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Contractors Unlicensed at Any Time During Performance of Work Cannot Recover Any Compensation, California Supreme Court Rules
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March 20, 2006
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By John Foust
Thelen Reid Brown Raysman & Steiner LLP
The California Supreme Court has decided a major case involving the contractor's licensing law. The case involved Business and Professions Code §7031, which provides that a contractor may not sue to recover compensation unless the contractor was duly licensed "at all times during the performance of [the] act or contract." Lower courts had disagreed over whether the statute would allow a contractor that was unlicensed during part of a job to recover compensation for the portion of work that it performed while validly licensed. The California Supreme Court resolved the issue by holding that the contractor could not recover unless it was licensed at all times during the project. MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Company, Inc., 36 Cal.4th 412 (2005).
The case involved a construction of a hotel. Niederhauser was the steel subcontractor and entered into two second-tier subcontracts with MW Erectors for structural and ornamental steel work. At the time MW Erectors entered into the subcontracts, it was not licensed to perform the work. About three weeks after beginning work, MW Erectors obtained its Class C-51 structural steel license.
After commercial disputes arose, MW Erectors brought a claim against Niederhauser for approximately $1.3 million in unpaid compensation. Niederhauser raised the licensing law as a defense to the claim, arguing that MW Erectors should be barred from recovering compensation because it was not licensed at all times during its performance of work on the project. The trial court agreed and granted summary judgment against MW Erectors based on the contractor's licensing law.
The Court of Appeals reversed, holding that MW Erectors could recover compensation for the portion of work that it had performed after becoming licensed. The court's ruling was based on its interpretation of §7031, which provides that the contractor must be licensed "at all times during the performance of [the] act or contract." The Court of Appeals believed the phrase "act or contract" allows contractors to recover compensation for specific "acts" that were performed during the time the contractor was duly licensed. The court stated any other interpretation would overlook the word "act" and violate the rule that statutes should be interpreted in a way that avoids any word being made redundant or superfluous.
The California Supreme Court reviewed the decision and reversed the Court of Appeals. The Supreme Court held that §7031 requires that a contractor be validly licensed "at all times" during performance of the project in order to recover compensation for any of the work performed on the project. The court based its holding on the plain language of the statute, explaining that the phase "at all times" conveys an "obvious intent to impose a stiff all-or-nothing legislative penalty for unlicensed work by specifying that the contractor be barred from all recovery for such an 'act or contract' if unlicensed at any time while performing it."
The Supreme Court specifically rejected the contention that the phrase "act or contract" was intended to allow a contractor to recover for work that it performed while licensed even though the contractor may not have been licensed throughout performance of the contract. To the contrary, the court explained, by using the phase "act or contract" the legislature was extending - not limiting - the statutory prohibition against unlicensed contracting to cover non-contractual work. In other words, the legislature used the phase "act or contract" so that a contractor would be prohibited from recovering compensation in quantum meruit for work that was performed outside a contract. The court noted that this interpretation is more consistent with the harshness of the statute and the strict manner in which it has been interpreted by the California courts.
Besides the main holding, the Supreme Court also made two other significant holdings. One is that the licensing law does not require the contractor to be licensed at the time of entering into the contract so long as the contractor is fully licensed at the time of commencing performance of work and remains so throughout the project. The other holding is that the doctrine of "substantial compliance," which is a special statutory defense to the licensing law's prohibition against recovering compensation for unlicensed work, is not available to any contractor that was not duly licensed at the time of commencing performance of work on the project.
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For more information about the issues covered in this report, please contact John A. Foust in our San Francisco office at 415-369-7205 or at jfoust@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2006 Thelen Reid Brown Raysman & Steiner LLP
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