Unlicensed Contractors Must Disgorge All Monies Paid by Consumers – Can’t Get Any Offsets or Credits


California has very harsh rules against unlicensed contractors. A recent case further tightens the noose. The Court in Robert D. White. v. Terry E. Harper Cridlebaugh (2009) 178 Cal. App. 4th 506, 521 stated in pertinent part, “[W]e conclude section [Business & Professions Code Section] 7031(b)’s reference to the recovery of all compensation paid an unlicensed contractor means the unlicensed contractor cannot reduce the recovery authorized [for the consumer] by asserting claims of offset arising out of the unlicensed work [be it materials, services, labor, etc.].”

Cridlebaugh was hired to build a log cabin (retirement home) for the Whites, who were friends from Church. After the work began the Whites became concerned with Cridlebaugh’s work and competence. White eventually fired Cridlebaugh. Cridlebaugh recorded a mechanic’s lien against White’s property. White sued Cridlebaugh and Cridlebaugh filed his own suit, both of which got consolidated.

During the project Cridlebaugh was working under a corporate contractors license held by JC Builders, Inc. The responsible managing officer or RMO for JC Builders, Inc., a gentleman named Diani, was not involved with the White project and testified that he had only been in the United States on two occasions in the last two years prior to the White contract, and that he didn’t even know that Cridlebaugh was working with the corporate license. In other words, Cridlebaugh had borrowed the JC Builders, Inc. license, but Cridlebaugh was not himself licensed, nor was he being supervised by any licensed individuals.

If a responsible managing officer/employee RMO/RME is not participating in the construction activities or actively involved in the day-to-day operations of the corporate entity, the California Court of Appeal in Buzgheia v. Leasco Sierra Grove (1977) 60 Cal.App.4th 374, has held that it is as if the contractor is not licensed at all. In other words, the contractor is a sham and is unlicensed by operation of law.

By virture of the Diani testimony Cridlebaugh, specifically, the corporate licensed entity, JC Master Builders, Inc., was deemed an unlicensed contractor for the White project and had to disgorge all monies paid to them by the Whites. Pursuant to B&P 7031 they were also not entitled to advance their own lawsuit against the Whites.

Previously, California Supreme Court explained that unlicensed contractors are required to disgorge all monies paid to them pursuant to Business and Professions Code 7031(b). In the seminal case of Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 955, the Hydrotech court stated “[t]he purpose of the licensing law is to protect the public from incompetence and dishonesty in those who provide building and construction services…The licensing requirements provide minimal assurance that all persons offering such services in California have the requisite skill and character, understand applicable local laws and codes, and know the rudiments of administering a contracting business… [Business & Professions Code] Section 7031 advances this purpose by withholding judicial aid from those who seek compensation for unlicensed contract work. The obvious statutory intent is to discourage persons who have failed to comply with the licensing law from offering or providing their unlicensed services for pay…Because of the strength and clarity of this policy, it is well settled that § 7031 applies despite injustice to the unlicensed contractor….Section 7031 represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties, and that such deterrence can best be realized by denying violators the right to maintain any action for compensation in the courts of this state…”

On appeal Cridlebaugh and JC Master Builders, Inc. argued that they were prejudiced by not being able to pursue offsets (for materials provided, services performed, and labor, etc.) on the disgorgement claim. The Court analyzed the longstanding history of the licensing statutes and determined that allowing unlicensed contractors to claim offsets for services would eviscerate or reduce the effectiveness of the preventative nature of the statute. Precluding unlicensed contractors attempts to claim offsets against disgorgement claims for materials supplied and services rendered was consistent with the statutory scheme.

Thus, an unlicensed contractor is precluded from recovering on their claims for breach of contract, they must return or disgorge all monies paid by a consumer to the unlicensed individual, and they are not entitled to any affirmative offsets for materials supplied and services rendered. The offset clarification cleared up some previous references to prior case law which pre-dated the 2001 amendment to B&P 7031(b), thereby eliminating any potential confusion or ambiguity.

The Lesson

When you are considering hiring a contractor for any project you must thoroughly check out their credentials and their experience. First, you can go online to www.cslb.ca.gov and check out the contractor’s license status and personnel. Second, you should request in writing a list of their most recent projects and interview all of the customers involved with the contractor in the past few years. Third, if the contractor is a corporation, you should demand to interview the RMO/RME who is responsible for the construction activities. Fourth, you should request a list of the sub-contractors that the contractor intends to use on the job and check their license status online. Fifth, once a contractor has been selected have an attorney review the contract, review the construction schedule, and review any other agreements you have discussed with the contractor prior to signing the contract.

In our experience, when reviewing contractors’ contracts we find that 9 out of 10 of these construction contracts do not comply with Business & Profession Code §§ 7000-7200. These simple statutory contract violations alone are enough to subject a contractor to discipline and possible suspension of their license.

Unfortunately, the CSLB processes tens of thousands of license applications each year. This administrative body has no possible way of adequately screening and qualifying each and every individual who applies for a license, therefore it has to rely on individuals being truthful, honest, and professional. The public has to be aware of this and must do everything they can to protect themselves when hiring a contractor.

Let the consumer beware.

David S. Roberson, Esq. is an associate at the law firm of Rossi, Hamerslough, Reischl & Chuck, 1960 The Alameda, Suite 200, San Jose, CA 95126, http://www.rhrc.netdaver@rhrc.net, 408-261-4252.

For Answers to Any and All Construction Questions Go To [http://www.ConstructionQandA.com].

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Author: Piyawut Sutthiruk

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