Court of Appeal Ameliorates (a Bit) the "Harshness" of Business and Professions Code Section 7031

California courts have variously described Business and Professions Code section 7031 as “draconian,” “harsh[ ]“ and “[u]njust[ ],” but nonetheless enforceable.

Section 7031 both (1) prohibits unlicensed or improperly licensed contractors from suing to recover compensation for construction work requiring a license, and (2) permits property owners to sue such contractors for disgorgement of all compensation paid for such work.  The strict enforcement of Section 7031 has been based on the view by the courts that despite Section 7031's harsh consequences it serves the public policy purpose of ensuring that contractors meet the minimum qualifications necessary for licensure.

In E. J. Franks Construction, Inc. v. Sahota, Case No. F066327 (June 5, 2014), the California Court of Appeals for the Fifth District carved out a limited exception to Section 7031 for contractors who form business entities and transfer their existing contractor’s license to such entities.

Background

In 2004, E J. Franks Construction entered into a construction contract with Bhupinder Sahota to build a custom home in Livingston, California for $962,390,40.  At the time the contract was entered, E. J. Franks Construction was a sole proprietorship of Edward J. Franks II who had held a general contractors license since 1995.

During the course of construction, Mr. Franks incorporated E. J. Franks Construction, Inc. and, on April 12, 2005, his contractor’s license was reissued to the newly formed corporation.

In the Spring of 2006, when the project was approximately 90% complete, Mr. Franks was terminated from the project and his company later sued for unpaid extra work. The Sahotas in turn, filed a cross-complaint, alleging numerous problems with the work.

Applicability of Business and Professions Code Section 7031

By the time the case went to trial, the only remaining claim by the company was a quantum meruit claim for the reasonable value of services rendered, in which the jury returned a verdict in favor of the corporation in the amount of $66,000. The Sahotas appealed.

On appeal, the Sahotas argued that because Mr. Frank’s individual contractor’s license was reissued to his corporation on April 12, 2005, that the corporation was unlicensed at the time work was performed prior to April 12, 2005 and that the corporation was therefore barred from pursuing its quantum meruit claim pursuant to Business and Professions Code section 7031.

The Court of Appeals didn’t bite.

While acknowledging that prior court decisions have applied Section 7031 “despite injustice to the unlicensed contractor” because of the “legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties,” the Court held that Section 7031 did not apply:

"Unlike the authorities cited by the Sahotas, this case did not involve a period wherein the contractor was unlicensed or where a license previously issued lapsed during the construction project. . . . Instead, this case involves a licensed contractor and a change in business entity status. Proper licensure was in place at all times. Applying section 7031 to the circumstances here would lead to absurd results. Were we to find section 7031 applied, it would effectively preclude licensed sole proprietor contractors from lawfully incorporating and obtaining a reissue of a general contracting license to the new business entity at any time during the construction period. The purpose of section 7031 is to deter unlicensed contractors from recovering compensation for their work. It is not intended to deter licensed contractors from changing a business entity’s status, and obtaining a reissuance of the license to the new entity, during a contract period."

The Court further held that Business and Professions Code section 7164, which requires that any contract or changes to a contract for the construction of a single-family dwelling held by the owner for at least one year be in writing and signed by both parties, did not preclude the corporation from pursuing its quantum meruit claim since Section 7164 has been held not to bar claims where a homeowner would otherwise be unjustly enriched.

Conclusion

E. J. Franks is a logical, reasonable decision that, while limited in its application, avoids the harsh results that would otherwise follow if Section 7031 were applied to situations where a licensed contractor merely has its license reissued to another entity.

There is, however, one other lesson from the case. Although E. J. Franks Construction, Inc. prevailed in the trial court and on appeal, it recovered only $66,000, and I’m sure the attorneys’ fees and costs it incurred were many multiples over that amount. This is the very definition of a pyrrhic victory.

Thus, if you’re a licensed contractor that has its licensed reissued to another entity during the course of a construction project, make sure there is a contractual provision in your construction contract that allows you to assign the contract, preferably without the need to obtain the other party’s consent, or if it does require the other party’s consent, obtain that consent.  Even better yet, make sure you have formed a business entity which limits your personal liability before even signing that construction contract to begin with.  This way, if you need to file a lawsuit to recover compensation for work performed, you can rely on the terms of the construction contract including the scope of work to be performed, its payment provisions and, perhaps most importantly, any provision allowing you to recover your attorneys’ fees and costs if you prevail.

 

Topics:  Construction Contracts, Construction Disputes, Contractor's License, Contractors, Disgorgement, General Contractors, Licensing Rules

Published In: Civil Procedure Updates, Civil Remedies Updates, General Business Updates, Construction Updates

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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