MW Erectors, Inc. v. Niederhauser Ornamental and Metal Works Co.,
30 Cal. Rptr. 3d 755 (2005)
The California Supreme Court has clarified the rules under California Business & Professions Code section 7031 regarding an unlicensed contractor’s ability to recover compensation for performance of work which requires a contractor’s license.
In MW Erectors, the Supreme Court held that section 7031 bars a contractor from recovering any compensation for work performed that would require a license unless the contractor was licensed at all times during the performance of the work. In so ruling, the Supreme Court reversed a prior decision of the Court of Appeal, which had held that in a situation where a contractor was licensed for some but not all of the time it was performing the work, it was not entitled to recover for work performed during the time it was not licensed, but was nonetheless entitled to recover for the work performed during the time it had a valid license.
In addition, the Supreme Court ruled that:
(i) Section 7031 does not allow a contractor who becomes licensed only during performance of a contract to recover for “acts” performed after becoming licensed (as opposed to performing an entire contract);
(ii) the substantial compliance exception of section 7031 is not available to a contractor unless the contractor was licensed at some time prior to beginning the work at issue, and
(iii) as long as the contractor was licensed at all times during performance of the work of the contract, the contractor is not barred from recovering solely because it was not licensed at the time the contract was executed.
In MW Erectors, a subcontractor sued a general contractor for monies allegedly owed to it for performance of two subcontracts for structural and ornamental steelwork. The subcontractor began work on the project on December 3, 1999, but did not obtain the contractor’s license required to perform certain portions of the work until December 21, 1999. The defendant general contractor contended that Section 7031 barred the subcontractor from recovering any amounts under the contract. The Court of Appeal ruled in favor of the subcontractor, and held that although the subcontractor could not recover for work performed during the period in which it was not licensed, it was entitled to recover for all work performed after it obtained the license on December 21.
The California Supreme Court reversed, holding that the subcontractor was not entitled to any recovery because it was not licensed at all times during performance of the work. The court relied on the plain language of section 7031, which provides that a contractor may not recover compensation for “the performance of any act or contract” requiring a license unless he or she was duly licensed “at all times during performance” of the contract. The court reasoned that allowing a contractor who was not licensed at all times during performance of the contract to recover would be contrary to the plain language of the statute, and was therefore prohibited.
The Supreme Court also rejected the subcontractor’s contention that it was entitled to recover for individual “acts” performed after becoming licensed, as opposed to recovering for performance of an entire contract. The subcontractor contended that because the statute refers to “the performance of any act or contract,” a contractor was entitled to recover for performance of either an “act” or a “contract” requiring a license, so long as the contractor was licensed at all times while performing either the particular “act” or the “contract.” The court first noted that interpreting the statute in that way would render the statutory language prohibiting recovery unless the contractor was licensed at all times during performance of the contract meaningless, and was therefore unacceptable. Second, and contrary to the subcontractor’s assertion, the court held that by inserting the word “act,” the Legislature had not intended to expand the ways in which an unlicensed contractor could recover. On the contrary, the court ruled, the use of “act” was intended to close a potential loophole in the statute, and to prevent a contractor from evading the bar of section 7031 by performing work without a formal contract, and then seeking to recover on a quantum meruit basis for “acts” performed rather than for a “contract” performed.
With respect to the substantial compliance doctrine, the subcontractor asserted that it was in substantial compliance with the licensing requirements because it became licensed before the work was completed. The court rejected this contention, again relying on the plain language of the statute. Under the version of section 7031(d) in effect at the time of the contract at issue (the statute has since been amended), a contractor could show substantial compliance with the licensing requirements if, among other things, the contractor “had been licensed . . . prior to the performance of the act or contract.” The court held that because the subcontractor had not been licensed prior to beginning work under contract, but became licensed only after beginning the work, the substantial performance exception did not apply. The court also noted that under the current version of the substantial compliance exception, which is found in section 7031(e), the contractor is also required to have been licensed at some time prior to beginning the work.
Finally, the Supreme Court ruled that Section 7031 does not require that a contractor be licensed at the time it signs the contract, so long as it is licensed at all times during performance of the actual work under the contract. The court ruled that signing the contract is an act which brings the contract into existence; it is not the performance of the contract. Therefore, the fact that a contractor is not licensed when the contract is signed does not preclude it from recovering.
For more information please contact Robert Sturgeon. Robert Sturgeon is a senior attorney in the Construction, Environmental, Real Estate and Land Use Litigation practice group in the firm’s Los Angeles office.