Obtaining a California contractor’s license is a milestone in any contractor’s career. It takes four years of journeyman level experience in order to even qualify to take the two-part exam. However, obtaining the license is just the beginning. In order to avoid being precluded from filing a lawsuit to collect money and/or the fatal “disgorgement” remedy contained in the Contractors State License Law, contractors must learn the limits of what their specific license allows them to do and how to properly maintain their license.
Who is Legally Required to Have a Contractor’s License?
California Business and Professions Code section 7026 expressly defines “contractor” as “…any person who undertakes to or offers to undertake to, or purports to have the capacity to undertake to, or submits a bid to, or does himself or herself or by or through others, construct, alter, repair, add to, subcontract from, improve, move, wreck or demolish any building, highway, road, parking facility, railroad, excavation or other structure, project, development or improvement, or to do any part thereof…” This definition is not surprising because it covers most of the work one may reasonably expect requires a contractor’s license. Section 7026 continues, however, and establishes additional activities which fall within the express definition of “contractor.” For example, section 7026 goes on to state, “…including the erection of scaffolding or other structures or works in connection therewith, or the cleaning of grounds or structures on connection therewith, or the preparation and removal of roadway construction zones, lane closures, flagging, or traffic diversions, or the installation, repair, maintenance, or calibration of monitoring equipment for underground storage tanks…”
What is the Legal Consequence of Being an Unlicensed Contractor?
In California, if a contractor does not have a contractor’s license, or it fails to be “duly licensed” at all times during the performance of any act or contract, it is unable to recover for labor and materials furnished on a work of improvement. (Cal. Bus. & Prof. Code § 7031, subd. (a).) It cannot enforce any rights to collect unpaid amounts, including but not limited to mechanic’s lien, stop payment notice, or payment bond rights. More importantly, Business and Professions Code section 7031, subdivision (b), contains the Contractors State License Law’s “disgorgement” provision. Pursuant to that provision, “…a person who utilizes the services of an unlicensed contractor [which includes a contractor who fails to be “duly licensed” at all times during the performance of any act or contract] may bring an action…to recover all compensation paid to the unlicensed contractor for performance of any act or contract.” (Emphasis added.) This means that every dollar and cent paid to the unlicensed contractor must be returned to the person who utilized the services of the unlicensed contractor and paid them compensation.
Can a Court Rule That I am Unlicensed, Even if I Have a Contractor’s License?
Yes. In California, simply having a contractor’s license does not guarantee that a contractor has the correct license for the construction work being performed. Nor does simply having a license establish that a contractor has properly maintained it at all times during the performance of the project in question. A finding that a contractor is not properly licensed leads to the same consequences as those faced by a contractor acting with no license. Both are subject to the harsh penalties of Business and Professions Code section 7031.
Can an Incorrect License Classification Lead to Disgorgement Under Business and Professions Code section 7031?
Yes. In Jeff Tracy, Inc. v. City of Pico Rivera (2015) 24 Cal.App.4th 510, the court of appeal ruled that a contractor who performed work outside the scope of its Class C-27 landscaping license, and for which a general engineering Class A license was required, was a unlicensed contractor for the purposes of Business and Professions Code section 7031. Interestingly, the court refused to apportion the landscaping work for which the contractor had a license. The court determined that because the contractor was not properly licensed for even part of the scope of work contained in the contract, “all compensation” as stated in Business and Professions Code section 7031 was owed back to the owner as a penalty. This means that that court ordered the contractor to return all compensation it received under the contract, even for the landscaping work.
Can Failure to be Properly Licensed for a Portion of a Project Lead to Disgorgement Under Business and Professions Code section 7031?
Yes. In WSS Industrial Construction, Inc. v. Great West Contractors, Inc. (2017) 162 Cal.App.4th 581, the court of appeal held that because the contractor was not licensed at all times during the performance of the contract, in violation of Business and Professions Code section 7031, the contractor could not recover monies owed to it. In WSS Industrial Construction, Inc., the work performed while the contractor was unlicensed was the ordering of anchor bolts, preparing shop drawings, and coordinating and overseeing steel galvanization. Nonetheless, the court determined that these could not be segregated from the subcontract. Therefore, the subcontractor was legally unlicensed and subject to the harsh remedies of Business and Professions Code section 7031.
Is there a Defense if a Contractor’s License inadvertently Lapses During a Project?
Yes. The “substantial compliance” defense has been codified in Business and Professions Code section 7031, subdivision (e). The defense requires the following three elements:
- The person has been duly licensed as a contractor in this state prior to the performance of the act of contract;
- The person acted reasonably and in good faith to maintain proper licensure; and
- The person acted promptly and in good faith to remedy the failure to comply with the licensure requirements upon learning of the failure.
One of the key elements required is that the person has been duly licensed prior to the performance of the act or contract. This means that if a contractor never had a contractor’s license, then it cannot successfully assert the substantial compliance defense. (WSS Industrial Construction, Inc. v. Great West Contractors, Inc. (2017) 162 Cal.App.4th 581.)