A few months ago, I was retained to draft a construction contract by a client who is building a house in my area. During this assignment, I checked the website of the California Contractor's State License Board to see if the general contractor selected by my client was licensed. The contractor did not have a license in the name of his corporation and did not have worker's compensation insurance. My client selected another contractor who had a license and insurance.
A recent Court of Appeal case, Great West Contractors, Inc. v. WSS Industrial Construction, Inc. (2008 Cal. App. LEXIS 627) provides a good overview of the circumstances under which a licensed contractor can be denied any payment for its work. In that case a steel subcontractor sued the general contractor for labor and materials it provided for a school. The steel subcontractor ("WSS") was not licensed when it bid the job, did preliminary work under the subcontract (preparing plans and ordering materials), and began to invoice the general contractor. WSS became licensed before the subcontract was signed by both parties and before it did the lion's share of its work under the subcontract.
The Court of Appeal reversed a ruling by the trial court in favor of WSS, holding: "With one exception, the [Contractor's State License Law] forbids a contractor from recovery -- in law or equity -- on an otherwise valid claim for performance of any service for which a license is required if the contractor was unlicensed at any time during performance of the work." (Emphasis added.) This "bright line" test requires contractors to be licensed at the commencement of its services. If the contractor is aware of the problem and fixes it during the project, it is a case of "too little, too late."
But as the Court of Appeal said in that case, there is a statutory exception which is subject to interpretation by California courts. Under Business & Professions Code section 7031(e), a contractor can recover money in a civil action if it proves there has been "substantial compliance" with the licensure requirements: (1) the contractor had been duly licensed in this state prior to the contract or act; (2) it acted reasonably and in good faith to maintain proper licensure, (3) and did not know or reasonably should not have known that it was not licensed. This means that a contractor with an expired license can recover for work done without a license if a court finds that its ignorance of the law and the facts was excusable -- even if the excuse is a weak one. See, e.g., ICF Kaiser Engineers, Inc. v. Superior Court (1999) 75 Cal. App. 4th 226 (the appellate court excused Kaiser from compliance with the licensing law because it was a large company and could not be expected to keep abreast of developments that resulted in the suspension of its license). This is a case where ignorance was bliss.
But the owner who contracts with an unlicensed contractor is unlikely to achieve a state of bliss if a worker is injured on the job. Assuming the unlicensed contractor does not have worker's compensation insurance (a likely state of affairs), the injured worker may be deemed an employee of the owner. Labor Code section 2750.5. A possible consequence is that the unlicensed contractor who is injured on the job will make a worker's compensation or personal injury claim against the owner. This is a case where ignorance will not be bliss -- an owner should determine if a contractor is licensed and has worker's comp insurance before he or she signs a construction contract.
To read a recent Los Angeles Times article about the problems that can be created by hiring an unlicensed contractor, click here.
