Delving Deep Into The California Contractor's License Issue: Do Not Take The "Certificate of License" At Face Value

May 19, 2008

Copyright 2008.  All rights reserved.

In a classic subcontractor claim for money, the enforceability of the claim against a contractor and its surety ultimately turned on the lack of the subcontractor's license at the commencement of performance.  Because the subcontractor was not properly licensed at all times during the performance of its work, the subcontractor was denied any recovery against the contractor and surety despite a finding at trial that it was owed money for work performed.[1]  As held in Great West Contractors, Inc. v. WSS Industrial Construction, Inc., 2008 Cal. App. LEXIS 626 (Cal. App. 2d Dist., April 28, 2008), Business and Professions Code §7031 absolutely barred the contractor from maintaining an action due to lack of licensure at all times during the performance of the construction work.[2] 

The Great West case demonstrates the importance of looking beyond the "face" of the license to ensure that it was validly in place at all times during the performance of the work.  The ruling provides an example of the investigation and analysis which must be undertaken when faced with a contractor claimant who may not be properly licensed throughout performance.  Proper licensure is mandated by Business and Professions Code §7031 which provides:

(a) Except as provided in subdivision (e), no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract, regardless of the merits of the cause . . . .

Bus.&Prof.C. §7031(a).  Although the licensing issue was raised during the trial by way of a Motion for Non-Suit, the issue may be raised by any defendant, including the surety, at any time, even for the first time on appeal.  Lewis & Queen v. N.M. Ball Sons (1957) 48 Cal.2d 141, 148-149. 

In Great West, the subcontractor produced a verified certificate of licensure from the Contractor's State License Board.  Thus, on the surface, there did not appear to be any license defense since an active license number was set forth on the contract.  Going beyond the surface, however, the facts revealed that the subcontractor's license had first been issued two months after the subcontractor began to perform the construction work, a date which was before the execution date on the written subcontract.

Although the corporation's president held a valid individual license at all times and was ultimately the qualifier for the corporation, these facts did not assist the "person" engaged in the business of a contractor, i.e. the corporate claimant.[3]  Because the corporate entity began performance of services (while it was unlicensed) that could only be performed by a licensed contractor, the Contractor's License Law forbade it from recovery for all construction services.

While the subcontractor successfully proffered a variety of arguments at trial why its claim should not be precluded by the Contractor's License Law, all of its arguments were later rejected by the Court of Appeal.  Several of the arguments addressed by the Court of Appeal are discussed immediately below.

Segregation of Acts.  The subcontractor argued that its preliminary acts of ordering materials and preparing shop drawings could be segregated from the construction contract as they were not performance of construction services.  The Court of Appeal found that these tasks, specifically identified in the subcontract, could not be severed from the parties' integrated agreement as they were performed in furtherance of the total scope of work included in the contract.  Citing Banis Restaurant Design, Inc. v. Serrano (2005) 134 Cal.App.4th 1035, 1046.

Acts Performed by Third Party Vendor.  The construction work included steel galvanization which was not performed by the subcontractor but by a third party hired by and under the control of the subcontractor.  While the subcontractor argued it was not required to be licensed for work performed by another, the Court of Appeal rejected this argument noting that California courts have long held that those who enter into construction contracts must be licensed, even when they themselves do not perform the actual work under the contract.  Citing Vallejo Development Co. v. Beck Development Co. (1994) 24 Cal.App.4th 929, 941.

Lack of Existence of Written Contract.  Prior to the execution of the subcontract, the subcontractor ordered materials and prepared shop drawings.  As the subcontractor was not licensed at that time, the subcontractor argued that these acts could not have been tasks done in performance of the subcontract and therefore did not require a contractor's license.  This theory was rejected by the Court of Appeal as Business and Professions Code §7031 requires a license for "any act or contract for which a license is required."  Citing MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co, Inc. (2005) 36 Cal.4th 412, 427.  The execution of the contract is not determinative and, as noted above, the courts will not allow specific acts to be segregated from the contract as a whole.

Substantial Compliance.  The subcontractor's final argument was that it substantially complied with the licensing requirements as the corporation's President and RMO previously qualified a related partnership for a contractor's license and held various individual licenses at all times before and after the corporation obtained its license. [4]  The Court of Appeal ruled that the licensing history of the partnership and individual were not relevant to the corporation's license status as the corporation was the entity which bid the project, entered into the contract, performed the work and sought recovery.  Because the corporation had never been licensed before it began performance, it could not meet the threshold requirement of the statutory substantial compliance exception set forth in subsection (e) of Section 7031.  The statutory substantial compliance applies only if all four elements are satisfied and the claimant therefore did not meet the requirements of the limited exception.

The lesson to be learned from Great West is that the license certificate may not always tell the whole story.  Further information should be sought as part of a routine analysis of a contractor's claim.  In order to maintain a lawsuit seeking recovery for the performance of construction services, a contractor has the burden of proving that the contracting entity was properly licensed at all times during the performance of that specific contractor's work.  Performance is not limited to the dates set forth in the terms of the contract.  The key determinative fact is the date work began in relation to the effective period of the license. 

In summary, Great West Contractors provides an example of the investigation and analysis which must be undertaken when faced with a contractor claimant who may not be properly licensed.  Thus, as part of a thorough claim analysis, parties will be well served to:

(1)  Always check on the status of a claimant's license;

(2)  Inquire into the dates all work was performed to ensure this occurred after the license was in place;

(3)  Verify that the contractor was duly licensed in the proper classification of contractors; and

(4)  Investigate whether there were any lapses of licensure during performance of the work.

Despite what many may construe as a harsh or inequitable result, this decision follows a long standing public policy and the strict enforcement of contractor's licensing requirements in California.  While many, if not most, states equally enforce statutorily mandated licensing requirements, each state's laws should be reviewed as applicable.

[1] With interest, statutory penalties, costs and attorneys' fees, the judgment appealed from was in excess of $400,000.00.
[2]Initially the opinion was not certified for publication.  On April 28, 2008, the Court of Appeal issued an order certifying the opinion for publication.  A copy of the decision is attached.  The briefing on appeal was drafted by Edward D. Lodgen and Laura P. Nash.  Mr. Lodgen argued the case before the Court of Appeal on behalf of the surety.
[3] All "persons" engaged in the business of or acting in the capacity of a contractor must be licensed.  "Persons" is broadly defined to include an individual, a firm copartnership, corporation, association or other organization, or any combination thereof.  Bus.&Prof.C. §7025.
[4] Section 7031 allows a court to determine that there has been substantial compliance with licensure 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) did not know or reasonably should not have known that he or she was not duly licensed when performance of the act or contract commenced, and (4) acted promptly and in good faith to reinstate his or her license upon learning it was invalid.  Bus.&Prof.C. §7031(e).

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Edward Lodgen

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