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What Unpaid Subcontractors and Material Suppliers Need to Know About Contractor’s License Bonds

Edward J. Farrell

Subcontractors and material suppliers have a myriad of available remedies to address non-payment. This includes seeking relief against the above tier contractor’s license bond posted with the California State License Board (CSLB). This article explains which parties are recognized claimants to the bond under the statutory law and their burden of proof to ultimately recover bond proceeds. Because of the heightened evidentiary burden subcontractors and material suppliers must meet to trigger the surety’s obligation on the bond, claimants are well advised to seek the consultation of experienced construction attorneys in seeking this remedy.

Every licensed contractor is required to either file with the California State License Board (CSLB) a bond or make a deposit in lieu of the bond, for the protection of persons damaged by the contractor. (Cal. Bus. & Prof. Code Sections 7071.6, 7071.8.) Under most conditions, the monetary amount of the bond is $15,000. The bond shall be executed by an admitted surety insurer

If a contractor does not comply with the contractor license law, the bond can be enforced. However, only certain persons are protected by the bond and may maintain a court action against the surety for the bond proceeds. Under Cal. Bus. & Prof. Code Sections 7071.5, such persons include:

  • any homeowner contracting for home improvement on a personal family residence that was damaged as a result of the contractor’s violation of the statute;
  • any property owner contracting for construction of a single family residence not intended or offered for sale who is damaged as a result of the contractor’s violation;
  • any person damaged as a result of a willful and deliberate violation of the statute, or by a fraud in the execution or performance of the construction contract by the contractor;
  • any employee of the contractor damaged by the failure to receive wages; and
  • any laborer damaged by the failure of the contractor to make the contracted-for payments

Subcontractors or material suppliers only fit into the third category of claimants. Unfortunately, there are drawbacks to this classification. First, as non-homeowner claimants, subcontractors and material suppliers can only recover a maximum amount of $7,500 against the bond. (Cal. Bus. & Prof. Code Section 7071.6.)

Moreover, unpaid subcontractor or material supplier claimants have a steep evidentiary burden to ultimately recover against the bond. Notably, they must produce evidence that the above-tier contractor “committed a willful and deliberate violation” to establish grounds for recovery, including showing that the contractor had the capacity to pay the claimant, but failed to do so. Under Cal. Bus. & Prof. Code Section 7120, only “[w]ilful or deliberate failure by any licensee … to pay any moneys, when due for any materials or services rendered in connection with his operations as a contractor, when he has the capacity to pay or when he has received sufficient funds therefor as payment for the particular construction work, project, or operation for which the services or materials were rendered or purchased constitutes a cause for disciplinary action…” Thus, the mere fact that a subcontractor or material supplier was not paid by the contractor does not automatically suffice as a violation. Instead, an unpaid subcontractor or material supplier must show that the contractor was actually paid sufficient sums due to them and that the contractor willfully or deliberately withheld subsequent payment. This evidentiary standard can be difficult to meet especially if the contractor never had the capacity to pay or if the owner never paid the contractor sufficient funds on the project.

Here at Cummins & White, LLP, we specialize in counseling and representing subcontractors and materials suppliers on both private and public works of improvement. As such, we routinely advise construction clients on how to best address non-payment claims and potentially enforce contractor license bond claims.