The Painful Price of Not Being A Properly Licensed Contractor

By January 31, 2014 October 25th, 2018 Construction Litigation Blog, Iman Reza
Iman Reza

Iman Reza

I recently litigated a dispute that serves as a cautionary tale for those contractors who are not properly licensed under the “Contractors State License Law.”

The simple facts were as follows. Contractor contracted with subcontractor for a work of improvement. Contractor paid subcontractor for some work but they had a falling out. Subcontractor then filed a complaint alleging it was deprived of the benefits of the contract and that it was deprived of earnings from other projects it could have accepted. Fatal to subcontractor’s claims was the fact that it was not a “duly licensed contractor at all times during the performance of that…contract.”

The obvious intent behind Bus. & Prof. Code § 7031 is to discourage persons who have failed to comply with the licensing law form offering or providing their unlicensed services for pay. Because of the strength and clarity of this policy, § 7031 applies despite injustice to the unlicensed contractor. Section 7031 represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties, and that such deterrence can best be realized by denying violators the right to maintain any such action for compensation in the courts of this state.

“Regardless of the equities, § 7031, bars all actions, however they are characterized, which effectively seek compensation for illegal unlicensed contract work. Thus, an unlicensed contractor cannot recover either for the agreed contract price or for the reasonable value of labor and materials.”  Similarly, § 7031 precludes the enforcement of a mechanic’s lien. Public policy concerns are so strong that § 7031 applies even where the person for whom the work was performed knew the contractor was unlicensed. And § 7031, subd. (e), provides that the possible exception of substantial compliance won’t apply where the contractor has never been a duly licensed contractor in California.

As any defendant to a lawsuit would feel, contractor was not pleased. So, contractor decided to turn the tables and filed a cross-complaint for disgorgement and restitution of the money that was paid to subcontractor for the work that it actually complete. Bus. & Prof. Code § 7031(b) provides:  “[a] person who utilizes the services of an unlicensed contractor may bring an action . . . to recover all compensation paid to the unlicensed contractor for performance of any act or contract.”

Yes, the tables sure did turn. At first, subcontractor sought recovery; but at the end of the day, its failure to secure proper licensure made it susceptible to no recovery and paying back the money it had previously been paid. My simple advice is for all contractors to check their licensure after reading this blog.

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[1] Bus. & Prof. Code § 7000 et seq.
[1] Bus. & Prof. Code § 7031(a)
[1] Banis Restaurant Design, Inc., Supra, 134 Cal. App. 4th at 1043; Hydrotech Systems, Ltd. v. Oasis Waterpark 52 Cal.3d 988, 995. (1991).
[1] Hydrotech, Supra, 52 Cal.3d at 997
[1] Banis Restaurant Design, Inc., Supra, 134 Cal. App. 4th at 1043.