Supreme Court "Slams Contractors" by Bruce Rudman - Abdulaziz & Grossbart
Fourteen years ago, the Supreme Court issued a ruling that held that an out of state contractor who was fraudulently lulled to California to perform work on a project, and who was allegedly promised that they would be paid despite their lack of a California contractor’s license, could not collect. That decision set a bright line rule that unlicensed contractors could not collect despite the harsh realities of how they came to get that job. The reasoning was to protect the public.
Fourteen years later, the California Supreme Court has issued a ruling that is extremely harsh to the licensed contractor who becomes unlicensed during the performance without a valid statutory excuse. This decision is contrary to most practitioner's opinions and beliefs on the license issue, and does nothing to protect the public.
Business and Professions Code section 7031(a) provides:
"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, except that this prohibition shall not apply to contractors who are each individually licensed under this chapter but who fail to comply with Section 7029."
In the case before the Supreme Court of California, MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Company, Inc., MW Erectors was a subcontractor to Niederhauser in building a hotel for Disney in Anaheim, California. There were two contracts at issue, one for structural steel work, and a separate contract for the performance of ornamental steel work. MW Erectors had applied for its contractor’s license, but had not yet received it when it signed either contract. It commenced work on the structural steel contract before the contractor’s license was issued, but didn’t commence work on the ornamental metal contract until after the license was issued.
At the completion of the project, MW Erectors sued Niederhauser for the value of its work under both contracts, contending it was entitled to be paid for all work it performed during the time it had a valid contractor’s license. MW Erectors also tried to raise the Doctrine of Substantial Compliance, which would allow someone who is unlicensed for a period of time due to inadvertence or other reasons beyond the reasonable control of the contractor, to collect compensation for the unlicensed period, though MW Erectors did not meet one of the important requirements to invoke that doctrine.
The court evaluated the plain language of the statute at issue. Our office filed a brief with the California Supreme Court as an Amicus Curiae (Latin for friend of the court), siding with MW Erectors and arguing that the words “act or contract” meant that a contractor could collect for “acts” performed while licensed even though it wasn’t licensed for the entire time that the contract was in effect. Others agreed with our position, though the Supreme Court did not.
The Supreme Court looked at the language of the statute and stated that a contractor may not collect for its work on a work of improvement if it was not validly licensed at all times during its performance. This means that unless the Doctrine of Substantial Compliance (discussed below) applies to make that contractor “licensed” during a period that it was technically unlicensed, that contractor cannot collect for anytime they worked on the project, if at any time they were unlicensed. Moreover, there is the possibility that the party hiring that contractor might be able to recover the monies paid to that contractor. This is a particularly harsh holding, and one that even the court recognized could possibly cause people to stop working altogether on a project, as if they realize they will not be able to collect for the balance of their work, they have no incentive to continue on the project.
The Legislature did create an exception that would allow a person who is technically unlicensed for a period of time to be deemed licensed for the entire period of the contract if they met four specific requirements. The purpose of this exception is to assist contractors whose licenses inadvertently expired or were suspended without knowledge of the contractor. Those requirements are:
The person was duly licensed prior to performance;
Acted reasonably and in good faith to maintain proper licensure;
Did not know or reasonably should not have known that he or she was not licensed when performance of the act or contract commenced; and
The person acted promptly and in good faith to reinstate his or her license upon learning it was invalid.
Because MW Erectors was not validly licensed prior to the time that performance commenced, they could not meet the requirements of this exception. Thus, they could not be deemed to be licensed.
It should also be noted that in a footnote to their decision, the California Supreme Court said that,
“…nothing in the statute precludes the satisfied beneficiary of such work from paying for it voluntarily. Business considerations may persuade the beneficiary to ignore license lapses it deems insignificant, and to continue compensating the contractor, in order to avoid disruption of progress on the project.”
Such a statement flies in the face of their own decision, as while it is true that a person may ignore the license lapses, it is also clear that the statute would allow that same person to go back and sue the unlicensed contractor at the conclusion of the work, to seek the recovery of the money paid to that person. Unfortunately, the Supreme Court did not answer whether reimbursement in that instance is appropriate or allowed for the period when work was performed under a valid license, though their distorted logic in the overall decision leads us to believe they would allow the disgorgement of the money paid to the persons as well.
The court held a little differently with regards to the ornamental metal contract. As discussed above, the license was not in effect when the contract was signed, but the subcontractor was licensed during all times of performance. In that instance, the court held that they could collect based upon the language of the statute which required the license to be in effect during performance.
There is yet another holding within this decision that also smacks of hypocrisy. There is a doctrine known as judicial estoppel, which generally prevents a person from arguing in one proceeding one set of facts, and then in another proceeding something completely different. As an example, where a person in one proceeding argues that they are disabled and cannot work so that they can collect disability payments, that person cannot typically turnaround and then sue someone else for discrimination in failing to hire them.
MW Erectors argued that Niederhauser could not raise a defense to payment of MW Erectors based on the licensing issue because Niederhauser sued Disney for compensation based upon the work done by MW Erectors. That is to say, on the one hand, Niederhauser filed suit to collect for the work done by MW Erectors, and then on the other hand, it was raising a license defense to keep from paying for the work. The court allowed that type of activity to occur, even though Niederhauser would be unjustly enriched, as it served the purpose of protecting the public from incompetent and unlicensed contractors.
The effects of this case are particularly harsh. Perhaps it is consistent with California’s laws favoring licensed contractors to punish the unlicensed contractors. However, when one is licensed during the entire time for which they seek to be paid, there seems to be no valid reason under the law, or applying good sense, to prohibit that person from collecting for the work performed while the license was in effect even if they were unlicensed for another period of time for which they do not seek to collect.
All of the foregoing suggests you must do whatever is necessary to make sure that your license never lapses.
Law Offices of Abdulaziz & Grossbart
P.O. Box 15458
North Hollywood, CA 91615-5458
(818)760-2000 FAX (818)760-3908
Please visit our website at http://www.aglaw.net
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