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(A
version of this article will appear in the California
Construction Law Reporter, published by the West Group.)
By James E. Acret
A
contractor recorded a mechanic's lien after building a residence.
The owner filed a complaint seeking an injunction to vacate
the mechanic's lien on the ground that the contractor was
unlicensed. The contractor released the original lien and
recorded a new one limited to the cost of work performed
before the license was suspended for lack of a license bond.
The owner applied for a preliminary injunction requiring
release of the second claim of lien on grounds that the
contractor was not licensed throughout the project.
The
contractor introduced evidence that it was licensed when
the contract was signed and was notified of suspension three
months from completion of a three-year job. (The suspension
had become effective four months earlier because of the
cancellation of the bond.) It took the contractor six months
to obtain a new bond, after which the license was retroactively
reinstated back to March 12, 2001, which left the contractor
unlicensed between August 27, 2000, and March 12, 2001.
The trial court refused to order the release, and the owner
appealed. The ruling was affirmed. Slatkin v. White,
102 Cal.App.4th 963, 126 Cal.Rptr.2d 54 (2002).
Business
and Professions Code §7031 requires a person acting
in the capacity of a contractor to allege proper licensure
at all times during the performance of the work. A contractor
may avoid the harshness of §7031 by establishing substantial
compliance under subdivision (e) of §7031, which permits
the court to determine substantial compliance if the person:
1) had been duly licensed as a contractor; 2) acted reasonably
and in good faith to maintain proper licensure; and 3) did
not know or reasonably should not have known of the nonlicensure.
Plaintiffs
did not contend that the contractor acted unreasonably or
in bad faith. (The issuance of the new license bond was
delayed by a heavy workload caused by the withdrawal of
several surety companies from the market.) So, the question
was whether subdivision (3) – did not know or reasonably
should not have known of the nonlicensure – could be satisfied.
The
application of subdivision (3) is uncertain as to time.
It is plausible to read the language to refer to the time
when the contract was signed or when construction was commenced.
The interpretation urged by plaintiffs – that it applies
at all times – would require a contractor to stop work
immediately or automatically lose the right to be compensated
both for work already performed and for work to be performed,
and this would be contrary to the best interests of the
both the contractor and the owner. It also would be contrary
to the legislative purpose to ameliorate the harshness of
§7031.
The
court held that the more sensible construction is that the
contractor does not necessarily lose the right to be compensated
simply because he or she performs additional work after
discovering the loss of licensure, so long as the contractor
did not have knowledge or notice of the loss before the
start of the job. Factors relevant to the contractor's right
to recover include the reason for which the license was
lost, the stage of construction at which the contractor
received actual or constructive notice of the loss, and
the expressed or apparent desires of the client or property
owner.
On
the record before it, the court could not reach a conclusive
determination whether the contractor substantially complied
although the limited facts available suggest that it did.
The issue, however, was whether the trial court abused its
discretion. The Court of Appeal held that it did not.
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To learn more about Thelen Reid's Construction and Government Contracts Department, click here. For more information about books and other legal materials written by James Acret, click here and enter "Acret" in the Search Products Field. To learn more about topics covered in this article, contact Paul Berning at (415) 369-7229 or at pwberning@thelen.com.
©2003 Thelen Reid Brown Raysman & Steiner LLP
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