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
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:
- The contractor had been duly licensed as a contractor in the state prior
to the performance of the act or work at issue;
- The contractor acted reasonably and in good faith to maintain proper licensure; and
- 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.