Previously, California law required that a contractor must be duly licensed contractor at all times while working on a contracted project to receive compensation. California courts interpreted this statutory provision as a means to deny any payments to licensed contractors who were in violation of the licensing statutes even if a license lapsed for only a short period of time or to require the unlicensed contractor to disgorge any payments it received during the period when its licensed had lapsed.

For example, in Judicial Council of California v. Jacobs Facilities, Inc. (2015) 230 Cal. App. 4th 882, the appellate court considered a matter in which a contractor had transferred the personnel performing a contract to another subsidiary and allowed the contracting party’s license to lapse. The owner subsequently sued the contractor seeking disgorgement of funds paid to the contractor for the work that could only be performed by a licensed contractor. The contractor had argued that it was in substantial compliance with the licensing statutes in an effort to prevent disgorgement. At trial, the jury returned a verdict for the contractor without a hearing on the substantial compliance issue. On appeal, the appellate court reversed the judgment, stating that it could not enter judgment for the owner because the contractor was still entitled to a hearing on the substantial compliance issue. However, the court noted that “courts can no longer exercise discretion in the application of the [substantial compliance] doctrine. To avoid forfeiture for a CSLL violation, a contractor must now satisfy the terms of [Business & Professions Code] section 7031, subdivision (e).” That subdivision to section 7031 then required that a court determine that there had been substantial compliance with the licensure requirements. An additional requirement was that the contractor must show to that it did not know and reasonably should not have known that it was not licensed at the time it commenced work on the project to establish substantial compliance.

The amendments to Business & Professions Code section 7031, which became effective January 1, 2017, now eliminate the “did not know and reasonably should not have known” requirement. Instead, a contractor now attempting to prove substantial compliance with the licensing requirements must now prove at an evidentiary hearing:

1. The contractor had been duly licensed as a contractor in the state prior to the performance of the act or work at issue;
2. The contractor acted reasonably and in good faith to maintain proper licensure; and
3. The contractor acted promptly and in good faith to reinstate his or her license upon learning that it was invalid.

This amendment to section 7031 hopefully should limit outcomes where unsuspecting contractor who have let their licenses lapsed for a short period of time are disgorged of monies they have received or are prevented from recovering sums for work performed. At the same time, the remaining requirements of section 7031 should continue to protect the public from scofflaws who ignore the state’s contractor licensing requirements and seek to profit from that non-compliance.

Despite the revisions to section 7031, prudent contractors should steadfastly maintain close watch on the expiration dates for their contracting licenses and promptly renew them, so they do not incur unnecessary litigation costs associated with actions under Business & Professions Code section 7031.