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Achieving “Substantial Compliance”
A contractor’s ability to survive a
license-related challenge depends on five
key factors
In a March 2006 ruling, the Arizona Court of
Appeals offered a useful refresher course
in, and a tighter interpretation of, the
factors that courts and administrative
authorities must consider in determining
whether a contractor has “substantially
complied” with statutory licensing
requirements before bidding or contracting.
The case at hand, Arizona Commercial
Diving Services, Inc. v. Applied Diving
Services, Inc., involved the awarding of
a municipal contract to a contractor that
had applied for – but not yet received – the
proper license.
Arizona Commercial Diving Services (ACDS)
was formed in March 2003. On May 15 of that
year, ACDS submitted an application to the
Registrar of Contractors (ROC) for a class
K-05 license. The license was issued on June
20. On May 23 – after ACDS had
applied for its license but before
the license was issued – ACDS bid on a City
of Phoenix project. ACDS was the low bidder
and on June 20 was notified that its bid had
been recommended for approval. One of the
unsuccessful bidders filed a complaint with
the ROC, alleging that ACDS had violated
A.R.S. § 32-1151, which states, in part:
“It is unlawful for any person … [or]
corporation … to engage in the business
of, submit a bid or respond to a request
for qualification or a request for
proposals for construction services as,
act or offer to act in the capacity of or
purport to have the capacity of a
contractor without having a contractor's
license in good standing in the name of
the person … [or] corporation … unless the
person …[or] corporation … is exempt.”
ACDS admitted that it did not hold a
contractor’s license when it submitted its
bid but argued that it had substantially
complied with the ROC’s licensing provisions
and, therefore, had not violated the
statute. The ROC conducted an administrative
hearing, and the administrative law judge
ruled that ACDS had indeed violated the
statute and recommended suspension of the
ACDS’s license. ACDS filed for judicial
review in Superior Court and sought a stay
of its license suspension, which was granted
pending the review. When the Superior Court
ruled against ACDS, the contractor appealed.
Of interest to contractors is whether ACDS
had “substantially complied” with the
statute at the time it bid on the project.
In its ruling, the Court of Appeals reviewed
the five factors that are to be considered
in determining whether substantial
compliance has been achieved:
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Whether a failure by the ROC contributed
to the contractor’s noncompliance.
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Whether the contractor was financially
responsible while its license was
suspended or not yet issued.
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Whether the contractor knowingly ignored
the registration requirements.
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Whether the contractor immediately
remedied the statutory violation.
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Whether the failure to comply with the
statute prejudiced the party the statute
seeks to protect.
The third factor was ACDS’s undoing. Like
the administrative law judge and Superior
Court, the Court of Appeals found that ACDS
was indeed aware of the need for a Class
K-05 license, as evidenced by the fact that
ACDS had applied for one, and had knowingly
ignored that requirement by submitting its
bid before receiving the license.
ACDS argued that applying for the license
should prove that the contractor did not
ignore the license requirement, but that
argument failed at every level. ACDS further
argued that substantial compliance should
not be defeated by just one factor but
should be considered by balancing all five
factors. But the Court of Appeals countered
that the Arizona Supreme Court’s 1995 ruling
in Aesthetic Property Maintenance
clearly stated that a knowing violation of
the licensing requirements is “fatal” to a
claim of substantial compliance.
In its ruling in this case, the Arizona
Court of Appeals expands the holding of its
2002 Crowe v. Hickman’s Egg Ranch
decision (see
article) regarding the necessity for
having an appropriate license before
negotiating a contract. The Crowe
ruling focused on the requirement that a
contractor have the proper license before
entering into a contract; the more
recent case underscores the importance of a
contractor having the proper license before
bidding on a contract.
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