License Requirements for California Contractors and a Novel Trial Strategy that Failed

Author: Robert Bernstein

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May 13, 2019 3:00pm

Contractor’s License Requirements and Penalties

Most California construction contractors know that they must be licensed in order to do business in the state.  This requirement is contained in a provisions of the California Business & Professions Code.  California Business & Professions Code, Section 7031 provides, in part:

  1. Except as provided in subdivision (e), no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract regardless of the merits of the cause of action brought by the person .   .   . 
  2. Except as provided in subdivision (e), a person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract.

The consequences of an unlicensed individual entering into a contract to perform work on a residential or commercial project can be severe.  First, under Section (a), an unlicensed contractor is not permitted to recover the value of services or materials provided for a project.  “The purpose of section 7031 is to deter unlicensed contractors from recovering compensation for their work.”  (E.J. Franks Construction, Inc. v. Sahota (2014) 226 Cal. App. 4th 1123, 1129.)  The plain language of §7031(b) limits the recovery to compensation paid to the unlicensed contractor.  “Section 7031 is a regulatory statute designed to discourage persons who are not licensed from offering their services for pay.” (Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 995.)

Although courts recognize that preventing an unlicensed contractor effectively provides the property owner with an unjust enrichment, they follow the Legislature’s determination that deterring work by unlicensed contractors is of sufficient importance to justify the penalty imposed on some contractors not to be paid for their work and the corresponding enrichment of property owners. (See, Executive Landscape Corp v. San Vicente County Villas IV Assn (1983) 145 Cal.App.3d 496, 498.)  By applying the statute in this matter, a homeowner or property owner may use §7031 as a “shield” to prevent an unlicensed contractor from recovering the value of their labor and materials.

Second, under Section (b), a homeowner or property owner can also use §7031 as “sword,” to compel an unlicensed contractor to disgorge and turn over any monies paid to them for work undertaken while they were unlicensed.  In fact, Section (b) was enacted by the Legislature to address decisions in which the courts held that §7031 could be used as a “shield” by the property owner to defeat an unlicensed contractor’s claim, but that moneys already paid to the contractor could not be recovered if the work was satisfactory.  “[T]he authorization of recovery of ‘all compensation paid to the unlicensed contractor for performance of any act or contract’ (§ 7031(b)) means that unlicensed contractors are required to return all compensation received without reductions or offsets for the value of material or services provided.”  (White v. Cridlebaugh (2009) 178 Cal.App.4th 506, 518.)  Thus, a contractor may be entitled to compensation for services performed for a property owner which were ancillary to its construction work and for which a licensed is not required, but it is required under Section (b) to return any moneys paid for construction services and materials provided when it was not licensed.  (See, Phoenix Mechanical Pipeline, Inc. v. Space Exploration Technologies, Inc. (2017) 12 Cal.App.5th 842.

The intent of Section 7031(a) is to “convey the Legislature’s obvious intent to impose a stiff all-or-nothing penalty for unlicensed work by specifying that a contractor is barred from all recovery for such an ‘act or contract’ if unlicensed at any time while performing it.”  (MW Erectors, Inc. v. Niederhauser Ornamental and Metal Works Co, Inc. (2005) 36 Cal.4th 412, 426.)

Although §7031 almost always precludes an unlicensed contractor from being paid, the statute includes a narrow exception. The Legislature enacted a narrow exception to protect contractors who were previously licensed, who acted reasonably and in good faith to maintain their licensed, and who corrected a problem with the license promptly upon its discovery.  That section provides:

  1. The judicial doctrine of substantial compliance shall not apply under this section where the person who engaged in the business or acted in the capacity of a contractor has never been a duly licensed contractor in this state. However, notwithstanding subdivision (b) of Section 143, the court may determine that there has been substantial compliance with licensure requirements under this section if it is shown at an evidentiary hearing that the person who engaged in the business or acted in the capacity of a contractor (1) had been duly licensed as a contractor in this state prior to the performance of the act or contract, (2) acted reasonably and in good faith to maintain proper licensure, and (3) acted promptly and in good faith to remedy the failure to comply with the licensure requirements upon learning of the failure.

Given the severe penalties associated with performing work without a license, every California contractor should make it a priority to verify that they are properly licensed for the work they perform and to ensure that their license is properly and timely renewed.  The consequences of performing work without a license can be devastating to any size business, but especially to an individual contractor or to a small business.

Attempt to Limit Repair Cost Evidence From Unlicensed Contractor Blocked

Design Built Systems v. Sorokine, Court of Appeal for the First District, Case Nos. A151264 and A152059 (February 26, 2019) involved a complex set of facts and extensive cast of characters. At its heart, the case concerned improvements made to a San Rafael, California home, including the construction of retain walls and a driveway, which work was to be performed by Design Built Systems (“DBS”) for the sum of $175,000.  Before that work was completed by DBS, the homeowner fired DBS and retained a second company, PA Builders, to complete the work.  It was later learned that PA Builders was unlicensed.  A third contractor, Kornach, performed an extensive remodel of the subject home, but was also fired before he completed his work.  Complex litigation involving the parties and sureties followed.

At trial, the attorney for home improvement Kornach brought a motion to preclude the introduction of evidence and testimony by the homeowners in regard to the work performed and amount paid to PA Builders to repair allegedly improper work performed by DBS and Kornach.  The motion was granted by the trial court.

Following the trial determining the homeowners were precluded from presenting evidence of the amounts paid to PA Builders, it resulted in a material recovery for Kornach, and the homeowners appealed.  The First District Court of Appeal reversed the trial court’s grant of Kornach’s motion to preclude introduction of evidence and testimony related to the scope and cost of work done by unlicensed contractor PA Builders.  The Court held:

There is no authority for the proposition that a person who unwittingly hires an unlicensed contractor to repair work not properly performed by someone else is precluded from introducing evidence of the cost of repair.

*    *    *

The purpose of the licensing law is to protect the public from incompetence and dishonesty in those who provide building and construction services, not to punish the innocent people who hire them.

Creative lawyers are always searching for new ways to apply existing laws to the advantage of their clients.  In the Design Built Systems case, the trial court agreed that the “taint” associated with work performed by an unlicensed contractor precluded the introduction of evidence associated with the scope and cost of work performed by that party at trial.  The Court of Appeal disagreed and found that the purpose of §7031 is to preclude unlicensed work by contractors, not to punish homeowners who unknowingly hire them.

Takeaway

The takeaway is clear: if you perform contracting services in California, you must be licensed and you must stay licensed as long as you perform those services.  The absence of a license does not, however, prevent a party from introducing evidence at trial of the scope of work performed by an unlicensed contractor or the cost of that work.

We will continue to monitor the laws and cases relating to contractor licensing in California and will report on important developments in the future.

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