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Subcontractor Without California License Not Barred From Collecting For Work On Federal Project – K. Nina Reynolds
In general, California law prohibits an unlicensed contractor from bringing an action to recover payment for work that requires a license. (Bus. & Prof. Code § 7031 (“Section 7031”).) Two recent cases have addressed Section 7031. As made clear in Technica LLC v. Carolina Casualty Insurance Co. and E.J. Franks Construction v. Sahota, while the prohibition in Section 7031 remains firmly in place, it does not preempt federal law and will not be applied where the circumstances establish no actual violation of license laws.
Technica and the Miller Act
Technica was a sub-subcontractor on a federal construction project in California but was not a licensed contractor in the state. After receiving only partial payment for its work, Technica filed suit against the prime contractor and its surety. Defendants filed a motion for summary judgment based on Section 7031 and the case was dismissed by the District Court for the Southern District of California.
The Ninth Circuit Court of Appeal reversed, holding that California’s restriction on the right of a non-licensed contractor to bring an action for collection of unpaid services (Section 7031) does not apply to an action under the Miller Act. The Miller Act is a federal statute that requires the general contractor on a federal construction project to furnish a payment bond for the protection of all those who provide labor and materials to the project. The Act was intended to remedy the historical dilemma faced by subcontractors who were denied payment on public projects but had no direct contract with the government and were barred by federal law from asserting liens on federal property.
Following decisions of the U.S. Supreme Court, as well as the Eighth and Tenth Circuits, the Ninth Circuit court observed that federal subcontractors routinely bid on projects throughout the country and perform contracts that span multiple states. Requiring them to comply with contractor licensing requirements in any given state would create procedural and substantive hurdles that would undermine the Congressional intent of the Miller Act.
The court clarified that state laws can still control the application of the substantive law of contracts in Miller Act claims, such as calculation of damages or the existence of implied agreements for additional work, but that state laws cannot impair the rights established by the Act. (Technica LLC ex rel. U.S. v. Carolina Cas. Ins. Co. (9th Cir. 2014) __ F. 3d __, 2014 WL 1674108, April 29, 2014.)
E.J. Franks and Section 7031
Edward J. Franks obtained his contractor’s license in 1995 and operated as a sole proprietor. During construction of a home for the Sahotas in 2005, Franks incorporated his company and his license was reissued to the corporation. When the Sahotas failed to pay for additional work outside of the contract, E.J. Franks Construction sued them for “quantum meruit”, the well-established principle that payment should be made for services that were not part of the contract but were understood to require compensation.
The Sahotas unsuccessfully argued that Section 7031 barred recovery because the corporation was not yet licensed when the contract was formed. The Merced County trial court rejected the Sahotas’ contention, correctly finding that the change in business entity status did not constitute unlicensed work. The work was initially done by the licensed sole proprietor and later by the licensed corporation, so there was no point in time where work was done by an unlicensed contractor. The Court of Appeal affirmed. The court also distinguished the case from instances where a contractor’s license was misrepresented as belonging to a corporation when it was actually issued to an individual. In such cases, Section 7031 would prevent recovery. (E.J. Franks Construction, Inc. v. Sahota (2014) __ Cal.App.4th __, 2014 WL 2526978, June 5, 2014.)