California Court Rules That a Licensed Contractor Using An Unlicensed Subcontractor Cannot Recover Compensation for the Unlicensed Work if There is a Dispute

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By: William F. Bresee, Esq.

On May 13, 2022, in a matter of first impression, the California Court of Appeal (Sixth Appellate District) ruled that a general contractor who engages an unlicensed subcontractor cannot, if a dispute arises as to that unlicensed work, recover compensation for the subcontractor’s work through the courts and has to return to the party engaging it all compensation paid for the unlicensed work. The ruling expands the reach of California Business & Professions Code Section 7031, a contractor licensing statute, which bars all actions by an unlicensed contractor who seeks compensation for his or her unlicensed contractor work and permits a person who engages an unlicensed contractor to bring a legal action to have the unlicensed contractor disgorge all payments for the performance of the unlicensed work. Kim v. TWA Construction, Inc. (May 13, 2022).

California Business & Professions Code Section 7031 reads in pertinent part, “(a) [Except in specified cases,] no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that they were a duly licensed contractor at all times during the performance of that act or contract regardless of the merits of the cause of action brought by the person.”

Sally Kim and Dai Truong engaged TWA Construction, Inc. and its owner, Keith Tai Wong, to construct a home on a wooded lot. Part of the project involved the removal of trees including a eucalyptus tree. Although they had received permits to remove the eucalyptus, Kim and Truong were unaware that the tree straddled the property line with a neighbor, Todd, whose permission to remove the tree they failed to obtain. A subcontractor hired by TWA began to remove the eucalyptus tree. The neighbor protested and demanded that the work stop. Subsequently, Kim and Truong advised Wong they couldn’t get a construction loan with TWA as the contractor, and terminated the TWA contract. As pertinent to the case, Todd sued Kim and Truong for trespass, negligence and damage to the eucalyptus; Kim and Truong cross-complained against TWA for on various claims, including indemnity, and TWA filed a cross-complaint against Kim and Truong for breach of contract. The action by Todd, the neighbor, was settled. Kim and Truong filed a motion in limine, requesting the trial court require TWA to make an offer of proof as to the subcontractor’s license status; claiming the subcontractor did not have a specialty license for tree work (a “C-61/D-49, Tree Service Specialty” license), that TWA had the burden of establishing proper licensing, and that TWA should disgorge the $10,000 they contended they paid for the tree work. TWA opposed the motion and asserted that, as it held “A”, General Engineering, and “B”, General Contractor licenses and was permitted to do the work. TWA did not assert that the subcontractor was a TWA employee. The trial court found in favor of Kim and Truong on their claims and as to TWA’s cross-complaint.

The appellate court noted that the Contractors’ State License Law (B&PC Section 7000 et seq.) “imposes strict and harsh penalties for a contractor’s failure to maintain proper licensure”, citing Section 7031(a) and MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412, 418, and noted further that “The obvious statutory intent is to discourage persons who have failed to comply with the licensing law from offering or providing their unlicensed services for pay,” citing Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.2d 988, 995. Reviewing the application of Section 7031 to the question of a licensed contractor engaging an unlicensed contractor to perform work, the appellate court followed the general rule that a court’s primary goal in construing a statute “is to determine and give effect to the underlying purpose of the law,” Goodman v. Lozano (2010) 47 Cal.4th 1327, 1332, and consider the meaning of the section in the context of the entire statute and the statutory scheme of which it is a part, DuBois v. Workers’ Comp. Appeals Bd. (1993) 5 Cal.4th 382, 388.

The court found the plain meaning of Section 7031 unambiguous, although not immediately clear as to its applicability to the TWA scenario, and looked to the broader legislative intent of the Contractors’ State License Law as interpreted by the California Supreme Court, of providing assurance that persons offering contractor services in California meet baseline qualifications and discouraging noncompliance with the licensing law, Hydrotech, at p. 995. Pairing Section 7031’s bar of use of the courts to seek compensation for work where licensure is required with California Business & Professions Code Section 7026’s definition of a “contractor” as any person who does construction-related work “himself or herself or by or through others,” the court concluded that to narrowly construe Section 7031(a) to allow TWA’s claim for compensation would undermine “other provisions of the statutory scheme governing contractor licensing and contravene the policy behind the statute” and that “it would be unreasonable to permit TWA to collect compensation for work performed by an unlicensed contractor when all facets of the Contractors’ State License Law are directed at ensuring licensing compliance.”

For any further analysis of how this California court decision will affect your interests, or if you have any questions on this article, please contact William F. Bresee.

William F. Bresee is a partner in Leech Tishman’s Pasadena, CA office and co-leads the firm’s Construction Industry Group. He is also the leader of the Energy & Natural Resources Industry Group.  Bill can be reached at 626.796.4000 x 325 or 412.261.1600 x261 or wbresee@leechtishman.com.

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