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Expert Advice

May 2, 2008

Avoiding Perils for Unlicensed Contractors

Are your clients thinking of doing construction work without a license? Have them think again.

The Legislature has dealt a harsh blow to unlicensed construction contractors. Business and Professions Code section 7031 has long prohibited unlicensed contractors from suing to collect compensation for work that requires a license. Why? "[T]o protect the public from the perils incident to contracting with incompetent or untrustworthy contractors." (Davis Co. v. Sup. Ct., 1 Cal. App. 3d 156, 158 (1969).)
      In 2001, section 7031 was amended to allow consumers to sue and "recover all compensation paid to the unlicensed contractor for performance of any act or contract." (Bus. & Prof. Code § 7031(b).) Thus, not only is an unlicensed contractor prohibited from suing for money due, but the contractor could actually be forced to return money paid-including monies passed on to subcontractors-even for work properly performed.
      The pecuniary risk under section 7031 makes it crucial to counsel construction contractor clients against working without a license.
      One acts as a "contractor" when the person "undertakes to ... construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building, highway, road, parking facility, railroad, excavation or other structure, project, development or improvement, or to do any part thereof, including the erection of scaffolding or other structures or works in connection therewith." (Bus. & Prof. Code § 7026.) The sale of materials, or a prefabricated structure, arguably falls outside the statute. (See, Walker v. Thornsberry, 97 Cal. App. 3d 842, 848 (1979).)
      Section 7031(b) allows an owner/ consumer to sue and recover "all compensation paid" to an unlicensed contractor. Though interpretation of the word compensation might be limited to the contractor's "profit," nothing in the statute, its legislative history, or case law supports such a narrow reading.
      A broad interpretation of section 7031(b) compels an unlicensed contractor to return not only money received and kept but also money passed on to subcontractors. Such a devastating result arguably exceeds the statutory purpose of protecting the public from "incompetence and dishonesty." (Holland v. Morse Diesel Int'l., Inc., 86 Cal. App. 4th 1443, 1450 (2001).) It provides unscrupulous consumers a potential windfall. One could knowingly contract with an unlicensed contractor, receive the benefit of satisfactory performance, and still sue to recover all money paid for the job.
      An early version of the amending legislation would have barred consumers from suing unlicensed contractors if they "knew that the contractor was unlicensed prior to the time that any payments were made to the contractor." This limitation was stricken, though, based on a concern that contractors would avoid the license requirement by quietly disclosing their unlicensed status in the fine print of a contract. As the law stands, however, an unlicensed contractor cannot escape the sting of section 7031(b) even by making a full disclosure.
      What happens if a contractor becomes unlicensed during part of a construction job? For example, an otherwise properly licensed contractor might be suspended for failing to maintain workers compensation coverage during the performance of a contract (see, Bus. & Prof. Code § 7125.2); similarly, a contractor might not have been licensed when the contract was executed, but obtained a license before work began.
      Earlier cases softened the severity of the license law "by allowing contractors ... to show they had substantially complied with licensure requirements." (MW Erectors, Inc. v. Niederhauser Orn. & Met. Wks. Co., Inc., 36 Cal. 4th 412, 418 (2005).) But the Legislature tightened the screws in 2001. As the state Supreme Court observed in MW Erectors, amendments to section 7031 make clear that "[t]he judicial doctrine of substantial compliance shall not apply" unless 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 (MW Erectors at 419). Tough medicine, indeed.
      Section 7031 makes it unwise for construction contractors to work without a license. And the amendment allowing consumers to recoup money makes it especially important to counsel clients against taking this risk. Unlicensed contractor clients could be left holding the bag-even for a job well done.
      Alex W. Craigie is a partner in the Los Angeles office of Dykema. His practice focuses on business, construction, and real estate litigation.

Alexandra Brown

Daily Journal Staff Writer

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