LEGALLY SPEAKING Risks and Perils of Working Without a License T he requirements for contractor, engi- neer, design-builder and subcontractor licenses vary from state to state. While many states require licenses for specialty subcon- tractors (including geotechnical subcontrac- tors), several states, such as Arizona, Delaware, Louisiana and Mississippi, include subcontractors within the broad definition of “contractor,” such that geotech- nical subcontractors are subject to the contractor license requirement. Just as the requirements for licenses vary by state, so too do the penalties and other ramifications for performing work without a license. For example, it is a misdemeanor in Virginia for a contractor to perform construction without a license, subject to a fine of $500 for every day the contractor is in violation of the licensure requirement. In California, it is unlawful for a contractor to even advertise construction services without an applicable license, subject to a penalty of up to $1,000 per violation. Some states, such as Florida, preclude mechanics’ liens by unlicensed contractors. Others take a more severe approach, preventing unlic- ensed contractors from enforcing contract terms, essentially rendering the contracts null and void. Courts in the following states have upheld statutes preventing contractors and/or subcontractors from collecting contract/subcontract payments where the work was performed without a proper or current license: • Alabama • Alaska • Arizona • Arkansas • California • Colorado • Hawaii • Michigan • Nevada • New Mexico • New York • North Carolina • South Carolina • Utah • Maryland • Washington Egregious offenders (i.e., those that are unqualified, failed to obtain a license, mislead about licensing status, etc.) are not the only contractors/subcontractors subject to forfeiture of contract or subcontract payments. Courts have demonstrated a willingness to enforce licensing statutes strictly, even where the result seems unreasonable and unfair. In August 2015, a California appellate court overturned a jury verdict in favor of a contractor who sued a public owner to collect over $4.6M in cont r a c t payments. Judicial Council of California v. Jacobs Cal.App.4 882 (2015). T h e r e , t h e own e r withheld payments from the contractor when it discovered that the contractor allowed its license to expire for a period of time during the project when the contractor reorganized its business. Actual work on the project was unaffected by the reorganization, as employees and assets from the dissolving subsidiary were transferred to the new subsidiary seamlessly. The license, however, lapsed when the contractor’s “qualifying individual” (for the license) withdrew as the qualifier for the dissolving company to become the quali- fying individual for the new company. Nevertheless, the owner’s contract remained with the then-unlicensed dissolving sub- sidiary. The contractor argued that it had assigned the contract (albeit “internally”) from one subsidiary to the other, that the owner was aware of the assignment, and that the owner ratified the assignment by con- senting to it and allowing the new entity to perform and complete the work. While the court recognized that the contractor’s violation of the licensing statute “resulted from the manner of execution of their corporate reorganization, rather than any attempt to evade licensure requirements,” the court con- cluded that forfeiture of income “is the remedy the Legislature has prescribed, and our task is to implement the Legislature’s prescrip- tion.” The court did, however, grant a sub- Fac i l i t ies , Inc . , 239 th Brian Wood Attorney Of Counsel Smith, Currie and Hancock A recent California case highlights the risks and perils of working without a current contractor’s or subcontractor’s license. sequent hearing to determine whether the contractor sub- stantially complied with the licensing require- ments. In order to do so, the contractor would need to show that it: 1. Had been duly lic- ensed as a contractor prior to the perfor- mance of the contract 2. Acted reasonably and in good fai th to maintain proper licensure 3. Did not know or reasonably should not have known that he or she was not duly licensed when performance of the act or contract commenced 4. Acted promptly and in good faith to rein- state its license upon learning it was invalid An excavation support subcontractor received a similar decision — directing a subsequent hearing to determine substantial Inc. v. Bernards Bros. Inc., 198 Cal.App.4 681 (2011). The risks of not strictly complying, however, were demonstrated in compliance — in Pacific Caisson & Shoring, th Co., 79 Cal.App.4 1254 (2000). There, a California court determined that a con- tractor had not substantially complied with the licensing statute because the evidence showed that the contractor knew its license was suspended before commencing work on the project. The takeaway: contractors and subcon- tractors should be vigilant and diligent about maintaining current applicable licenses in order to avoid the harsh result of being unable to enforce contracts and collect payments otherwise earned. DEEP FOUNDATIONS • MAY/JUNE 2016 • 123 Pacific Custom Pools, Inc. v. Turner Construction th
