Construction Contracts – Limitation on Recovery For Unlicensed Contractor

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E.J. Franks Construction, Inc. v Bhupinder K. Sahota, et al.

Court of Appeal, Fifth Appellate District (June 5, 2014)

The purpose of the Contractors’ State License Law (Business & Professions Code sections 7000 et seq.) is to “protect the public from incompetent or dishonest providers of building and construction services,” and to prohibit a contractor who has violated the statue from recovering “for the fruits of his labor.”  This case considered whether a contractor who was licensed at all times while performing work, albeit through two different named companies, was prevented from suing to collect for work performed. 
 
Edward Franks became licensed as a general building contractor in 1995, and did business as E.J. Franks Construction.  He contracted with Bhupinder K. Sahota (“Sahota”) to build a custom home for the Sahotas on their property in Livingston.  During the course of construction, he incorporated his business as E.J. Franks Construction, Inc. (“EJFCI”) and his license was re-issued to the corporation.  He continued to work on the project until it was approximately 90% completed.  By that time, in the spring of 2006, issues over construction led the Sahotas to refuse to allow Franks to continue or complete the work.  They hired another contractor to finish the home.  EJFCI then filed suit for foreclosure of a mechanic’s lien, breach of contract and quantum meruit.  The Sahotas answered and filed a cross-complaint against EJFCI and Franks for breach of contract and fraud.  Prior to trial, the court ruled that EJFCI was limited to recovery on claims of “quantum meruit or unjust enrichment” from the time the license was re-issued in the name of the corporation.  Trial commenced, and the jury found in favor of EJFCI on its complaint, awarding it $66,000 for various change orders, and the jury found against the Sahotas on their cross-complaint.  The Sahotas appealed.
 
The Court of Appeal affirmed the judgment, and held that EJFCI was entitled to recover on a theory of quantum meruit for the value of the work performed by the corporation on the change orders performed after the corporation took over Mr. Frank’s personal license.  In doing so, the Court rejected the Sahotas’ arguments that EJFCI was prohibited from recovery as an unlicensed subcontractor, and held that Business and Professions Code section 7031 did not apply in this case.
 
Section 7031 precludes an unlicensed contractor from maintaining a lawsuit to recover compensation for its work, while at the same time allowing that the contractor may be sued for disgorgement of any monies paid for work performed for which a license was necessary.  In arguing that this section barred the plaintiff from any recovery, the Sahotas had referenced various cases citing section 7031 where a contractor was not allowed to receive payment in quantum meruit.
 
The Court noted that in each and every case cited by the Sahotas, there was a period of time (at the time of contract, or when work started, or at the conclusion of the work) where the contractor was not licensed.  In contrast, the Court held that at no time was the work on the Sahotas’ home being performed by an unlicensed contractor.  Rather, the work commenced pursuant to a contract by E.J. Franks Construction as a sole proprietor, under Mr. Franks’ license.  Subsequently, when he incorporated and the license was reissued to the corporation, all work was being performed pursuant to that license. 
 
The Court noted that the purpose of the statute was to deter unlicensed contractors from recovering, and that the statue was not intended to deter licensed contractors from changing a business entity’s status, and obtaining reissuance of the license to the new entity during a contract period.  Where, as here, the licensed contractor was a corporation which had actually performed work at the homeowner’s request, it could still recover the reasonable value of those services on a quantum meruit basis, even if the corporation never had a contract with the homeowners. 
 
The Court of Appeal upheld the judgment in favor of the plaintiff contractor.
 
COMMENT
 
The terms of section 7031 are very harsh and unforgiving to a contractor who performs work without a license for the same.  However, courts will not apply the bar to recovery by (or enforce disgorgement against) a contractor who was at all times relevant in possession of the correct license.  Mere changes in business structure will not bar the contractor’s right to recovery. 
 
For a copy of the complete decision, see: 
 
http://www.courts.ca.gov/opinions/documents/F066327.PDF

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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