Where a contractor executed a contract before having its license and then obtained the license shortly after performance began, the contractor forfeited all right to payment for either the work performed before licensure or the work performed after licensure.  Under a second contract with the same contractor for different work on the project, the contractor also had no license when it executed the contract but it obtained its license before beginning to perform any of its work under that contract.  The court held that the contract was not null and void merely because the contractor did not have its contract as of the date of signing the contract, and that the contractor was therefore entitled to argue its right to payment for the work performed under that contract.

In MW Erectors, Inc. v. Niederhauser Ornamental and Metal Works Company, Inc. (S123238), the Supreme Court of California,  addressed the applicability of  the Contractors’ State License Law (CSLL; Bus. & Prof. Code, § 7000 et seq.).  That statute imposes strict and harsh penalties for a contractor’s failure to maintain proper licensure.  Among other things, the CSLL states a general rule that, regardless of the merits of the claim, a contractor may not maintain any action to recover compensation for “the performance of any act or contract” unless he or she was duly licensed “at all times during the performance of that act or contract.”  (§ 7031, subd. (a) (section 7031(a)), italics added.)

The court explained that earlier case law softened the severity of this scheme by allowing contractors, though technically unlicensed at the time of performance, to show they had substantially complied with licensure requirements.  But, says, the court, the CSLL has since limited the availability of the substantial compliance exception by specifying that “[t]he judicial doctrine of substantial compliance shall not apply” unless the contractor “had been duly licensed as a contractor in this state prior to the performance of the act or contract” for which licensure was required.

The dispute in question arises out of hotel project being built for Disney Corporation by Turner Construction Company.  Turner contracted with defendant Niederhauser Ornamental and Metal Works Company, Inc. (Niederhauser) to perform specialized metal work on the project, and Niederhauser, in turn, awarded two subcontracts to MW Erectors, Inc. (MW).

MW began work under the structural contract on or before the date it signed the contract, but did not obtain a C-51 structural steel contractor’s license (see Cal. Code Regs., tit. 16, § 832.51) until about three weeks later. Work on the ornamental contract began in early January 2000, and by the time this work began MW had obtained the C-51 license.  An important side issue in the case was whether the fact that MW didn’t obtain a separate license for performing ornamental work was a bar to recovery.

MW subsequently sued Niederhauser seeking amounts allegedly due in the amount of $955,553 for work under the structural contract and $366,694 for work under the ornamental contract.  Niederhauser moved for summary judgment, alleging that MW’s claim was barred under section 7031(a), because MW had not been properly licensed at all times during the performance of its contracts.  Niederhauser asserted that MW had no C-51 license when it began performance of the structural steel contract.  Niederhauser also averred that MW could not demonstrate its substantial compliance with the C-51 license requirement because it had never held a California contractor’s license before beginning work under the contracts in December 1999.

Niederhauser also argued that both contracts were illegal, void, and unenforceable ab initio because MW was unlicensed when they were executed. The lower Court of Appeal had held that the contracts were not void ab initio because of MW’s unlicensed status when they were executed.  Instead, said the appeal court, MW’s right to recover depended on its licensure during its performance of the contracts.  It held that MW could not recover for work it performed under the agreements during the relatively short time before it had secured either a license, but that MW could obtain compensation for every individual act it performed under its contracts after all necessary licensure was in place.

Niederhauser sought review, urging that section 7031(a) required due licensure at all times during performance of a contract, and that both contracts were void ab initio because MW was not licensed when they were executed.  The Supreme Court reviewed the statute at length, comparing it to an earlier version and also discussing numerous other court decisions that have applied the statute in different situations.

The essential conclusions of the Supreme Court were these:  (1)  Section 7031(a) 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;  (2)  Section 7031(a) does not allow a contractor who was unlicensed at any time during contractual performance to recover compensation for any individual acts performed while he or she was duly licensed;  (3)  a contractor who had not been duly licensed at some time before beginning performance under the contract may not assert protection under the substantial compliance exception to the strict enforcement of the statute; and  (4)  If a contractor is fully licensed at all times during contractual performance,  the contractor is not barred from recovering compensation for the work solely because he or she was unlicensed when the contract was executed.

The court stated that the Legislature’s obvious intent was to impose a stiff all-or-nothing penalty for unlicensed work by specifying that a contractor is barred from all recovery for such an “act or contract” if unlicensed at any time while performing it.  “This all-or-nothing philosophy is directly at odds with the premise that contractors with lapses in licensure may nonetheless recover partial compensation by narrowly segmenting the licensed and unlicensed portions of their performance.”

The statutory language specifies that due licensure must have existed at some time “prior to” performance, and the court said that language cannot be squared with the notion that the contractor could first become licensed at some time during performance.

The court thus held that: “Because MW was not duly licensed “at all times” during performance of the structural contract (§ 7031(a)), and cannot alternatively establish its substantial compliance with the licensure requirements in that it had never held a valid California contractor’s license “prior to” beginning performance… MW cannot sue to recover any compensation for work performed under that contract.  Insofar as related to this portion of MW’s complaint, the summary judgment entered by the trial court was proper.   On the separate issue of the validity of the contract for the ornamental metal work which was executed by MW before it had its license, the court affirmed the lower appeal court decision which had held that since MW had a contract prior to performing any of the work under that contract, it could present its case for compensation, and the contract was not rendered null and void solely because the contractor didn’t have a license as of the date it signed the contract.

About the author: Article written by J. Kent Holland, Jr.,  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 founder and president of a consulting firm, ConstructionRisk, LLC, 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, Vol. 7, No. 6 (Oct 2005).

Copyright 2005, ConstructionRIsk.com, LLC