” {Emphasis added}.

5. The above contractual language is found to have effectively created a condition precedent for payments from Respondent to Complainant in this case. However, further inquiry must be made with respect to whether the Owner’s failure to pay the general contractor is attributable to a gross mistake, fraud or an error amounting to a failure to exercise honest judgment. This Finding of Fact is also intended to serve as a Conclusion of Law.

6. It was not disputed, based upon the evidentiary presentations at the hearing, that Complainant not only completed all specified work but also that such work performance was without fault or uncorrected problems. Nor was it disputed that Respondent has not received full payment from the project’s Owner. It was similarly uncontroverted that the project was completed in December, 1999, and the structure has been occupied by the Owner since that time.

7. The aggregate total of all monetary amounts paid to Complainant by Respondent was $78,688.00 against the modified final subcontract price of $86,870.00, after the subsequent adjustment that included the approved change orders, leaving an unpaid balance of $8,182.00. Such balance was shown to be $505.00 less than the combined 10% retention amounts of $8,687.00, tending to indicate that some small calculated portion of the retention has been released and paid..

8. In addition, no part of the additional approved or ratified invoice amount of $12.645.00 has been paid, and Respondent had never presented such invoice as part of any of its progress draw applications transmitted to the Owner. However, Respondent has initiated civil litigation against the Owner seeking to collect all unpaid amounts under the prime contract and has included the sum reflected in the additional invoice from Complainant. That matter is presently being submitted to a binding arbitration.

9. Numerous and repeated unsuccessful requests and demands have been made by Complainant to Respondent for payment of $20,827.00, representing the remaining retention amounts ($8,182.00) plus the unpaid invoice ($12,645.00) for extra work. The testimony on behalf of Respondent, essentially confirming its position in the lawsuit against the Owner, tended to indicate that all charges sought by Complainant were appropriate, despite any purported maximum limitation stated in the last formal Change Order, and that the Owners failure to pay Respondent was wholly unjustified and contrary to prior express assurances from the Owner. Respondent further stated its intention that full payment would be transmitted to Complainant by Respondent when and if collected from the Owner.

10. Under all the circumstances, as demonstrated by the evidence and testimony adduced at the hearing, it is determined, with respect to the subcontract applicable to this Complainant, that the Owner’s failure to transmit payments to Respondent of the combined amounts withheld, representing both the balance of the periodic retentions and the total of the additional authorized invoice from Complainant, constitute a failure to exercise honest judgment, in turn operating to excuse the condition precedent language in the subcontract agreement between the parties to this administrative action.

11. It is found and determined that even though the minimum impact of the subcontract’s language would tend to generate an extension of the otherwise applicable payment due date for a reasonable duration, Respondent has failed to timely pay Complainant the sum of $20,827.00 which remains long past due, owing and unpaid. However, the good faith efforts by Respondent to attempt collection from a third party, primarily for the benefit of Complainant as well as to secure its own contemplated profits from the project, must be held to preclude any finding of the commission of a wrongful act on the part of Respondent to the detriment of Complainant within the meaning and intent of another charged contracting law violation hereunder.

12. While not empowered to adjudicate and award money damages, the Registrar of Contractors may include reasonable conditions in an Order, compliance with which would reduce or eliminate any otherwise appropriate disciplinary penalties against a contractor's license. Under the proven facts and circumstances of this case, the inclusion of a condition providing for the payment or tender by Respondent of all sums shown past due and owing to Complainant is found to be appropriate and fully warranted.

CONCLUSIONS OF LAW

1. Remaining mindful of the long-standing and understandable reluctance of the judiciary to hold for resulting forfeitures, the courts of this State will nevertheless presently enforce a clearly written sub- contractual pay-when-paid clause so as to create a condition precedent to the general contractor’s duty to make payment and the subcontractor’s right to receive same, thereby effectively shifting the risk of non-payment to the subcontractor. Campisano v. Phillips, 26 Ariz. App, 174, 547 P.2d 26

(1976); L. Harvey Concrete, Inc. v. Agro Construction & Supply Company, 189 Ariz. 178, 939 P.2d 811 (1997). See also Watson Construction Company v. Reppel Steel & Supply Company, Inc., 123 Ariz. 138, 598 P.2d 116 (1979).

2. However, the above-described transferred risk to the subcontractor is not absolute, and prevailing case law recognizes an exception where courts excuse rather than enforce such conditions precedent. Consequently, when interpreting agreements purporting to contain even express conditions precedent to payment based upon receipt of funds from third parties, recognized exceptions have developed pursuant to which enforcement of such conditions will be held inapplicable and inequitable. One such exception occurs when the Owner’s failure to pay the general contractor is attributable to a gross mistake of fact, fraud or an error amounting to a failure to exercise honest judgment. L. Harvey Concrete, Inc. v. Agro Construction & Supply Company, supra. See also New Pueblo Constructors, Inc. v. Lake Patagonia Recreation Association, Inc., Ariz. App. 13, 19, 467 P.2d 88, 94 (1970).

3. Under all the facts and circumstances of the instant case, as revealed by the evidence of record, this subcontractor should not and must not be made into an insurer against what appeared to be arbitrary and unwarranted actions by the project Owner in refusing to pay Respondent under their contract agreement. Irrespective of the purportedly specific subcontractual language of the applicable “pay-when-paid” clause in the parties’ agreement, the totality of the evidence supported a determination that the Respondent has failed to pay Complainant the amounts past due and owing for properly completed work. The evidence further demonstrated that such unpaid sum was in the amount of $20,827.00

4. The evidence adduced at the hearing sufficiently established that Respondent has violated the failure-to-pay provisions of A.R.S. §32- 1154(A)(11). However, no

violations by Respondent of the wrongful act provisions of A.R.S. §32- 1154(A)(7) were adequately proven hereunder.

RECOMMENDED ORDER

In view of the foregoing, it is recommended commencing on the effective date of the Registrar’s Order, that the Class B-01 license of Respondent shall be suspended until the Registrar receives proof that Respondent has paid or tendered the sum of $20,827.00 to Complainant.

It is further recommended that if proof that Respondent has paid or tendered the above-specified monetary amount to Complainant is filed with the Registrar on or before this Order’s effective date, then no license suspension shall be imposed but instead that the entire Citation and Complaint in Case Number M01-0722 shall be closed.

Dated: June 12, 2001. OFFICE OF ADMINISTRATIVE HEARINGS

______________________________________ Robert I. Worth Administrative Law Judge

Original transmitted on _____________________

by: _____________________________ , to:

Michael P. Goldwater, Director Registrar of Contractors 800 West Washington Street (6th Floor) Phoenix, AZ 85007

ATTN: Joyce Armijo -----------------------

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