Monday, October 13, 2008

No License = No Payment

In 2005, the California Supreme Court decided a case that could be catastrophic for contractors working in California and a fortuitous windfall for anyone contracting with an unlicensed contractor. In MW Erectors, Inc. v. Neiderhauser Ornamental and Metal Works Company, Inc., the court held that contractors unlicensed at any time during a project cannot sue for payment, unless they satisfy a narrow statutory safe-harbor for contractors substantially complying with licensing laws. An unlicensed contractor’s forfeiture is required even if equity – principles of fundamental fairness – compels payment to the unlicensed contractor.

This year, a new case upheld a similarly harsh interpretation of Business & Professions Code section 7031. In Great West Contractors, Inc. v. WSS Industrial Construction, Inc., a subcontractor, WSS Industrial Construction (“WSS”), was barred from bringing a suit against Great West Contractors because WSS was not licensed at all times. WSS is a corporation that had applied for, but not yet obtained, their corporate contractor’s license at the time it submitted its bid. WSS had entered into the contract, ordered parts, and submitted plans before the corporation was actually licensed. However, it had not started actual construction of the site. The RMO of WSS was licensed as an individual and a partnership, but not on behalf of the corporation.

The law states that “…except as expressly otherwise provided, a contractor may not sue to collect compensation for performance of ‘any act or contract’ requiring a license without alleging that he or she was duly licensed ‘at all times during the performance of that act or contract.’ ”

Business and Professions Code section 7031(e) gives the only exception to the contractor’s licensure requirements. It states that the courts can find there is substantial compliance with the license requirements, “if it is shown at an evidentiary hearing that the person who engaged in the business or acted in the capacity of a contractor (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 maintain proper licensure, (3) and did not know or reasonably should not have known that he or she was not duly licensed.” Just as MW Erectors failed to meet this standard, so did WSS because the corporation was not licensed.

The Appellate Court denied WSS’s case, even though the Court itself agreed that they “are cognizant of the harshness of this result. But the law is clear.”

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