Writ Column UNLICENSED CONTRACTOR MUST RETURN HARD-EARNED PAYMENTS (00263802).DOC

Across the Line

(PUBLISHED MARCH 2012)

Published in the Washoe County Bar Association’s The Writ

By: Jim Porter of Porter Simon

MUST UNLICENSED CONTRACTOR RETURN HARD-EARNED PAYMENTS?

 

            When it comes to ensuring that Californian’s are protected from unlicensed builders, the State means business. The courts have consistently denied unlicensed builders the right to collect for their labor and materials. But it gets worse for those builders.

Friends Don’t Let Friends Do Business Together

            Esaul Alatriste hired Cesar’s Designs to perform landscape construction services at Alatriste’s newly-built home. They were good friends. Emphasis on were. Alatriste knew that Cesar did not have a contractor’s license but his son had taken the test and would soon be a fully licensed landscape contractor. That should be good enough.

The Question

            Cesar began work on December 11, 2006, after signing the contract on December 1st. Cesar got a license on April 5, 2007. Cesar quit the job in May 2007 for non-payment after being paid $57,500. He was still owed $12,000.

            Query: Is Cesar entitled to the $12,000 due under the contract? Oops, wrong question.

            Query: Is Alatriste entitled to recover any of the money he paid to Cesar? You may be surprised at the answer.

Contractor Licensing Law: The Shield

            The Contractors’ State License Law (Business and Professions code 7000 et seq.) is “designed to protect the public from incompetent or dishonest providers of building and construction services.” (White v. Cridlebaugh (2009) 178 Cal App. 4th 506, 517.) The civil remedies in the codes “affect the unlicensed contractor’s right to receive or retain compensation for unlicensed work. The hiring party is entitled to enforce these remedies through a defensive “shield” or an affirmative “sword.” (White at pp. 518-519.)

            The shield contained in section 7031 (a) provides that a party has a complete defense to claims for compensation made by a contractor who performed work without a license. (WSS Industrial Construction, Inc. v. Great Western Contractors, Inc. (2008) 162 Cal App. 4th 581, 587.) The substantial compliance exception in section 7031 (e) provides relief only in narrow circumstances, and does not apply where the unlicensed contractor has never been a duly licensed contractor in California. (White at pp. 589, 594-595.) The California Supreme Court has held section 7031 (a) applies even when the person for whom the work was performed knew the contractor was unlicensed. (Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal. 3d 988, 994-1002.) Hydrotech was a landmark change in the law.

            The high court recently reconfirmed that section 7031 (a), “bars a person from suing to recover compensation for any work he or she did under an agreement for services requiring a contractor’s license unless proper licensure was in place at all times during such contractual performance.” (MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412, 419.) “Section 7031 represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties, and that such deterrence can best be realized by denying violators the right to maintain any action for compensation in the courts of this state.” (MW Erectors at pp. 423.) The courts may not resort to equitable considerations in defiance of section 7031. (Lewis & Queen v. N. M. Ball Sons (1957) 48 Cal 2d. 141, 152.)

Section 7031: The Sword

            In 2001, the California Legislature amended section 7031 to add a sword remedy to the hiring party’s litigation arsenal. The sword remedy, section 7031 (b), reads: “Except as provided in Subdivision (e), a person who utilizes the services of an unlicensed contractor may bring an action in any court of common jurisdiction in the State to recover all compensation paid to the unlicensed contractor for performance of any act or contract.”

Poor Cesar

            So far our man Cesar is not looking too strong in his effort to keep the money he had been paid by Alatriste. Although Alatriste knew Cesar was unlicensed, he wanted him to do the job; and according to Cesar, he did the job timely and properly. But Cesar hadn’t read Hydrotech and White.

            Certainly Cesar could recover for the work he had done after he became licensed, approximately halfway through the job, right?

Compensation for Work after Licensing

            Cesar argued he should be entitled to keep at least $11,968 of the $57,500 he had been paid—representing payment for work after he obtained a Landscape Contractor’s License. Again, the Fourth District court cited MW Erectors, where the contractor obtained the proper specialty license shortly after beginning a large project and was thus licensed during almost all of the work. He was unable to recover for any work because he was not properly licensed at all times during performance. Like I said, California courts mean business.

Reimburse Material Costs

            But Cesar should be able to recover for the materials he paid for and delivered to the Alatriste job site, correct? Cesar argued to rule otherwise “serves no purpose other than punishment.” Guess what. Cesar got punished. Cesar got shredded—like a salad.

This is Fraud

            Cesar finally argued it would be fraud to be forced to return all the money when Alatriste knew Cesar was unlicensed when they signed the contract.

            The court made short shrift of that argument writing, “The Legislature specifically intended to permit recovery by a party even if the party had knowledge of an unlicensed status. Thus, the fraud defense is unsupported on this record.” The court added in a footnote: “In reaching this conclusion, we do not comment on whether a fraud defense under section 7031 (b) would be viable under different facts, such as where the plaintiff improperly uses the court to perpetuate a fraud. Nothing we say here is intended to authorize or condone abusive manipulation of the courts.”

            Under current California court cases, I can’t imagine how anyone could make a viable fraud defense argument.

Substantial Compliance

            Over the years the Legislature has tightened-down a contractor’s ability to meet licensing requirements by arguing substantial compliance.

            Section 7031 (e) provides for a very narrow substantial compliance exception. It is possible for a contractor to meet the substantial compliance requirements if the contractor can prove that he or she (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 obtain proper licensure, (3) did not know or reasonable should not have known that he or she was not duly licensed from performance of the act or contract commenced, and (4) acted promptly and in good faith to reinstate his or her license upon learning it was invalid.

         Attorney Jim Porter is licensed in California and Nevada. He was the Governor’s appointee to the California Fair Political Practices Commission and McPherson Commission, both involving election law and the Political Reform Act. Jim may be reached at porter@portersimon.com or at the firm’s web site www.portersimon.com.

© 2012