LEGAL ISSUES


Contractors Beware: License Law Violations May Lead to Disgorgement of Payment


By Robert G. Campbell, Cox, Castle & Nicholson LLP


within the state be licensed. “Te licensing


T


requirements provide minimal assurance that all persons offering such services in California have the requisite skill and character, understand applicable local laws and codes, and know the rudiments of administering a contracting business. [Citations omitted].” (Hydrotech Systems, Ltd. v. Oasis Waterpark, (1991) 52 Cal.3d 988, 995). Te license requirement is designed


to protect the public from incompetent and dishonest providers of building and construction services. Tese purposes are advanced by closing the doors to California courts to unlicensed contractors who seek payment. Even worse, offending contractors can be required to disgorge payments made to them. If this rule seems harsh, it is because


it is intended to be. Te California Supreme Court has


stated: “Because of the strength and clarity of this policy, it is well settled that Section 7031 (of the California Business and Professions Code) repre- sents a legislative determination that the importance of deterring unlicensed person 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


20 May/June 2020


he California Contractors’ License Law (CSLL) requires that contractors performing work


compensation in the courts of this state.”


‘The Shield’: Protecting Consumers from Unlicensed Contractors


Section 7031(a) is often called a


“shield” because it protects consumers of contractor services from lawsuits to collect payment by unlicensed or invalidly licensed contractors. Conse- quently, contractors may not seek judicial recourse, in law or in equity, to collect payment if they were not duly licensed “at all times during the period of contractual performance.” (MW Erectors, Inc. v. Neiderhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412.) Tis shield extends to the assertion


of mechanic’s liens, payment bond and stop payment notice rights – violators are barred from exercising these remedies. Similarly, equitable legal theories such as quantum meruit and unjust enrichment are unavailable. In WSS Industrial Construction, Inc. v. Great Western Contractors, Inc. (2008) 162 Cal.App.4th


581, the court ruled


that “courts may not resort to equitable considerations in defiance of section 7031. Section 7031 has been applied by


courts to bar contractors from seeking recovery of payment in many circum- stances. For example, a validly licensed individual was barred from recovery when he contracted under his corpora- tion’s name and not his own. (Opp v. St. Paul fire & Marine Ins. Co. (2007) 154 Cal.App.4th


71.) In another case a contractor was


barred from recovering payment by segregating the value of equipment and materials supplied to the job the supply of which, by itself, would not require a license. However, because the contract


combined licensed with unlicensed work, the contractor was barred from asserting any lien or stop payment notice. (Banis Restaurant Design, Inc. v. Serrano (2005) 134 Cal. App.4th


1035.)


Section 7031 even bars payment where the party hiring the contractor knows or has reason to know that the contractor is not properly licensed.


‘The Sword’: On the Offensive Against Unlicensed Contractors


Te coup de grace is set forth in


Section 7031(b), the “sword,” which allows persons who utilize unlicensed contractors to go on offense to recover compensation paid to the contractor for performing unlicensed work. It states: “Except as provided in


subdivision (e) [substantial compliance], 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.” License violations may be asserted


retroactively to invalidate licensure, thereby allowing for disgorgement. Under Section 7068.1 of the California Business and Professions Code, a qualifier (RMO or RME) for a licensee “shall be responsible for exercising that direct supervision and control of his or her employer’s or principal’s construction operations to secure compliance with” the CSLL and related regulations. Tus, where a licensee lacks an


active qualifier the license may be invalidated after the fact. Contractors who violate these requirements or who “borrow” the license of another contractor, may be found to have violated Section 7031, triggering the


California Constructor


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