May 2, 2011

California "Contractor Licensing Laws: the Sword and the Shield"

In my last post I discussed that even though a home improvement contract is required to be in writing, a contractor could recover compensation even if it was not. In such a case, the court will consider the equities -- whether the homeowner will be unjustly enriched if the contractor is not paid -- if the contractor provided labor and materials without obtaining a written contract.

The story is very different if the contractor never had a contractor's license before the labor and materials were provided. A landscaping contractor faced such a dilemma last year in Alatriste v. Cesar's Exterior Designs, Inc. (2010) 183 Cal.App.4th 656. There the contractor began the job without a landscaping contractor's license, but obtained a license from the State Contractors Licensing Board during the course of the project. The homeowner paid $57,500 to the landscaping contractor before it left the job because of non-payment. The homeowner then sued to get his money back from the landscaping contractor on the basis that it was not licensed when it began the project. The Court of Appeal held that the California Contractor's License Law is both a sword and a shield in the hands of a homeowner who has hired an unlicensed contractor.

A person who utilizes the services of an unlicensed contractor is shielded from lawsuits by that contractor to collect payment for unlicensed work by Business & Professions Code section 7031(a). The California Legislature complemented the shield in section 7031(a) by adding a sword that allows recovery of all compensation paid to a contractor for performing unlicensed work. Section 7031(b) provides in pertinent part: 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.

The landscaping contractor in Alatriste v. Cesar's Exterior Designs, Inc. made several arguments that the Court of Appeal rejected: the homeowner knew it was unlicensed when it began the job; the homeowner would be unjustly enriched; and some of the labor and materials were provided after the landscaper was licensed. This was a case where the five letter synonym for justice applied: "tough."

The Court of Appeal followed a line of California cases which have held that section 7031 embodies an “all-or nothing” philosophy aimed at deterring persons from offering or providing unlicensed contractor services for pay. Section 7031 does not permit an unlicensed entity to recover partial compensation by narrowly segmenting the licensed and unlicensed portions of their performance. Where applicable, section 7031 bars a person from recovering or retaining compensation for any work performed in connection with an agreement for services requiring a contractor's license unless proper license was in place at all times during such contractual performance. In Alatriste v. Cesar's Exterior Designs, Inc. , the landscaping contractor even had to refund the money paid for materials retained by the homeowner!

The story might have had a happier ending for the landscaping contractor if it previously had a license which expired and which was being reinstated. But that will have to be the subject of another post.

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