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Thelen Reid Brown Raysman & Steiner LLP
To
protect property owners from incompetent and dishonest contractors,
California's licensing laws are designed to ensure that
contractors are properly licensed with California's Contractors
State License Board. California Business and Professions
Code §7031 provides a strong incentive. The statute
prohibtis a contractor from bringing a lawsuit for payment
or other compensation for services provided if the contractor
was not properly licensed at all times, regardless of the
merits of the contractor's claim.
A
contractor that is in "substantial compliance"
with the licensing requirements is shielded from the harshness
of this rule by §7031 (d). Under this exception, the
contractor must convince the court that: (1) the contractor
was duly licensed in California as a contractor before entering
into the construction contract or providing the work and
services; (2) the contractor acted reasonably and in good
faith to maintain the proper license; and (3) the contractor
either did not know or should not have reasonably known
that the contractor was not duly licensed. The California
Court of Appeal recently handed down a decision illustrating
what does not qualify as substantial compliance. Pacific
Custom Pools, Inc. v. Turner Const. Co., 79 Cal.App.4th
1254 (2000).
The
dispute in Pacific Custom Pools arose over construction
of a theme park ride. The owner of the theme park contracted
with Turner Construction Company to build a ride for the
park. Turner, as general contractor, negotiated a subcontract
with defendant Pacific Custom Pools, Inc., which entered
into second-tier contracts with the two plaintiffs, Harrington
Industrial Plastics and Pacific Engineered Projects, for
materials and supplies for the project.
Plaintiffs
brought suit against Pacific, Turner and the owner for breach
of contract and foreclosure of mechanic's liens, each claiming
it was unpaid under its contract. Turner filed a cross-complaint
against Pacific for indemnity while Pacific filed a cross-complaint
against the owner and Turner for damages arising from alleged
misrepresentations.
Pacific
worked on the project for 14 months, from April 1995 to
June 1996. From October 12, 1995, through March 14, 1996,
Pacific's contractor's license was suspended. Furthermore,
Pacific's license expired on January 31, 1996, and Pacific
did not renew it until May 5, 1996. Thus, Pacific operated
without a valid license for approximately seven months of
the project.
Turner
and the owner moved for summary judgment on Pacific's cross-complaint
on the grounds that Pacific was unlicensed for a period
of time during its contract and thus was barred by Business
and Professions Code §7031 from maintaining an action
for work performed. The parties disagreed over whether or
not Pacific acted reasonably and in good faith to maintain
its license and whether Pacific knew or reasonably should
have known that is was unlicensed. The trial granted the
summary judgment, and Pacific appealed.
The
Court of Appeal affirmed. In opposing summary judgment,
Pacific had submitted a declaration from its president in
an effort to prove that Pacific substantially complied with
the licensing laws. According to the declaration, the Contractors
State License Board suspended Pacific's license on October
12, 1995, because Pacific failed to notify it in writing
of an unsatisfied judgment within 90 days of entry of the
judgment. According to Pacific's president, before 1994,
Pacific had a dispute with a supplier. Pacific posted a
bond for the amount owed, entered into a settlement and
made payments to the supplier. Pacific's president stated
he was unaware that the bonding company at some point thereafter
filed for bankruptcy and that a judgment had been entered
against Pacific. Upon learning of the license suspension,
Pacific satisfied the remaining debt owed and submitted
proof to CSLB. CSLB then lifted the suspension on Pacific's
license.
However,
the trial court found that Pacific did not substantially
comply with licensing requirements because: (1) Pacific
was aware of its license suspension and (2) Pacific did
not act reasonably to maintain its license. The Court of
Appeal agreed, relying on CSLB records submitted to the
trial court by Turner and the owner. The records showed
that Pacific was aware of its license suspension in November
1997. CSLB had sent a license renewal form to Pacific on
November 27, 1995, showing that: (1) Pacific's license would
expire on January 31, 1996; (2) Pacific's license was under
suspension; and (3) a license could not be renewed while
under suspension. Second, Pacific knew shortly after it
submitted its license renewal application in February that
its application was untimely. CSLB records showed that Pacific
filed a renewal application on February 23, 1996, whereupon
CSLB informed Pacific that the renewal was untimely. Third,
CSLB told Pacific on April 22, 1996, that its license renewal
was denied because Pacific presented CSLB with a dishonored
check.
The
appellate court also rejected Pacific's argument that its
claims were not an effort to obtain "compensation for
performance" but non-contractual delay costs and added
materials and services that fell outside the ambit of §7031.
The court pointed out that in its causes of action for quantum
meruit (the reasonable value of goods and services provided)
and unjust enrichment, Pacific included its contract with
Turner in its allegations. In addition, Pacific alleged
that the owner oversaw the services for which Pacific sought
recovery. Thus, the court found, Pacific was seeking additional
compensation arising from its contractual relationships
with Turner and owner. Citing prior cases, the Court of
Appeal affirmed that the courts will not permit a contractor
to avoid §7031 by couching a claim for compensation
as a claim for something else, such as a claim for fraud
or reimbursement for lost profits, or as an action to foreclose
a mechanic's lien or to enforce a vendor's lien.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-369-7229 or at pwberning@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2000
Thelen Reid Brown Raysman & Steiner LLP
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