For Contractor to Recover Compensation, Proper Licensure Must be in Place At All Times During Performance of the Contract.

MW Erectors v. Niederhauser Orn. and Metal Works (July 15, 2005) __ Cal.4th __.

The California Supreme Court has definitively barred lawsuits to recover compensation for any work requiring a contractor's license, unless proper licensure was in place at all times during performance of the contract. In MW Erectors v. Niederhauser Orn. and Metal Works, the court provides a lengthy analysis of Contractor State License Law § 7031, and makes what it describes as four "significant conclusions" addressing its application:

  1. Where applicable, § 7031(a) bars a person from suing to recover compensation for any work under an agreement for services requiring a contractor's license unless proper licensure was in effect at all times during such contractual performance;
  2. Section 7031(a) does not allow a contractor who was unlicensed at any time during contractual performance to recover compensation for individual acts performed while he or she was duly licensed;
  3. The statutory exception for substantial compliance is not available to a contractor who had not been duly licensed at some time before beginning performance under the contract; and,
  4. If fully licensed at all times during contractual performance, a contractor is not barred from recovering compensation for the work solely because he or she was unlicensed when the contract was executed.

    This case arises out of the construction of the Disney Grand Californian Hotel. Subcontractor Niederhauser Ornamental (Niederhauser) hired MW Erectors (MW) as a second-tier subcontractor to perform both structural and ornamental steel work. The structural steel contract was entered into in October 1999, and work commenced on December 3, 1999. The ornamental steel contract was executed in November 1999, and work began in January 2000. MW did not obtain a C-51 structural steel California Contractors License until December 21, 1999, after it had commenced work on the structural contract. MW never obtained a C-23 ornamental metals license. Six months after work began, Niederhauser terminated both contracts with MW due to the licensure problem. MW sued Niederhauser for payment on the work it had performed, approximately $956,000 on the structural contract and $367,000 on the ornamental contract.

    Niederhauser obtained summary judgment on the grounds MW was not properly licensed at all times during performance of the work, and the Court of Appeal reversed and found that an unlicensed subcontractor may recover compensation for prior services so long as they had completed the licensure process before completion of the job; but the compensation would be limited to the work (or "acts") completed while actually licensed. (The Court of Appeal decision was reported in Value Added, April 2004.)

    The Supreme Court took issue with the Court of Appeal's statutory interpretation, and ruled that the purpose of a 1989 amendment that referenced unlicensed performance of both "acts" and "contracts" was intended to close a loophole, not to open one. Whereas the appellate court interpreted the statute as meaning a contractor could recover for work during the period the license was in effect, the Supreme Court said that the absence of a formal contract was not an all-ornothing bar against recovery, providing the licensure requirements were satisfied. In other words, one may not recover compensation for work accomplished under a contract requiring a license, unless duly licensed for the work "at all times during the performance of that...contract."

    The Supreme Court then explained that the substantial compliance doctrine applies to the properly licensed contractor whose license inadvertently lapses during performance of the work, which was not the case here. The statute explicitly contemplates a situation in which (1) the contractor had been licensed "prior to" performance; (2) the previously valid license had expired, or was suspended, at the time "performance of the act or contract commenced"; and (3) the contractor, upon learning of the lapse, acted diligently to "reinstate" the license.

    Finally, the Supreme Court concluded that contractors are not barred from recovering compensation for their work solely because they are unlicensed when the contract is executed. The court explained that the Legislature barred recovery of compensation by unlicensed contractors under certain circumstances, but it did not impose this bar against contractors who, though licensed at all times during performance of contracting work, had executed agreements for the work while unlicensed. The decision goes on to say that there is no compelling reason to conclude that the public protective purposes of the Contractors State License Law can only be served by deeming such contracts illegal, void, and unenforceable on that basis alone.

    The upshot of the decision is that contractors and subcontractors must make sure they are properly licensed before commencing work on any project requiring a license. Should their license lapse during performance, they must promptly resolve the issue and have the license reinstated, or they risk forfeiting the right to payment on work performed while unlicensed.

    - Randel J. Campbell