General contractors and subcontractors must pay close attention to their licensure status with the Contractors State License Board. Even seemingly trivial lapses in a license could nonetheless make the unsuspecting contractor liable for millions of dollars in damages.
California has an intentionally punitive licensing statute when it comes to contractors. To promote compliance with the licensing statutes and to prevent fly-by-night, unlicensed contractors from taking advantage of consumers, California's Contractor's License Law ("CLL") requires that a contractor be licensed at the start of any job and throughout that job.
In the event of a lawsuit regarding any aspect of the contractor's work, including payment for work, it is a contractor's burden to prove that it was licensed at the start of and during the entirety of a project. An aggrieved builder or owner can ask for an evidentiary hearing at the outset of trial to establish whether the contractor has met the burden of proving full licensure. The contractor must, at a minimum, produce a certified copy of its licensing history showing compliance with the CLL during the project. Failure to meet this burden bars any affirmative recovery by the contractor.
The Legislature has taken steps to make the licensure requirement more onerous over the past several decades. Prior to 1989, an unlicensed contractor could seek relief from the license requirement during litigation by arguing that it "substantially complied" with the licensing statute, and that any non-licensure that occurred was immaterial or short in time. Beginning in 1989, the Legislature began to remove this broad common law exception, and replaced it with a narrow statutory exception that requires the contractor to be licensed at the start of the job, maintain licensure throughout, and take reasonable steps to ensure licensure throughout. Most importantly, the entity which contracts to perform the project, such as a corporation, LLC or partnership, must be duly licensed for all periods of the project. Even when a Responsible Managing Agent or Partner of the entity is licensed, if the entity itself was not licensed, it is not considered substantial compliance.
Unresolved judgment liens, lapses in bond payments, and other events which trigger automatic license suspension under the CLL are now sufficient grounds for a court to find that the contractor was unlicensed, regardless of whether the contractor takes immediate steps to address the problem and reinstate the license. In some instances, the mere failure to timely pay the biennial license renewal fee can be sufficient grounds to find non-licensure.
In 2003, the Legislature sought to further encourage compliance with the CLL by expanding the law to allow builders and homeowners to seek full "disgorgement" of any money paid to an unlicensed contractor during a construction project. Thus, the builder or homeowner can seek a full refund of any construction fees, materials costs, or even money paid to other subcontractors, based solely upon the contractor's failure to maintain its license at the beginning of and throughout the project. Under the law, a homeowner can receive a fully-completed, high quality home at absolutely no cost, if, at the conclusion of the project, the homeowner determines that the general contractor was unlicensed at any point during the project and then sues to disgorge the contract payments.
There are few defenses to claims against contractors based on non-licensure. A defense of set-off for unpaid amounts owed to the contractor was recognized by courts under prior versions of the law, but the set-off defense has been called into question given the recent, more punitive changes to the CLL. It is unclear whether a set-off defense is incompatible with the recently-enacted disgorgement remedy. At least one California court of appeal has held that the set-off defense is no longer available.
Finally, recent court cases have highlighted how even unknown technical violations of aspects of the CLL can render a contractor unlicensed and unable to recover. In one case, a contractor who failed to procure adequate worker's compensation insurance for the number of employees on its jobsite was later deemed by a court to have had its license automatically suspended. Thus, the contractor was found to have been non-licensed for the entirety of the project, even though the contractor received no notice of the license suspension, and the issue of the adequacy of the worker's compensation insurance and its effect on the contractor's license was not raised until well after completion of the project and the commencement of litigation.
Given the current environment and the stated public policy in favor of consumers, contractors should exercise the utmost care in maintaining their licenses. If a license unknowingly lapses, a contractor should seek to have its license retroactively reinstated when it corrects the lapse and pays the renewal. Retroactive reinstatement is not automatic and must be specially requested; such a request must be made no later than 30 days after the date of lapse.
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