United States: California Court Of Appeal Affirms That Unlicensed Contractor May Not Pursue Litigation

California's Second District Court of Appeal recently threw out a potentially valid claim for breach of contract asserted by a contractor which failed to comply with the state's contractor's licensing requirements. The case is noteworthy not only for the holding, but also for the prominent defendant, Tesla founder Elon Musk's SpaceX, a private space exploration company. 

California Business & Professions Code, Section 7031 provides, in part:

  1. Except as provided in subdivision (e), no 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 law acts as a virtually impenetrable shield under which a party sued by an unlicensed contractor may find protection and may repel a lawsuit filed by the unlicensed contractor. Although the law is generally viewed as a consumer protection - which provides relief for homeowners and precludes them from being required to pay unlicensed contractors who perform poor quality work - it applies to both residential and commercial projects. Furthermore, the law may be invoked to bar a contractor's claim, even if the opposing party knew at the time of signing the contract, or discovers prior to completion of the work, that the contractor is unlicensed. The law is based upon a strong public policy which favors the licensing of construction contractors and which penalizes them for failing to obtain a license by precluding them from pursuing or defending claims in the courts of the state of California. 

Although the law is quite draconian, it does provide some relief to a contractor who can prove in a hearing that they were: a) previously licensed; b) attempted in good faith to renew their license; and c) in fact renewed the license immediately upon discovery of any lapse in license status. However, absent proof of these circumstances, an unlicensed contractor has virtually no chance of prevailing in litigation in California's courts.

The statute was employed successfully this year by Space Exploration Technologies, Inc. ("SpaceX"), the private spacecraft launching and exploration company founded by Elon Musk. The decision is entitled, Phoenix Mechancal Pipeline, Inc. v. Space Exploration Technologies, Inc. (2017) 12 Cal.App.5th 842.

Case Facts

A contractor known as Phoenix Mechanical Pipeline, Inc. ("Phoenix") entered into a contract with SpaceX in 2010, under which it was to provide multiple services, including "plumbing, general maintenance and repair, concrete removal and pouring, trash clean-up and disposal, demolition, car washing, electrical, excavation and installation." Phoenix claims that it performed services for SpaceX pursuant to the contract and that it was paid, for a time. SpaceX subsequently refused to pay Phoenix for its services and eventually informed Phoenix that its services were no longer needed. SpaceX then demanded that Phoenix's personnel leave its premises. In 2014, Phoenix sued SpaceX in Los Angeles Superior Court for breach of contract and related claims, asserting damages in excess of $1 million.

Allegations and Challenges

In its original complaint, Phoenix failed to allege that it "was a duly licensed contractor at all times during the performance of" its work under the contract with SpaceX, as required by Section 7031. SpaceX demurred to the complaint, asserting that the complaint lacked the requisite allegation that the plaintiff was properly licensed. Phoenix responded to the demurrer by amending its cross-complaint. It added an allegation that an individual who it characterized as its "Responsible Managing Employee" oversaw all services performed under the contract and that the individual was the owner of another entity, "Phoenix Mechanical Plumbing, Inc.," which held a valid California contractor's license.

SpaceX demurred to the first amended complaint, arguing that the new allegations were not sufficient to comply with Section 7031, which requires the "person engaged in the business or acting in the capacity of a contractor" to allege that it was properly licensed and that Phoenix had alleged only that another entity was licensed. The trial court sustained SpaceX's demurrer but allowed Phoenix to amend its complaint a second time. 

In its second amended complaint, Phoenix characterized the individual as a "Responsible Managing Officer" and, tracking language in California State Contractor's License Board regulations, stated that the individual "supervised construction and related services managed construction activities by making technical and administrative decisions, checked jobs for proper workmanship, and directly supervised construction job sites." Phoenix also asserted that it was not required to hold a contractor's license for services provided which were not construction-related. SpaceX demurrered to the second amended complaint filed by Phoenix. This time, its demurrer was again sustained without leave to amend. Phoenix appealed.

Appellate Opinion

The Second District of Appeal mainly agreed with the trial court. The Appellate Court found that neither the explanations provided by Phoenix nor the manner in which its claim was plead were sufficient to overcome the strict requirement of Section 7031 that it be duly licensed in order to prosecute a claim in the California courts. The Court explained that Section 7031 is intended to, "protect the public from incompetence and dishonesty in those who provide building and construction services," that it "advances this purpose by withholding judicial aid from those who seek compensation for unlicensed work," and that application of Section 7031 "applies despite injustice to the unlicensed contractor." Because Phoenix had not plead that it was licensed during the performance of its contract with SpaceX, it could not recover for alleged breach of the agreement regardless of whether it was otherwise entitled to recover for contracting services provided to SpaceX. 

The Appellate Court did provide Phoenix with a small victory. It concluded that Phoenix could obtain payment for work done for SpaceX which did not constitute "contracting" work - for which a contracting license is required - based upon applicable legal authorities defining such work. Phoenix submitted separate invoices for each type of work done and alleged that each constituted a separate contract, therefore, findings could be rendered as to which of the tasks it performed for SpaceX did not require a license. The Court of Appeal remanded the case to the trial court for further determination as to the scope of such services. 

It should be noted, however, that Section 7031 not only includes a "shield" against affirmative claims, the statute also provides for the recovery of funds paid to an unlicensed contractor. Phoenix may find that its monetary recovery for services which it can prove were not subject to contractor's licensing requirements are offset by the amounts which must be disgorged due to its unlicensed status. The Phoenix decision proves that an unlicensed contractor might as well do charity work because it may end up donating the value of its services.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions