UNLICENSED OR IMPROPERLY LICENSED CONTRACTORS BEWARE—REVERSAL OF UNDERLYING JUDGMENT ALSO WILL MEAN LOSS OF A FEE AWARD

Fourth District Rejects Substantial Compliance Doctrine and Strips Judgment/Fee Award From Subcontractor on Appeal.

            Business and Professions Code section 7031 bars unlicensed contractors from recovering compensation for work performed under a construction contract.  In recent years, the substantial compliance doctrine—which previously gave breaks to certain unlicensed situations where a managing agent had a license or a license was obtained into the performance—has been severely constricted.  (See Bus. & Prof. Code, § 7031(e); Opp v. St Paul Fire & Marine Ins. Co., 154 Cal.App.4^th 71 (2007).)  If the unlicensed contractor issue is raised, even appellate courts are sensitized and have no compunction in reversing a judgment and ancillary fee award if licensing status is not proven satisfactorily.  That is what occurred in the case we now discuss.

            In Golden West Electric, Inc. v. Controlled Environments Construction, Inc., Case Nos. G037556 & G038122 (4^th Dist., Div. 3 May 29, 2008) (unpublished), subcontractor won a judgment against contractor for $44,982.62.  The trial judge later awarded subcontractor attorney’s fees of $64,103.50 under Civil Code section 3260 and Business and Professions Code section 7108.5, the prompt payment statutes discussed in our May 29, 2008 post.

            Contractor appealed and won.  Result:  judgment and fee award reversed, and a dismissal ordered by the Court of Appeal.

            The trial judge determined contractor had waived the licensure issue by failing to raise it as an affirmative defense.  Contractor claimed that the issue was controverted through its filing of a general denial.  That was a winning argument, the appellate court found, based on the reasoning in the recent decision of Advantec Group, Inc. v. Edwin’s Plumbing Co., Inc., 153 Cal.App.4^th 621 (2007). 

            Secondarily, the lower court rescued subcontractor under the substantial compliance doctrine, finding the subcontractor corporate entity could operate under its owner’s license.  Not so, the Santa Ana-based court determined, because the true corporate subcontractor was not licensed until well after the work was completed.

            Contractors need to be vigilant and properly maintain their licensing status.  Otherwise, they could suffer the same fate of the winning litigant at the trial level in this case—be victorious below, only to lose on appeal, learning in the process that appellate courts give careful attention to making sure litigants are compliant with licensing laws.

Comments

[h mahalo]

If the unlicensed contractor does not have the authority under California Law to contract, is any verbage in the contract legal since the entity did not have the right or legal authority to create the contract to start with?