[[Contractors Beware License Law Violations.png|Contractors Beware Article]] # Contractors Beware: License Law Violations May Lead to Disgorgement of Payment By [[Robert G. Campbell]], [[Cox, Castle & Nicholson LLP]] The California Contractors' License Law ([[CSLL]]) requires that contractors performing work within the state be licensed. "The licensing requirements provide minimal assurance that all persons offering such services in California have the requisite skill and character, understand applicable local laws and codes, and know the rudiments of administering a contracting business. [Citations omitted]." [^1] The license requirement is designed to protect the public from incompetent and dishonest providers of building and construction services. These purposes are advanced by closing the doors to California courts to unlicensed contractors who seek payment. Even worse, offending contractors can be required to disgorge payments made to them. If this rule seems harsh, it is because it is intended to be. The California Supreme Court has stated: "Because of the strength and clarity of this policy, it is well settled that [[Section 7031]] (of the California Business and Professions Code) represents a legislative determination that the importance of deterring unlicensed person 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 action for compensation in the courts of this state." ## 'The Shield': **Protecting Consumers Contractors from Unlicensed** [[Section 7031(a)]] is often called a "**shield**" because it protects consumers of contractor services from lawsuits to collect payment by unlicensed or invalidly licensed contractors. Consequently, contractors may not seek judicial recourse, in law or in equity, to collect licensed payment if they were not duly "at all times during the period of contractual performance." [^2] This shield extends to the assertion of mechanic's liens, payment bond and stop payment notice rights — violators are barred from exercising these remedies. Similarly, equitable legal theories such as quantum meruit and unjust enrichment are unavailable. In [WSS Industrial Great Western Construction, Inc. v. Contractors, Inc. (2008) 162 Cal. App.4th 581](https://casetext.com/case/wss-ind-cons-v-great-west-cont), the court ruled that "courts may not resort to equitable considerations in defiance of [[Section 7031]]. [[Section 7031]] has been applied by courts to bar contractors from seeking recovery of payment in many circumstances. For example, a validly licensed individual was barred from recovery when he contracted under his corporation's name and not his own. [^3] In another case a contractor was barred from recovering payment by segregating the value of equipment and materials supplied to the job the supply of which, by itself, would not require a license. However, because the contract combined licensed with unlicensed work the contractor was barred from asserting any lien or stop payment notice. [^5] [[Section 7031]] even bars payment where the party hiring the contractor knows or has reason to know that the contractor is not properly licensed. ## 'The Sword': **On the Offensive Against Unlicensed Contractors** The coup de grace is set forth in [[Section 7031(b)]], the "**sword**," which allows persons who utilize unlicensed contractors to go on offense to recover compensation paid to the contractor for performing unlicensed work. It states: "Except as provided in [[Section 7031(e)|subdivision (e)]] [substantial compliance], a person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract." License violations may be asserted retroactively to invalidate licensure, thereby allowing for disgorgement. Under [[Section 7068.1]] of the California Business and Professions Code, a qualifier ([[responsible managing officer|RMO]] or [[responsible managing employee|RME]]) for a licensee 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" the [[CSLL]] and related regulations. Thus, where a licensee lacks an active qualifier the license may be invalidated after the fact. Contractors who violate these requirements or who "**borrow**" the license of another contractor, may be found to have violated [[Section 7031]], triggering the sword in [[Section 7031(b)|subsection b]]. Similarly, a licensee which allows its workers' compensation insurance to lapse during the work, may find itself in the same predicament. The [[CSLL]] abolished the judicial doctrine of "**substantial compliance**", which excused contractor license violations under circumstances where it was equitable to do so. The only exception to the sword and shield of [[Section 7031]] is set forth in [[Section 7031(e)|subsection (e)]] and is sometimes referred to as the substantial compliance exception. Under this limited exception, if the violator was previously licensed: "... the court may determine that there has been substantial compliance with licensure requirements under this section if it is shown at an evidentiary hearing that the person who engaged in the business or acted in the capacity of a contractor - (1) had been duly licensed as a contractor in this state prior to the performance of the act or contract, - (2) acted reasonably and in good faith to maintain proper licensure, and - (3) acted promptly and in good faith to remedy the failure to comply with the licensure requirements upon learning of the failure." ## Also at Risk: **Specialty and GC's Working with Unlicensed Subcontractors** The [[CSLL]] requirements also apply to specialty contractors. Specialty contractors are permitted only to perform work within the scope for which they are licensed and work which is "**incidental**" or "**supplemental**" to the licensed work. Contractors who stray outside of the confines of their "C" license(s) are subject to the shield (barring payment) and sword (disgorgement) of [[Section 7031]], at least to the extent that work is unlicensed. Thus, if a subcontractor with a C15 license (Flooring and Floor Covering) performs both flooring and tile work (requiring a C45 license), the value of the C45 work is not compensable, and to the extent payment was made on account of the tile work, those payments are subject to disgorgement. General contractors who subcontract with unlicensed or invalidly licensed trades are also at risk. It is well settled in a California that licensed general contractor may not recover against an owner for work that was performed by an unlicensed subcontractor. [^4] Owners may contest payment to general contractors or, worse, seek disgorgement of the value of unlicensed work, where a subcontractor is found to have violated the licensing requirements of the [[CSLL]]. Contractors should jealously protect against violations which may lead to non-payment or disgorgement. Savvy contractors should confirm not only that a subcontractor has an active license, but that the licensee has an active qualifier and that its workforce is covered by worker's compensation insurance. By doing these things, a general contractor can significantly mitigate the risk of unwitting violations of the [[CSLL]]. [[Robert G. Campbell]] is a partner at [[Cox, Castle & Nicholson LLP]]. Based in the firm's Los Angeles office, he is one of Southern California's leading construction lawyers helping his clients resolve a wide range of construction claims disputes. He can be reached at [email protected]. [^1]: [[Hydrotech Systems, Ltd. v. Oasis Waterpark, (1991)]] 52 Cal.3d 988, [[Hydrotech Systems, Ltd. v. Oasis Waterpark, (1991)#^58194d|995]] [^2]: MW Erectors, Inc. v. Neiderhauser Ornamenta! & Metal Works Co., Inc. (2005) 36 Cal. 4th 412 [^3]: Opp v. St. Paul fire & Marine Ins. Co. (2007) 154 Cal. App.4* 71 [^4]: Holm v. Bramwell (1937) 20 Cal. App.2d 332 [^5]: Banis Restaurant Design, Inc. v. Serrano (2005) 134 Cal. App.4h 1035