A homeowner in California that contracted with a construction company to build a house filed suit for breach of contract and negligence, and violations of the state licensure requirements – seeking to recover sums it had paid to the contractor. The construction company filed a separate suit to enforce its mechanic lien and to recover unpaid sums under theories of breach of contract and quantum meruit for unjust enrichment in the event contract remedy were determined to be unavailable. The cases were consolidated and the trial court directed a verdict in favor of the homeowner based on the fact that because the construction company had lost its key employee who held a contractor’s license, the company itself was no longer licensed since corporate licensure is dependent upon employing a qualifying individual that holds a license.

Facts and Allegations

The construction company in question, JC Master Builders, Inc., depended for its license upon a licensed qualifying individual, by the name of Mr. Diani, that had left the employment of the company. Another individual (a Mr. Cridlebaugh) replaced Mr. Diani and he took primary responsibility for constructing the house. While the dispute arose when the Homeowners ordered the firm to stop construction due to a disagreement concerning billing, the case rested on whether the firm possessed a valid contractor’s license. The homeowner argued that since the there was no license qualifying individual working for the construction firm while the house was built, the firm itself was not qualified as a licensed contractor and therefore was not only barred from bringing suit against the homeowner but was also required by law to refund the homeowner for all payments previously made to the firm.

Consequences of working as an unlicensed contractor

Under California law, contractors must maintain a valid contractor’s license throughout the duration of the construction. When a construction firm employing the contractor seeks to obtain a valid license, it must qualify for such license through either a “responsible managing officer” or “responsible managing employee.” These people are referred to as “qualifiers.” If such a qualifier disassociates from the firm, the firm has 90 days to replace the qualifier, otherwise the firm’s license is suspended.

The construction firm, and thus, the new individual the performed the work, Mr. Cridlebuagh, were not qualified in this case to perform the work since the original qualifier was never replaced and there was no qualifier “actively engaged in its construction business.”

California law “bars a person from suing to recover compensation for any work he or she did under an agreement for services requiring a contractor’s license unless proper licensure was in place at all times during such contractual performance. “ Furthermore, the court states that under the law, “A person who utilizes the services of an unlicensed contractor may bring an action . . . to recover all compensation paid to the unlicensed contractor for performance of any act or contract.” These laws are designed to serve as deterrence to contractors working without a license. Additionally, contractors cannot offset or reduce the amount returned to the homeowner to account for the value to materials or services.

As explained by the court, “The licensing requirement and the penalties for violating that requirement are designed to protect the public from incompetent or dishonest providers of building and construction services.” Deterrence from violating the licensing requirements can best be realized, says the court, “by compelling violators to return all compensation received from providing their unlicensed services.” Even where the contractor may have honored its contract performed its services well, an unlicensed contractor is not entitled to be paid, and is not entitled to any offset for having provided good materials and work. The court says that “If such reductions for offset were allowed, deterrence of unlicensed work would be diminished.” White v. Harper, 178 Cal. App. 4th 506 (2009).

About the author: J. Kent Holland is a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is also founder and president of ConstructionRisk, LLC, a consulting firm providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report.