The Court Will Not Allow The Contractor To Contradict Its Previous Complaint

Law Talk

Let me start by saying that I think this case is more of a pleading case than a construction case. It does not say or clarify anything about construction law or the licensing laws that we have not known before. It merely clarifies the procedure of pleadings and what one can and cannot plead at the appellate level.

This recent case stemmed from a contract entered into between an unlicensed design contractor and an individual. Banis Restaurant Design Inc. (hereinafter "Banis") sued Borgata Serrano and Bank of America (hereinafter collectively referred to as "Serrano") claiming Serrano owed it an unpaid amount on the contract. The trial court agreed with Serrano and denied Banis relief because Banis was not a licensed contractor. Business and Professions Code section 7031 bars an unlicensed contractor from "collection of compensation for the performance of any act or contract where a license is required..." On appeal, Banis tried to bring in facts to show that the absolute bar of section 7031 did not apply. The court did not allow this.

A small legal lesson is in order. At the trial level, Serrano had filed a demurrer that was upheld by the court. A demurrer is a response to the complaint stating that even on those facts, there is no cause of action. This throws the case out of court. The trial court in this case, upheld the demurrer. The issue was whether an amendment would cure the defect and thus state a cause of action.

In July 2004, Banis filed a complaint to recover the unpaid balance on the contract, alleging seven causes of action. The first cause was a breach of contract action claiming that Banis entered into a contract with Serrano. Under the December 2001 contract, Banis was "to provide design labor, materials, equipment and services to be used and incorporated into the work of improvement." Thereafter, they entered into a series of additional agreements. Banis alleged that the agreed sum to be paid was over $1.7 million of which they have been paid approximately $1.5 million. The second cause of action was to foreclose on a $200,000 mechanic's lien filed against the property. The third through sixth causes of action alleged alternative theories for recovery of the unpaid balance. The seventh cause of action asserted that Banis had served a stop notice on Serrano and although there were funds to pay the claims, Serrano did not pay. Serrano filed a demurrer stating that Banis was not a licensed contractor and was therefore barred from seeking relief for amounts owed under the contract. In response, Banis stated that since the contract was for design work, no contractor's license was required. However, by its own pleading, the contract was for far more than merely design work. The trial court did not allow Banis to amend its pleading. The case was then brought before the appellate court.

The appellate court agreed that Banis was a "contractor" within the meaning of section 7026, since the complaint and the contract described work such as drawings for electrical and plumbing plans as well as coordination of architects and engineers. Significantly, the complaint in the first cause of action alleged that the more than $1.7 million of labor, services, equipment, and materials provided by the contractor were "used or consumed in" the project. Thus, Banis Restaurant Design, Inc. is classified as a contractor and not merely a material supplier. Since the contractor was not licensed, section 7031 barred the suit for compensation on the unpaid balance on the contract.

As to whether Banis could amend its pleading, the court reiterated that it would consider amendments that would cure the defect in the complaint that made it demurrable. However, Banis could not avoid the defects of its original complaint by filing an amended complaint that leaves out or directly contradicts facts alleged earlier.

The court said that such an amendment would directly contradict its earlier complaint. The court gave the following reasons: First, a mechanic's lien can only be filed when materials are physically incorporated into the structure therefore characterizing them as fixtures. By filing a mechanic's lien, Banis admitted that the materials are fixtures on the property. Second, Banis's services were more than incidental labor. The contract described work such as drawings for electrical and plumbing plans as well as coordination of architects and engineers. With these reasons, the court found that the exemption under section 7045 does not apply.

Although this case involved construction, and contractor related laws, the outcome of the case turned mainly on procedure. However, the case does lead to the fact that you should consult a competent attorney in your field should a dispute arise.