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Construction Contractor may not Charge for Work Done by its Unlicensed

Subcontractor, and Must Refund to Owner Payments it Received for Work Done by its Unlicensed Subcontractor

It is clear that under California Construction Law all construction contractors and subcontractors performing “construction” work or who act as a construction “contractor” in California must have a general or speciality license from the California Contractors State License Board.

And unlicensed contractors and subcontractors cannot sue to recover the agreed price for or the “reasonable value” of their work in “quantum merit”, and can be sued for disgorgement of any payments they received for construction work done by unlicensed construction businesses. See, Bus. & Prof. Code § 7031(a)&(b).

A recent Court of Appeal case clarified the application of these laws and policies to work done by unlicensed subcontractors of a prime contractor, Kim v. TWA Construction, Inc.

In that case a general contractor hired an unlicensed subcontractor to perform part of its work under a construction contract, and the property owner paid the prime contractor for the work done by the unlicensed subcontractor for the prime.

The neighbors of the property owners sued the property owners for damages allegedly caused by their prime contractor and its unlicensed subcontractor, and the property owners then sued their prime contractor for a refund - or “disgorgement” - of money they paid the general contractor for work performed by its unlicensed subcontractor.

The Court of Appeal upheld the jury verdict against the prime contractor ordering it to refund to the owners money paid for work done by its unlicensed subcontractor, finding that it failed to meet its burden of proof to show that its subcontractor was properly licensed, and stated:

“California law contains a strong policy barring actions that effectively seek compensation for unlicensed work. Section 7031 accomplishes this policy purpose “by denying a contractor ‘access to the courts to recover for the fruits of his labor ... when he violates the statute.’ ” (Asdourian, supra, 38 Cal.3d at p. 282, 211 Cal.Rptr. 703, 696 P.2d 95.)”

“Furthermore, it is clear that an unlicensed subcontractor may not recover compensation for his work from either the owner or the general contractor. (Hydrotech, supra, 52 Cal.3d at p. 997, 277 Cal.Rptr. 517, 803 P.2d 370.) To nevertheless enable a contractor to recover compensation for the performance of unlicensed work, simply because the work was accomplished by hiring a subcontractor, would circumvent the purpose of section 7031 and render meaningless the section 7031 bar and expansive definition of contractor to include work performed “by or through others” (§ 7026).” (Emphasis added)

Kim v. TWA Construction, Inc. (Cal. Ct. App., May 13, 2022, No. H045900) 2022 WL 1515516, at *10

The lessons to be learned from this decision are (1) all prime contractors must ensure that all their subcontractors are properly licensed at all times during the performance of the construction work, and (2) all property owners in disputes with general contractors and subcontractors should routinely investigate whether or not the general contractor and its subcontractors were properly licensed at all times during the performance of the construction work, as those facts may cause potential defenses to, and affirmative claims against, the contractor and its subcontractor.

It is also important to note that even if a contractor publicly appears to have a valid license according to Contractors State License Board records (www.cslb.ca.gov), that license nevertheless may have otherwise been suspended “by operation of law”, such as where the contractor does not have workers compensation insurance for its true employees (Bus.&Prof. Code § 7125.2), or if the property owner can prove that the person holding the actual license for the contractor or subcontractor [the RMO or RME] was not regularly or actively “exercis[ing] direct supervision over the [construction] work” of the contractor or subcontractor. Bus. & Prof. Code § 7068.1(a).

“In most cases, a contractor can establish valid licensure by simply producing “a verified certificate of licensure from the Contractors' State License Board which establishes that the individual or entity bringing the action was duly licensed in the proper classification of contractors at all times during the performance of any act or contract covered by the action.” (§ 7031, subd. (d).) . . . . But . . . by going behind the face of the license to prove that James Nale was a sham RME or RMO. (See Buzgheia v. Leasco Sierra Grove, 60 Cal.App.4th 374, 385, 70 Cal.Rptr.2d 427 (1997) [“It is possible for a party in a civil action to attack a contractor's license by going behind the face of the license and proving that a required RME is a ‘sham’ ”].)”

“In California, a corporation qualifies for a contractor's license “by the appearance of a responsible managing officer or responsible managing employee [a RMO or RME] who is qualified for the same license classification as the classification being applied for.” (§ 7068, subd. (b)(3); see § 7065, subd. (c)(3) . . . The qualifying individual must be “a bona fide officer or employee of the corporation and must be actively engaged in the work covered by the license. [Citation.] The qualifier must exercise direct supervision over the work for which the license is issued to the extent necessary to secure full compliance with the provisions of the law. (§ 7068.1.)” . . .; see § 7068.1, subd. (a) [qualifier “shall be responsible for exercising that direct supervision and control of his or her employer's or principal's construction operations to secure compliance with this chapter and the rules and regulations of the [Contractors State License board”].)” (Emphasis added).

Jeff Tracy, Inc. v. City of Pico Rivera (2015) 240 Cal.App.4th 510, 518–519.

If the RMO or RME did not exercise direct supervision over the construction work on a job or generally, then the RMO or RME is considered to be a “sham”, and Bus. & Prof. Code § 7031(a) & (b) operate as a sword and shield to prevent the contractor or subcontractor from getting paid for its work, and allowing an action by the property owner or payor to recover payments made for work done by the contractor who is unlicensed “by operation of law” or otherwise.

Also, if a contractor or subcontractor fails to carry workers compensation insurance for its unlicensed employees or “independent contractors” then Bus. & Prof. Code § 7125.2 may operate silently to suspend their license “by operation of law”, even though they might otherwise appear to have a valid contractors license in available public records.

Thus, to properly evaluate whether a license is valid, or not, it is consequently often necessary to an experienced construction attorney to evaluate the facts in a particular case, and to look beyond the apparent issuance of a valid license to the actual facts of whether the contractor or subcontractor conducted its business in accordance with the License Law.

Consequently, owners have an incentive and contractors have a legal obligation to make sure that both the general contractor and its subcontractors are properly licensed, including looking behind the apparent license to make sure that all are properly insured for workers compensation insurance and supervised by a licensed owner or employee in the manner required by law.

The consequences for the contractor or subcontractor of a failure to do so could be an inability to get paid for work otherwise properly and competently performed, or an obligation to refund monies already paid and received for construction work duly and otherwise competently performed.

Of course, dealing with a not properly licensed or unlicensed builder can also have unanticipated adverse affects on property owners as well.

N.B. This article DOES NOT constitute legal advice or create an attorney/client relationship with the reader, and YOU MAY NOT rely on it without retaining a competent California Construction Lawyer or Contractor Licensing Attorney to consult regarding your particular factual situation.

Facts and contracts vary greatly, and the law is constantly changing and evolving, and this article therefore may now be or may become outdated and invalid.

For further information on the subject of this article or for legal questions on contractor, subcontractor, or materialman’s licensing, payment claims, liens, stop notices, or bond claims or other questions on private construction contracts, issues, defects or disputes and litigation, and on the law applicable to your unique contract, facts and circumstances, please contact an experienced construction lawyer and/or call us at (415)788-1881, or Contact Us via email, or see www.wolfflaw.com.