Contractor Licensing

Law Talk

I have been getting a ton of inquiries about various issues that have just reared their ugly head. The questions come from a case known as MW Erectors. It essentially stated that you would have to be licensed at all times during construction in order to collect. MW Erectors was unlicensed for only a few days, but not at all times during construction. MW Erectors was licensed for approximately one year. Although at first blush one might believe this protects the public, it could have a Draconian effect for an inadvertent mistake by an innocent victim.

However, there is a saving paragraph for someone other than the person who is in the same boat as MW Erectors. That is Business and Professions Code section 7031 (e), which essentially states that there is a substantial compliance doctrine, and that if you fall within that substantial compliance doctrine, you may not have the drastic effect of MW Erectors.

The substantial compliance doctrine, among other things, states that the court may determine there has been substantial compliance with the licensing requirements 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, (3) did not know or reasonably should not have known that he or she was not duly licensed when performance of the act or contract commenced, and (4) acted promptly and in good faith to reinstate his or her license upon learning it was invalid.

There is another provision that is also very problematic. That is Business and Professions Code section 7031(b), which states that a person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction to recover compensation paid to the unlicensed contractor for the work that the unlicensed contractor did. As you can see, this is another tough issue in that there may be many reasons for an inadvertent non-license situation. We know of a case where a long time licensee went on an around the world cruise and did not renew the company's license. That created real havoc in that the licensee had already received an arbitration award in excess of a million dollars. The case never was confirmed by a court in that it was settled.

Another example came to me from my friend, David Kalb, of Capitol Services. His example is as follows:

"Or, as I have addressed with the Board, a contractor sends in his renewal 3-4 weeks ahead of the due date (i.e March 31); it is rejected and sent back to the contractor for corrections (on March 30th); it is received back by the contractor on April 1; by the time it is sent back to the Board, they've had an expired license for 5 days-- which will forever be on their permanent record. Jump ahead two years? Were they unlicensed and -- if so -- open to "disgorgement" on every contract they were working on?"

However, the same savings grace in Business and Professions Code section 7031(e) regarding substantial compliance explained above is applicable here. That is to say that the substantial compliance doctrine may apply in this case as well.

We did not like the harshness of the MW Erectors case. Indeed, we filed an Amicus Brief in opposition citing other options. As you can tell, we did not prevail. We believe the law is overly harsh.