New California contractors that are "All Work and No Pay."
May, 2008
The Second District Court of Appeal for the State of California recently provided a lesson for newly incorporated contractors who have not yet received a contractor's license for the corporate entity. That lesson is, "DO NOT PERFORM ANY WORK WHATSOEVER IN PERFORMANCE OF AN ANTICIPATED CONTRACT UNTIL YOU HAVE A LICENSE IN HAND!"
The Court of Appeal in Great West Contractors, Inc., et al., v. WSS Industrial Construction, Inc. held that a subcontractor was statutorily barred pursuant to California Business & Professions Code § 7031 from recovery under its subcontract with its general contractor (Great West) because "it was not duly licensed at all times during the performance of the contract and could not demonstrate substantial compliance with state licensing requirements because the corporation never held a California contractor's license before it began work under the subcontract."
The subcontractor (WSS) argued that the work performed was not work for which a contractor's license was required and that even if a license was required, they substantially complied with the requirements of the license law. The Court of Appeal disagreed holding to the effect that the simple pre-contract ordering of materials "meant to be incorporated into the ultimate construction" is work for which a contractor's license is required. Interestingly, the work, specifically the ordering of anchor bolts for the steel work contemplated, was performed before the execution of the subcontract. However, the Court held § 7031 applies not only to formal agreements, but governs "acts" as well and so the timing of the execution of the contract was irrelevant. The important fact here was that the work "meant to be incorporated into the ultimate construction," among other work requiring a license, was performed before WSS, the corporation, received its license. The Court held that these pre-contract unlicensed "acts" constituted performance under the later executed subcontract, barring recovery for all post-contract work, as well. In effect, the simple act of ordering anchor bolts without a license barred WSS from receiving any compensation for its further construction work upon the project.
WSS asserted that it had "substantially complied" with the licensing requirements, the only exception to the harshness of the law. The Court rejected this assertion holding that WSS could not satisfy even the first requirement of the exception set forth by § 7031(e), because as a corporation applying for a license for the first time, WSS could not show that it "was previously licensed" in the State.
This case provides a warning to newly incorporated contractors who may have previously worked under a different form of ownership and believed they may have substantially complied with the statute for that reason. The President and RMO for WSS had held valid individual licenses in California and had previously qualified for licenses for a WSS Partnership and a predecessor partnership, and an application for the corporation naming him as the RMO was pending. WSS argued that it had substantially complied with the purpose of the statute to protect the public because of the previous licensed status of the partnership and current licensed status of its RMO and president. However, the Court held that it was irrelevant that WSS, the partnership, an unrelated entity, previously held a license or that the RMO held valid licenses at all times. The corporation itself never held a license before it performed its unlicensed "acts." Despite any good faith and competence of the RMO, or the partnership's prior license history, the statute barred the corporation from maintaining the action to recover under its contract. It is important to realize that this ruling may be applied to out-of-State contractors as well.