California's Contractor's License Law (Business & Professions Code section 7026 et seq.) establishes that a contractor without a valid license cannot bring legal action to recover any compensation for work performed. B&P section 7031(a). That is the hiring party's "shield" against an unlicensed contractor. Responding to a court decision, the legislature added a "sword" in 2001. With the sword, an owner who has paid an unlicensed contractor for work performed can sue to recover those payments. B&P section 7031(b). The decision in Alatriste v. Cesar's Exterior Designs, Inc.1 answers questions about ambiguities in the "sword" statute – making it clear that it is intended to be punitive toward an unlicensed contractor. Following the Alatriste decision, it is more clear that the intent and application of the "sword" and "shield" mirror each other.
The contractor in the Alatriste case admitted that it was not licensed at the time it entered into the contract for $91,900 in landscaping at a new home. One of the principals of the company was in the process of obtaining a license, and the license was actually obtained while the work was being performed. The contractor also asserted that its customer actually knew these facts before the contract was entered into.
The Alatriste case answers three questions, relying largely upon application of similar concepts and decisions under the "shield" portion of the law.
Is the hiring party's actual knowledge of the contractor's unlicensed status of a defense to a lawsuit under the "shield" either legally (under the theory of fraud) or equitably (under the theories of unjust enrichment, equitable estoppel or unclean hands)?
Is the contractor entitled to compensation for work performed after it obtained a license?
Does the "sword" require disgorgement of the value of labor only, or also material that the property owner kept and which increased the value of the property?
The court ruled against the contractor in each instance.
Relying upon the Supreme Court's interpretation of similar provisions in the "shield" law2, this court ruled that the hiring party's knowledge that the contractor was unlicensed does not preclude utilizing the sword. Neither the legal nor equitable defenses claimed by the contractor are available.
Again relying upon a case with a similar set of facts under the "shield" statute3, and the legislative history of the "sword" statute, the court ruled that the contractor must be licensed at all times or qualify under the substantial compliance provision of the code. The fact that the contractor obtained a license part-way through the work is not relevant.
The court ruled that "all" means "all" and that the contractor must repay all the funds that it was paid by the hiring party, even though that means the property owner will be unjustly enriched by the increased value of the property.
The lessons for the contractor are clear. Your license is extremely important. A contract entered into before your license is valid is not only unenforceable but you can be forced to disgorge any payments you receive under that contract even if the work was accepted without defect or complaint. Lapses in your licensure can be equally dangerous unless you can convince the court that the circumstances fall within the narrow exceptions of the "substantial compliance" doctrine.
The court acknowledges that the impact of the ruling is punitive. They note that this punitive intent is found in the legislative history of section 7031(b) and they therefore are required to enforce it.
1Fourth District Case No. D054731; 2010 DJDAR 5125
2Hydrotech Systems, Ltd. V Oasis Waterpark (1991) 52 Cal.3d 988
3MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412