Unlicensed contractors have the riskiest of occupations. That is, they risk the legal ability to collect compensation for work they perform, and more importantly, they risk the ability to keep the money they have been paid. Why is this you say? Well the California legislature has made a point to prevent unlicensed individuals from doing business in this state by not offering them any judicial help to recover compensation even if the consumers strategically were lying in wait to prey on the unlicensed individuals. California Business & Professions Code Section 7031(a) prevents an unlicensed contractor from collecting on debts owed to them by consumers under contracts due to their unlicensed status. Similarly, B&P Sec. 7031(b) gives consumers who have contracted with unlicensed contractors the ability to sue for restitution or reimbursement of all monies paid to the unlicensed contractor for ‘any act or contract.’ This harsh and draconian rule applies even if the unlicensed individual has perfectly built you the Taj Mahal.
The California Supreme Court has a long history of consistently supporting the legislative determination that unlicensed contractors ‘work for free in this state.’ California courts have consistently held that the licensing status of all contractors and subcontractors is a condition precedent to recovering compensation for contracted work in this state.
Most recently the California’s Highest court held in MW Erectors v. Neiderhauser (2005) 36 Cal. 4th 412, that a sub-subcontractor (MW Erectors) who sued a subcontractor (Neiderhauser) for non-payment of more than $1.3 million for steel work performed under two sub-contracts on a private hotel project (California Grand Hotel at Disneyland) was barred from recovering their compensation because they were unlicensed when they entered into the subcontracts. Neiderhauser argued that MW’s payment claims were barred under 7031(a), because MW was unlicensed when the sub-contracts were signed and was not licensed for the first eighteen days of the year-long project in which it was involved under one of the contracts. MW performed their obligations proficiently but was barred from recovering their $1.3 million by the Court because they failed to abide by B&P Sec. 7031. Sound unfair? Write your state senator or assemblyperson and tell them you think so.
Recently, my firm represented a homeowner in a binding arbitration with this issue dominating the outcome. The homeowner stopped paying his contractor because he felt the contractor was not properly building his house, i.e., a number of defective components began to manifest themselves during construction which were denied by the contractor. The contractor filed a mechanic’s lien and sued our homeowner client for breach of contract and foreclosure of the lien. Our client cross-complained for defective construction and breach of contract. We began investigating the contractor’s background and found that he had obtained and maintained his contractor’s license by fraud. In essence, he had obtained his license by the use of sham RMOs (Responsible Managing Officers) – other licensed individuals who have an ownership interest in a construction corporation and who supervise the day-to-day operations of the contracting business. Needless to say, the RMOs this contractor had vouch for him never set foot on his projects; which is a violation of the statute. Thus, we were able to prove that he did not have a valid license, and we successfully prevailed under a B&P Sec. 7031(b) claim. Our client received approximately $400,000 in reimbursement of monies paid to the contractor and another $200,000 in attorney’s fees from this unlicensed individual. Ouch!
The lesson here is that it’s important to recognize this body of law when referring individual contractors to your clients, especially if they end up in a dispute with a contractor. A quick check of a contractor’s license may give you or your client a significant upper hand in a contract dispute if the facts show the contractor is not validly licensed. B&P 7031(b) is ultimate remedy against an unlicensed contractor and will give a consumer a judicial windfall by enabling them to collect all of the money paid to the contractor as a penalty for them not being licensed. (The status of a contractor’s license can be viewed at the California State Licensing Board’s website at www.cslb.ca.gov.)
Tags: Contractor Laws, Contractor Licensing, Legal, Real estate
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2 responses so far ↓
1 Kevin Boer, Three Oceans Real Estate // Feb 9, 2007 at 10:04 am
Thanks for this very informative post, David! I knew that unlicensed contractors were on shaky legal ground, but I had no idea that simply being unlicensed is grounds for them to not have to be paid!
2 Frank Dadgari // Jul 8, 2007 at 10:48 pm
Dear David,
I took a unlicenced contractor to court based on 1029.8 (a) and provided proof based on (www.cslb.c.gov) that the contractor never had a licenses. Even though the defendant didn’t even show up to court, I still lost my case. I had entered into contract for 23k with unlicensed contractors and I took him to small claims court asking only for damages to my property which added up to $7500. What Remedy if any do I have? I think the judge discriminated against me!!
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