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May 25, 2022

By Michele A. Ellison and Samantha R. Riggen

The opinion in Kim v. TWA Construction, Inc. (2022 Cal. App. LEXIS 412) issued by the California Court of Appeal on May 13, 2022, makes it clear that a properly licensed general contractor cannot bring an action for compensation from an owner for work performed by an unlicensed subcontractor.

California licensing law has long made explicit that an unlicensed contractor cannot bring or maintain any action to collect or recover compensation for work that contractor performed unless they were duly licensed at all times during the performance of that work. This new ruling extends the scope of this restriction to licensed contractors who hired unlicensed subcontractors.

The Underlying Dispute

The case involved a dispute between property owners and their former general contractor and its principal (collectively “TWA”). The property owners hired TWA to construct a home. During the early stages of the project, TWA hired a subcontractor to perform tree trimming services and to remove a large eucalyptus tree. The subcontractor partially removed the eucalyptus tree before it was discovered that the tree was partly located on the neighbor’s property. The neighbor, property owners and TWA all became parties to a lawsuit regarding the construction project.

Where Does Licensing Come In

The relevant licensing statute, Business and Professions Code § 7031(a), stated in pertinent part:

[N]o 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 he or she was 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.

The property owners argued that TWA chose to hire an unlicensed subcontractor to remove the eucalyptus, which required a specialty tree service license, and as a result, TWA cannot bring a claim for compensation for the tree trimming work. The trial court agreed and held that BPC § 7031(a) applied even where a general contractor seeks compensation for services of a purported unlicensed subcontractor and barred TWA from collecting compensation for services performed by the tree subcontractor if the subcontractor was unlicensed at the relevant time. On appeal, TWA argued that the trial court erred in its interpretation of the relevant licensing statutes.

The Appellate Court Upheld the Trial Court’s Ruling

The Appellate Court observed that on its face, BPC § 7031(a) bars a contractor from bringing an action for compensation for its own unlicensed performance of an act or contract where a license is required. Whether that bar extends to a licensed contractor for his use of an unlicensed subcontractor is not immediately apparent from the text of the statute. After considering the definition of contractor in BPC § 7026 (which is defined as including both “subcontractor and specialty contractor,” and a person who does the work “himself or herself or by or through others”), the Appellate Court found that taken together, BPC §§ 7026 and 7031(a) subject subcontractors to the same rules as contractors, prohibiting a subcontractor from taking legal action to recover compensation from the owner or general contractor for unlicensed work performed by the subcontractor.
Following therefrom, the Appellate Court concluded that it would be unreasonable to permit TWA to collect compensation for work performed by an unlicensed subcontractor The Court went into great detail about the public policy concerns behind contractor’s licensing laws, which are to protect the public from incompetent and dishonest contractors. While BPC § 7031(a) imposes harsh penalties for a contractor’s failure to maintain proper licensure, the intent is to deter unlicensed persons from performing any contracting work. To otherwise narrowly construe the statute and enable a contractor to recover compensation for the performance of unlicensed work, simply because the work was accomplished by hiring a subcontractor, would circumvent the purpose of BPC § 7031(a). Thus, in no uncertain terms, the Court of Appeal held that “[BPC § 7031(a)] bars even a licensed general contractor in California from bringing an action for compensation for an act or contract performed by an unlicensed subcontractor where a license is required.”

What Does This Mean for Suppliers?

If a supplier’s subcontractor customer is discovered to be unlicensed, neither the subcontractor nor anyone upstream can maintain a claim for the unlicensed subcontractor’s work. To be clear, the Court in Kim did not address whether a supplier jeopardizes its claim by supplying to an unlicensed contractor, and a supplier whose materials are utilized in the project could still avail themselves of their lien rights and statutory remedies, but collecting on unpaid balances could be more difficult because of the inability of anyone upstream to pursue a claim for the unlicensed work for which the materials were utilized. To avoid the potential impact to recovering compensation, suppliers should be sure to verify their customer’s licensure status prior to supplying materials.

Michele Ellison and Samantha Riggen are senior associates at Gibbs Giden working out of the San Jose and Westlake Village offices, respectively. Both specialize in construction litigation and have experience representing owners, general contractors, subcontractors, and material suppliers in all phases of the construction process. In addition, Michele and Sam often advise clients on contractor’s licensing laws and related issues.

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