On May 13, 2022, the California Court of Appeal for the Sixth Appellate District issued its opinion in Sally Kim et al., v. TWA Construction Inc., et al, finally resolving a long-standing issue: the Court of Appeal held for the first time that California Business and Professions Code section 7031 bars general contractors from collecting compensation for services performed by an unlicensed subcontractor.

Background

Sally Kim et al., v. TWA Construction Inc., et al, involves the construction of a California residential home. The property owners hired a general contractor to construct a home and bridge on a wooded lot. As part of the project, they sought to remove some trees, including a large eucalyptus tree (the “eucalyptus”). At the time, the property owners were unaware that the eucalyptus was partially on their neighbor’s property, requiring her approval to remove it.

The general contractor hired a subcontractor it found on CraigsList.org to perform the tree work. The general contractor did not verify the subcontractor’s license status before the subcontractor performed work. Before the subcontractor could finish removing the eucalyptus, the neighbor instructed the subcontractor to stop work and contacted the police. The eucalyptus removal ceased.

Because the property owners could not secure a construction loan, they ultimately terminated the construction agreement with the general contractor. The property owners paid the general contractor $16,000 for its work and later hired another contractor to complete the project.

The neighbor sued the property owners and the general contractor² for negligence, trespass, and other claims related to the work on the eucalyptus. The property owners filed a cross-complaint against the general contractor for, among other things, comparative negligence, breach of contract, express contractual indemnity, and equitable indemnity. In turn, the general contractor filed a cross-complaint against the property owners for breach of contract.

The Lawsuit

Before trial, the property owners filed a motion in limine requesting the trial court require the general contractor to make an offer of proof as to the subcontractor’s licensure status. The property owners argued that, under Business and Professions Code section 7031, the general contractor has the burden of establishing proper licensure and further claimed that the general contractor should disgorge the $10,000 they had paid for the tree work because it was performed by an unlicensed subcontractor. The general contractor countered by claiming it was entitled to recover payment for all work performed on the project. The general contractor, however, never suggested it had any evidence that the subcontractor was properly licensed and failed to make any offer of proof on the subject. The trial court granted the motion in limine, holding that section 7031 barred the general contractor from “collecting compensation for services performed by the subcontractor for the tree trimming if, in fact, the subcontractor was unlicensed at the relevant time.” The trial court repeatedly noted that this ruling did not explicitly bar any party from bringing evidence at trial as to whether the subcontractor was licensed.

In the midst of trial, the property owners reached a settlement with the neighbor whereby the property owners would pay $50,000 and the neighbor would allow the eucalyptus to be removed. As to the cross-complaints, the jury found the general contractor to be 100 percent liable for negligence. The trial court entered judgment in favor of the property owners and ordered the general contractor to disgorge the $10,000 for the tree trimming work performed by its unlicensed subcontractor.

On appeal, the general contractor claimed, among other things, that the trial court erred as a matter of law in its pretrial ruling on the application of section 7031. Ultimately, the Court of Appeal affirmed the trial court’s ruling and in doing so, held “section 7031 bars all actions, regardless of the equities and however they are characterized, which effectively seek ‘compensation’ for illegal, unlicensed contract work. Thus, if the primary ‘relief sought is compensation’ for the unlicensed work, then ‘section 7031 bars the action.’” (Citing Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 995).

In its analysis, the Court of Appeal reasoned that because section 7031 bars a contractor from recovering for any work it performed while unlicensed and includes both subcontractors and specialty contractors in its definition of “contractor,” section 7031 would also bar a subcontractor from recovering for any unlicensed work it performs. The Court then turned to other provisions of the statute to address the ambiguity of whether section 7031 would in turn bar a general contractor’s recovery from any work an unlicensed subcontractor performs. The Court found that it would be “unreasonable to permit [general contractors] to collect compensation for work performed by an unlicensed subcontractor when all facets of the Contractors’ State License Law are directed at ensuring licensing compliance.”

Takeaways

Sally Kim et al., v. TWA Construction Inc., et al is reflective of California’s policy protecting “the public from incompetence and dishonesty in those who provide building and construction services.” While in theory, general contractors remain free to hire unlicensed subcontractors, this case clarifies that general contractors who use unlicensed subcontractors may not turn to the courts to recover compensation for those services provided by any unlicensed subcontractors if a dispute arises.