November/December 2005

CONSIDER THIS FAIR NOTICE - THE CALIFORNIA SUPREME COURT DEALS A FATAL BLOW TO CONTRACTORS WHO PERFORM SERVICES WITHOUT A VALID LICENSE

By  Lauren J. Katunich

In 1939, the California Legislature adopted the Contractors State License Law (“CSLL”), codified in Business and Professions Code §7000 et seq., in an effort to protect the public from unscrupulous contractors performing services without a license. Still similar to its original form, Section 7031(a) of the CSLL generally provides  that, regardless of the merits of the claim, a contractor may not maintain any action, legal or equitable, to recover compensation for “the performance of any act or contract” unless he or she was duly licensed “at all times during the performance of any act or contract.”

For years, courts grappled with ways to alleviate the severity of Section 7031(a), often allowing contractors technically unlicensed at the time of performance of services to show that they had “substantially complied” with the state’s licensure requirements. In 1989 however, the California Legislature severely limited the availability of the substantial compliance exception to apply only in those instances where the contractor “had been duly licensed as a contractor in this state prior to the performance of the act or contract for which licensure was required.” Despite the seemingly unambiguous language of the statute, courts nevertheless varied in their leniency whenever an unlicensed contractor sought to recover money owed for his or her services. That is, until
now.

In MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Company, Inc., 36 Cal. 4th 412 (2005), a unanimous California Supreme Court dealt a fatal blow to recoveries by contractors who failed to obtain a license or those who negligently failed to keep their licenses up to date. There, owner Disney Corporation (“Disney”) built a hotel with Turner Construction Company (“Turner”) as the general contractor. Turner contracted with defendant Niederhauser Ornamental & Metal Works Company, Inc. (“Niederhauser”), to perform specialized metal work on the project, and Niederhauser, in turn, awarded two subcontracts to plaintiff MW Erectors, Inc. (“MWE”). On or about October 11, 1999, Niederhauser and MWE executed the first contract for MWE’s performance of “structural” steel work. On or about November 12, 1999, the parties entered into a second contract for MWE’s performance of “ornamental” steel work. Id. at 419.

By MWE’s own admission, MWE began work under the structural contract on or before December 3, 1999, but did not obtain the required C-51 structural steel contractor’s license until 18 days later, on December 21, 1999. MWE began work on the ornamental contract in early January 2000. Id. at 420. MWE subsequently sued Niederhauser and the issuers of its payment bonds, seeking payments allegedly due in the amount of $955,553 and $366,694 for work performed under the structural and ornamental contracts, respectively.

Niederhauser moved for summary judgment, arguing that Section 7031(a) barred MWE’s claims because MWE did not have the requisite C-51 license when it began work on the structural contract, and that MWE never obtained a C-23 license for the ornamental metal work. Niederhauser also argued that MWE could not demonstrate its “substantial compliance,” as that term is defined in Section 7031(e), since MWE admittedly had never held a C-51 or C-23 contractor’s license before beginning work under the contracts in December 1999. MWE responded that it was in substantial compliance with the C-51 license requirements at all times during its performance of both contracts, and that no C-23 license was necessary for work under the ornamental contract. MWE also argued that Niederhauser was judicially estopped to contest MWE’s licensure because, in related litigation brought by Niederhauser against Disney and Turner, Niederhauser obtained a settlement, a significant portion of which was attributable to MWE’s work under the contracts with Niederhauser.

The superior court granted Niederhauser’s motion for summary judgment, thereby disposing of all of MWE’s claims on MWE’s appeal. The court of appeal reversed, concluding that while Niederhauser was not judicially estopped to contest MWE’s licensure, MWE was nevertheless allowed to recover for work it performed under the agreement subsequent to MWE’s obtaining its license on December 21, 1999. The court of appeal reasoned that MWE was entitled to prove amounts due for its work on the structural contract after the C-51 license was issued and was entitled to recover for all work under the ornamental contract. Niederhauser appealed.

Judicial Estoppel

The California Supreme Court reversed, holding that MWE could not recover because it was not licensed when the work began. First, MWE argued that Niederhauser was precluded from asserting nonlicensure as a defense because Niederhauser had itself been compensated for MWE’s services in Niederhauser’s suit against Disney and Turner. Based upon the plain language of Section 7031(a), however, the Supreme Court clearly disagreed. It decided, in no uncertain terms, that Section 7031(a) bars payment “[r]egardless of the equities.” For decades, courts have held that “the courts may not resort to equitable considerations in defiance of section 7031.” Id. At 423. Thus, the Court reasoned, even the “possibility of the defendant’s unjust enrichment could not overcome the absolute prohibition against use of the courts to recover for unlicensed contract work.” Id. at 424.

Indeed, the Court took its holding even one step further, declaring that Section 7031(a) is a bar for unlicensed contractors even where the person for whom work was performed took “calculated advantage” of the contractor’s licensure or where the beneficiary falsely promised to pay despite the contractor’s lack of licensure. Id. Instead, because permitting unlicensed contractors to assert judicial estoppel would contravene the strong and clear public policy in favor of protecting the public from unlicensed contractors, it held that courts are strictly forbidden from engaging in a balancing of the equities.

Licensure During Performance Of “Act Or Contract”

Since the Court ruled that Niederhauser was not judicially estopped from asserting nonlicensure as a defense, it went to the critical question of whether MWE was permitted to recover for those services it performed while it was properly licensed or forbidden from recovering any sums due under the contract. After a thorough review of the case law, statutory interpretation and legislative history, the Supreme Court ruled, in no uncertain terms, that “where applicable, 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.” Id. at 419. Accordingly, because MWE had not been licensed “at all times” during the construction process, it was not entitled to receive any compensation for any of its services under the structural contract.

In reaching this conclusion, the Court was most swayed by the plain language of Section 7031(a), which seemingly imposes a strict all-or-nothing penalty for unlicensed work by a contractor. Indeed, in the Court’s view, the disjunctive prohibition of compensation for “an act or contract” exists to deny an unlicensed contractor any sort of recovery on a theory other than breach of contract. Thus, an unlicensed contractor is not only prohibited from bringing an action for breach of contract, it is similarly prohibited from bringing an action in quantum meruit or for any other form of equitable relief. Id. 427-28.
 
Substantial Compliance

Finally, MWE argued that it had “substantially complied” with Section 7031(a) because the great majority of the work performed was completed after MWE obtained the proper license. The Court, however, held that the proper focus was not on the length of time that MWE had the license once performance began, but rather, whether MWE had ever held a license prior to the time of performance. Section 7031(e) unambiguously provides that in order for an unlicensed contractor to assert a substantial compliance defense, he or she must prove the following: that he or she (1) had been duly licensed at some point prior to performance; (2) acted reasonably and in good faith to maintain proper licensure; (3) must not have known or reasonably should not have known that he or she was not duly licensed when performance of the act or contract commenced; and (4) must have acted promptly and in good faith to reinstate his or her license upon learning that it was invalid. Id. at 434. Because it was undisputed that MWE commenced performance under the contract 18 days prior to obtaining a license, it was of no consequence that MWE performed services with a license for the vast majority of time.

No Need For License At Time Of Contract

Despite an outwardly scathing denial of a contractor’s ability to sustain a cause of action for services performed without a license, the Court did make one concession to unlicensed contractors. Recall that MWE performed services under the ornamental contract beginning in January 2000, well after it had obtained its C-51 license. Niederhauser maintained that an agreement for work requiring a contractor’s license is illegal, void and unenforceable from the outset if the contractor was unlicensed at the time the agreement was entered. Id. at 435. The Court, however, disagreed and, instead,  held that a contractor may recover compensation under a contract for work requiring a license if he or she satisfies licensure requirements at all times while performing the contract, even if he or she was not licensed when the agreement was signed. According to the Court, a contrary result would in no way further the public policy rationale behind the CSLL, and would instead result in draconian consequences for contractors awaiting licensure. Thus, MWE was permitted to recover the $366,694 that was owed pursuant to the ornamental contract. Id.

Conclusion

Very rarely does a court’s decision have such a wide-sweeping effect on an entire industry, but, in those cases, affected persons are advised to heed its warnings. Although the prohibitions of Section 7031(a) have been in place for over 65 years, only recently has the state’s high court weighed in and obliterated any chance for carving out an exception thereto. The law in this regard could be no clearer: (1) 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 contract performance; (2) Section 7031(a) does not allow a contractor who was unlicensed at any time during contractual performance to recover compensation for individual acts performed while he or she was duly licensed; and (3) the statutory exception for substantial compliance is not available to a contractor who has not been duly licensed at some time before  beginning performance under the contract.

What should I do if I am a contractor whose license has lapsed in the middle of a project?

Provided that you were properly licensed at the beginning of the project, a momentary lapse in licensure is not fatal provided that the lapse is due to an inadvertent error and is remedied promptly upon learning of the lapse. As a precautionary measure, contractors in this situation are advised to seek counsel to ensure that their rights are best protected.

What should I do if I am a contractor who was unlicensed for the first week of my services, but have maintained a license ever since?

Regrettably, pursuant to MW Erectors, the chances for recovering payment for your services are slim. Nevertheless, contractors in this situation are advised to seek counsel to help devise the most prudent course of action depending on their particular scenario.

What should I do if I paid a contractor who I later learned was unlicensed?

Provided that you are within the applicable statute of limitations, Section 7031(b) expressly authorizes you to bring an action in any court in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract. You are advised to contact counsel to pursue an appropriate course of action.

If you have any questions regarding this bulletin, please contact Barry MacNaughton, Esq., editor of this publication and a partner in ECJ’s Litigation Department, at 310.281.6342 or bmacnaughton@ecjlaw.com, or Lauren J. Katunich, Esq. at 310.281.6370 or lkatunich@ecjlaw.com . If one of your colleagues would like to be a part of the Real Estate Reporter mailing list, or if you would like to receive copies electronically, please contact Cynthia S. Kaiser at 310.281.6328 or ckaiser@ecjlaw.com.