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Qualifying Parties May Now Have to Face Personal Liability for Construction Company’s Obligations

February 10, 2021

Phoenix, Arizona

Last year’s changes to the contractor’s licensing laws opened the door to personal liability for qualifying parties (“QP”).  The Legislature added Section B to A.R.S. § 32-1127.  Section B reads: “While engaged as a qualifying party for a licensee, the qualifying party is responsible for any violation of this chapter by the licensee.”

What are “any violations of this chapter”? A few examples are:

• Liability to pay subcontractors and material suppliers;
• Lability for conversion of payments received for work performed;
• Liability for payments out of the Residential Contractors’ Recovery Fund;
• Liability to indemnify the contractor’s bonding company;
• Liability for aiding and abetting unlicensed persons who render construction services;
• Liability arising from departure from approved plans, specifications, building codes;
• Violation of Arizona Registrar of Contractors (AZ ROC) rules;
• Failure to pay Federal Insurance Contributions Act tax (FICA), workmen’s compensation insurance or unemployment insurance;
• Failure of the construction company to pay income taxes;
• Failure of the construction company to withhold taxes;
• Failure of the construction company to comply with labor or safety laws;
• False or misleading marketing or advertising by the construction company.

The list is only a sample of the types of personal liability that might be imposed on the QP because § 32-1127(b) makes the QP responsible for any violation.  It is possible that this statute will be interpreted to mean that if the AZ ROC licensed company has liability for action or inaction under the AZ ROC licensing laws or under the AZ ROC rules and regulations, then the QP has exposure to personal liability for the company’s action or inaction.

How Should Qualifying Parties Become Proactive?

A few suggestions:

1. QP should contact the insurance agent or broker who issues the insurance policies for the AZ ROC licensed company and make sure that the qualifying party is named as an additional insured under the policies;
2. Make absolutely sure that the insurance premiums are always paid;
3. Make absolutely sure that all taxes are paid and that all tax withholdings are paid to the Internal Revenue Service (IRS) and the Arizona Department of Revenue;
4. Subcontractor agreements should be reviewed for indemnification clauses.  The qualifying party should be added as an additional party to be indemnified; and
5. QP should have the contracts used by the AZ ROC licensed construction company reviewed by an attorney to make possible revisions to mitigate the harshness of the § 33-1127(B).
6. QP should consult with an attorney to discuss other actions that may minimize the impact of A.R.S. § 32-1127(B)

For more information on this topic, please contact David Brnilovich or another member of the Jennings Strouss Business Litigation department.