Construction Law Update

March 2008

Life in the Fast Lane: Contracting Without a Proper License

California's Contractors' State License Law is strictly enforced. Even so, we seem to be seeing ever-increasing numbers of cases involving unlicensed or improperly licensed contractors. Whether you are a contractor or project owner, it is important to understand the general outline of the licensing rules.

1.    Contractors and Subcontractors Must be Licensed

No surprise here. A contractor or subcontractor must be licensed to perform any contract valued greater than $500. See Business and Professions Code (“B&P Code”) sections 7026, 7028, 7048. Without a license, criminal penalties, sanctions, and civil penalties can result.

It is equally important that a contractor keep its license in good standing. For example, if worker's compensation coverage lapses or is canceled, the contractor's license is automatically suspended. Accordingly, it is important for contractors to monitor their license status on a regular basis, by visiting the Contractors' State License Board (“CSLB”) website: http://www2.cslb.ca.gov/General-Information/interactive-tools/check-a-license/Name+Request.asp.

2.    Classifications and Specialties — Getting it Right is Critical

The real trick is in determining what license is needed for each contractor or subcontractor. California law has three license classifications — General Engineering Contractor (Class A), General Contractor (Class B), and Specialty Contractor (Class C). The Class A License permits the licensee to perform “fixed works requiring specialized engineering knowledge and skill,” including but not limited to irrigation, grading, paving, dam, airport, and bridge work.

A Class B License is what most people think of as the traditional “contractor,” and is defined generally as a contractor whose primary business involves “any structure built, being built, or to be built, for the support, shelter, and enclosure of,” people or property.

A Class C license involves the use of specialized building trades or crafts, and is typically issued to subcontractors. Currently there are forty-one separate Class C license specialties, ranging from framing, electrical, landscaping, and drywall, to ornamental metals, low-voltage systems, water conditioning, and hazardous substance removal.

a.   What type of work can a Class A licensee perform?

There is some confusion among contractors about whether overlap exists between the Class A and B licenses. Some contractors and owners believe that a Class A License is like a Class B License, with the addition of the ability to perform fixed works. This is not necessarily so. Though no case has clearly defined the distinction between the two types of licenses, our contacts at the CSLB interpret the law to read that a Class A Licensee cannot construct buildings because that is the province of a Class B Licensee. A Class B Licensee could, however, construct a fixed work by taking a contract for the construction of a building that also included a fixed work and subcontracting the fixed work to a Class A Licensee. These distinctions are important because not being properly licensed implicates the provisions of B&P Code section 7031 which are described below.

b.   Is it necessary to have the proper specialty license?

For subcontractors, having the correct specialty license is likewise critical. Having a general contractor's license, or an improper specialty license, when performing work requiring a specialty license could be detrimental. For example, a C-42 Sheet Metal contractor may not perform “Ornamental Metals” work without the C-23 Ornamental Metals license. Without the correct specialty license, a subcontractor may suffer sanctions by the CSLB, or the consequences of B&P Code section 7031, discussed below. For a full list of available specialty licenses, see http://www.cslb.ca.gov/General-Information/library/licensing-classifications.asp.

3.    Why proper licensure is critical — Business & Professions Code section 7031

If a contractor or subcontractor does not possess the correct license, the consequences can be extreme. Initially, performing work without the proper license can result in sanctions and penalties from the CSLB. B&P Code section 7117.6. In some cases, contracting to perform work without a license can result in criminal charges. B&P Code section 7028.

There are also very important non-criminal consequences. B&P Code section 7031 provides that if the contractor is not licensed at all times during performance of the contract, then:

(1)   The contractor may not bring or maintain any action for payment. Improper licensure is a complete defense. This means that the owner or higher-tier contractor may refuse to pay for work performed, and there is nothing the improperly licensed contractor can legally do about it.

(2)   Potentially more devastating, the owner or higher-tier contractor may sue to force the improperly licensed contractor to pay back any amounts the contractor received for work performed while improperly licensed.

The State legislature has made a conscious decision to impose harsh punishment on improperly licensed contractors in order to “encourage” contractors to be properly licensed. In short, an inappropriately licensed contractor runs the risk of never being paid for work performed, together with having to pay back all funds received for the unlicensed work. Moreover, the contractor must be properly licensed during the entire project or it has no right to bring an action for payment. Due to the potential consequences, it is far better to be overly cautious than not cautious enough.

4.    Substantial Compliance — Saving Grace or False Hope?

The one exception to the penalties of Section 7031 is the doctrine of “substantial compliance.” The doctrine has limited applicability, and does not apply if the contractor was never licensed.

To fall within the doctrine, the improperly licensed contractor must prove that it: (1) had been previously licensed prior to the contract in question; (2) acted reasonably and in good faith to maintain the license, (3) did not know that it was not duly licensed when the contract commenced, and (4) acted promptly to fix the problem once aware of the problem. Whether the doctrine applies is fact-specific to each case, and it should not be relied upon as a replacement for proper licensure.

 

© 2008 All rights reserved. Please note that the information contained herein is not intended to provide specific legal advice. You should consult with an attorney and not rely on any information contained herein regarding your specific situation.