New Case Law Alert: Licensed General Contractors Cannot Sue Owners to Recover Funds for Work Performed by An Unlicensed Subcontractor
Posted by GibbsGiden Under California Law
The opinion in Kim v. TWA Construction, Inc. (2022 Cal. App. LEXIS 412) issued by the Court of Appeal of California Sixth Appellate District, on May 13, 2022, makes it clear that a properly licensed general contractor cannot bring an action for compensation from an owner for work performed by an unlicensed subcontractor.
California licensing law has long made explicit that an unlicensed contractor cannot bring or maintain any action to collect or recover compensation for work that contractor performed unless they were duly licensed at all times during the performance of that work. This new ruling extends the scope of this restriction to licensed contractors who hired unlicensed subcontractors.
The Underlying Dispute
The case involved a dispute between property owners and their former general contractor and its principal (collectively “TWA”). The property owners hired TWA to construct a home, and during the early stages of the project, TWA hired an unlicensed subcontractor to perform tree trimming services and to remove a large eucalyptus tree. The subcontractor partially removed the eucalyptus tree, but was stopped by a neighbor, and it was discovered that the tree was partly located on the neighbor’s property. The neighbor brought suit against the property owners, and eventually TWA, for the damage. The property owners subsequently filed a cross-complaint against TWA, and TWA in turn filed a cross-complaint against the property owners.
Where Does Licensing Come In?
Prior to trial, the property owners filed a motion in limine to address the licensure status of the tree subcontractor. The relevant licensing statute, Business and Professions Code § 7031(a), stated in pertinent part:
[N]o person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract, regardless of the merits of the cause of action brought by the person.
The property owners argued that TWA chose to hire an unlicensed subcontractor to remove the eucalyptus, which required a specialty tree service license, and that TWA should disgorge the $10,000 the property owners had paid TWA for such tree work as a result. The trial court granted the motion, holding that BPC § 7031(a) applied even where a general contractor seeks compensation for services of a purported unlicensed subcontractor and barred TWA from collecting compensation for services performed by the tree subcontractor if the subcontractor was unlicensed at the relevant time.
After jury trial, the court entered judgment in favor of the property owners and ordered TWA to disgorge the $10,000 paid for the tree work performed by TWA’s unlicensed subcontractor. On appeal, TWA argued that the trial court erred in its interpretation of the relevant licensing statutes.
The Policy Behind BPC § 7031(a)
The appellate court addressed in great detail the extreme public policy concerns that led to the codification of BPC § 7031(a). The purpose of the contractor’s licensing law is to protect the public from incompetent and dishonest contractors. The laws are designed to provide minimal assurances that all persons offering contracting services possess the required skill and character, are aware of the applicable local laws and codes, and know the basis of administering a contracting business. BPC § 7031(a) is designed to withhold judicial aid from those who seek payment for unlicensed work by providing a general rule that, regardless of the merits of the claim, a contractor may not maintain any action, legal or equitable, to recover compensation for “the performance of any act or contract” unless he or she was duly licensed at all times during the performance of that act or contract. While it imposes strict and harsh penalties for a contractor’s failure to maintain proper licensure, the statutory intent of BPC § 7031(a) is to discourage and deter unlicensed persons from preforming contracting work.
The Appellate Court’s Statutory Analysis
Looking first to the express words of the statute, the Appellate Court observed that while the plain meaning BPC § 7031(a) was unambiguous, its application to the factual scenario at hand was not immediately clear. On its face, the statute bars a contractor from bringing an action for compensation for its own unlicensed performance of an act or contract where a license is required. Whether that bar extends to a licensed contractor for his use of an unlicensed subcontractor is not immediately apparent from the text of BPC § 7031(a).
After considering the definition of contractor in BPC § 7026 (which is defined as including both “subcontractor and specialty contractor,” and a person does the work “himself or herself or by or through others”), the Appellate Court found that taken together, BPC §§ 7026 and 7031(a) subject subcontractors to the same rules as contractors, prohibiting a subcontractor from taking legal action to recover compensation from the owner or general contractor for unlicensed work performed by the subcontractor. To otherwise narrowly construe the statute and 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 BPC § 7031(a).
The Appellate Court concluded that it would be unreasonable to permit TWA to collect compensation for work performed by an unlicensed subcontractor when all facets of the licensing laws are directed at ensuring licensing compliance. Thus, in no uncertain terms, the Court of Appeal held that “[BPC § 7031(a)] bars even a licensed general contractor in California from bringing an action for compensation for an act or contract performed by an unlicensed subcontractor where a license is required.”
How Does This Interact with Disgorgement Claims under BPC § 7031(b)?
In its decision, the Appellate Court referred to BPC § 7031(a) as “the shield” and BPC § 7031(b) as “the sword” of the Contractors State License Law, as both subsections represent ways in which the laws reinforce licensing requirements and penalize violations. BPC § 7031(b) provides, in relevant part, that:
[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.
The statute of limitations for a disgorgement claim was recently confirmed to be a one-year period, which begins running upon the completion or cessation of the performance of the act or contract at issue and is not subject to tolling under the delayed discovery rule. See Eisenberg Village etc. v. Suffolk Construction Co., Inc. (2020) 53 Cal. App. 5th 1201; San Francisco CDC LLC v. Webcor Construction L.P. (2021) 62 Cal.App.5th 266.
Under BPC § 7031(b), parties who hire an unlicensed contractor are entitled to reimbursement for compensation paid to an unlicensed contractor even if they knew the contractor was unlicensed. Importantly though, similar to BPC § 7031(a), it is not readily apparent from the statutory language who the disgorgement claim may be brought against – whether it can be alleged only against an unlicensed contractor, or like in Kim, against a general contractor who hired an unlicensed subcontractor. Case law analyzing this statute thus far appears to be focused only on recovery from and punishment of the unlicensed contractor. See White v. Cridlebaugh (2009) 178 Cal.App.4th 506, 520-21(“unlicensed contractors are required to return all compensation received without reductions or offsets for the value of material or services provided.”); Eisenberg Village etc. v. Suffolk Construction Co., Inc. (2020) 53 Cal.App.5th 1201, 1213 (“the disgorgement mandated by section 7031(b) is not designed to compensate the plaintiff for any harm, but instead is intended to punish the unlicensed contractor.”) However, similar to the analysis in Kim, to narrowly construe the statute would enable a contractor to retain compensation for the performance of unlicensed work, simply because the work was accomplished by hiring a subcontractor, and circumvent the public policy and purpose of BPC § 7031.
The Appellate Court in Kim did not make an express ruling regarding whether the property owners could disgorge amounts paid to TWA for work performed by the unlicensed subcontractor under BPC § 7031(b). At the trial level, this was in fact what happened, as TWA was ordered to disgorge the $10,000 it was paid by the property owners for work performed by the unlicensed subcontractor. However, we are unaware of any legal authority expressly supporting disgorgement from a licensed general contractor for payments for work performed by an unlicensed subcontractor. In light of the Appellate Court’s analysis, such a conclusion appears to be the logical next step, and it is only a matter of time when this issue is addressed at the appellate level.
For more information contact:
Senior Associate Michele Ellison is spearheading the newest Gibbs Giden office in San Jose, where she practices and represents clients in the areas of business, commercial and construction litigation. Ms. Ellison has experience representing general contractors, subcontractors, material suppliers and public agencies in a wide range of business, commercial and construction negotiations and disputes.
Senior Associate Samantha Riggen practices in Gibbs Giden’s Westlake Village office where she represents clients in all areas of business and commercial matters with an emphasis on construction litigation. Her construction practice includes the prosecution and defense of claims arising out of both public and private projects. She is experienced in contractual disputes, mechanic’s liens, and stop payment notice and bond claims.
The content contained herein is published online by Gibbs Giden Locher Turner Senet & Wittbrodt LLP (“Gibbs Giden”) for informational purposes only, may not reflect the most current legal developments, verdicts or settlements, and does not constitute legal advice. Do not act on the information contained herein without seeking the advice of licensed counsel.
This publication may not be reproduced or used in whole or in part without written consent of the firm and the attorneys involved.
Copyright 2022 Gibbs Giden Locher Turner Senet & Wittbrodt LLP ©