BILL ANALYSIS Ó
AB 1793
Page 1
Date of Hearing: May 3, 2016
ASSEMBLY COMMITTEE ON JUDICIARY
Mark Stone, Chair
AB 1793
(Holden) - As Amended April 18, 2016
PROPOSED CONSENT (As Proposed to be Amended)
SUBJECT: Contractors: license requirements: recovery actions
KEY ISSUE: Should a contractor be permitted to seek or retain
compensation for work performed during the period of time in
which the contractor was duly licensed, even if the contractor
performs part of the work after his or her license has lapsed?
SYNOPSIS
This author-sponsored bill seeks to soften a harsh rule. The
Contractors State License Law (CSLL) requires a person who
performs contracting work to obtain a license from a licensing
board within the Department of Consumer Affairs. The penalty
for acting without a license is severe. A person who uses the
services of an unlicensed contractor may bring an action to
recover all compensation that was paid to the unlicensed
contractor, and correspondingly a contractor may not bring an
action to recover compensation for work performed unless the
contractor was licensed "at all times" during the performance of
the contract. Similarly, any lien that a contractor records to
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secure payment for work performed is unenforceable unless the
contractor was duly licensed "at all times" during the
performance of the contract. For example, if a contractor
commences the work while duly licensed and performs 90% of the
work before the license lapses, the contractor would be barred
from bringing an action for any compensation; and if the person
for whom the work was performed has already made payment, that
person could bring an action to recover all of the compensation
paid to the contractor, even if the work was performed to the
client's complete satisfaction. For many years, the courts
applied the doctrine of "substantial compliance" in order to
avoid the inequity and unjust enrichment that results from such
a rule. However, in 1989 the Legislature amended the law to
state expressly that the doctrine of substantial compliance did
not apply to violations of the licensing law unless certain
requirements were met. If those requirements are not met, the
contractor cannot receive any compensation even if most of the
work is performed under a valid license. Last year, a
California Court of Appeal denied a contractor's right to
collect any compensation, but the court simultaneously noted the
inequity of the rule, writing: "While we appreciate the
potentially great harshness of this legislation in these
circumstances," any effort to change the rule "must be directed
to the Legislature." This bill follows the appellate court's
advice. Although the bill makes relatively minor changes to the
"substantial compliance" requirements, it more substantively
changes the existing requirement that the contractor be licensed
"at all times" in order to recover or retain any compensation;
instead, under this bill, the contractor would be permitted to
seek and retain compensation for that portion of the work
performed while duly licensed. The author will take an
amendment in this Committee to make a similar change to an
existing provision that authorizes a contractor to record a lien
to secure payment. The summary and analysis reflect that
amendment. The bill is supported by several contractors'
associations. There is no opposition to this bill, which
recently passed out of the Assembly Business & Professions
Committee on consent.
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SUMMARY: Provides that a contractor may pursue or obtain
compensation for any work performed on the contract while duly
licensed, as specified. Specifically, this bill:
1)Provides that a contractor may not bring an action to recover
compensation for the performance of any act or contract unless
he or she was a duly licensed contractor during the
performance of that act or contract for which compensation is
sought.
2)Permits a person who uses the services of an unlicensed
contractor to bring an action to recover all compensation paid
to the unlicensed contractor for any performance of an act or
contract, except that this right to recover from an unlicensed
contractor shall not apply to any compensation paid to the
contractor for work performed during a time when the
contractor was duly licensed.
3)Provides that a security interest taken to secure any payment
for the performance of a contract for which a license is
required is enforceable for work performed while the
contractor was duly licensed.
4)Modifies the showing that must be made to demonstrate that a
contractor is in "substantial compliance" with licensing
requirements. Specifically, existing law requires showing
that the contractor (1) had been duly licensed prior to
performing the contract, (2) acted reasonably and in good
faith to maintain proper licensure, (3) did not know or
reasonably should not have known that he or she was not duly
licensed when performance of the act commenced; and (4) acted
promptly and in good faith to reinstate his or her license
upon learning it was invalid. Under this bill the contractor
would, instead, need to show that he or she (1) had been duly
licensed prior to performing the contract, (2) acted
reasonably and in good faith to maintain proper licensure, and
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(3) acted promptly and in good faith to remedy the failure to
comply with the licensure requirements under this section upon
learning of the failure.
EXISTING LAW:
5)Establishes the Contractors State License Board (CSLB) within
the Department of Consumer Affairs (DCA) to implement the
Contractors State License Law (CSLL). All businesses and
individuals who construct or alter, or offer to construct or
alter, any building, highway, road, parking facility,
railroad, excavation, or other structure in California must be
licensed by the CSLB if the total cost (labor and materials)
of one or more contracts on the project is $500 or more.
(Business and Professions Code Section 7000 et seq.;
subsequent citations refer to this Code.)
6)Defines "contractor" to include any person, consultant to an
owner-builder, firm, association, organization, partnership,
business, trust, corporation, or company, who or which
undertakes, offers to undertake, purports to have the capacity
to undertake, or submits a bid to construct any building or
home improvement project, or part thereof. (Section 7026.1
(a)(2)(A).)
7)Provides that no contractor may bring or maintain any action
for the collection of compensation for the performance of any
act or contract where a license is required without alleging
that he or she was duly licensed at all times during the
performance of the contract. (Section 7031 (a).)
8)Permits a person who uses the services of an unlicensed
contractor to bring an action to recover all compensation paid
to the unlicensed contractor for performance of any act or
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contract. (Section 7031 (b).)
9)Provides that proof of licensure is made by producing a
verified certificate of licensure from the CSLB that is valid
during all times of the performance of any act or contract;
provides that the burden of proof to establish licensure or
proper licensure is on the licensee. (Section 7031 (d).)
10)Authorizes a court to determine at an evidentiary hearing
that a contractor has substantially complied with licensure
requirements if the contractor: (1) had been duly licensed as
a contractor prior to performing the act or contract; (2)
acted reasonably and in good faith to maintain proper
licensure; (3) did not know or reasonably should not have
known that he or she was not duly licensed when commencing the
act or contract; and, (4) acted promptly and in good faith to
reinstate his or her license upon learning it was invalid.
(Section 7031 (e).)
FISCAL EFFECT: As currently in print this bill is keyed
non-fiscal.
COMMENTS: This bill seeks to amend the Contractors State
License Law (CSLL) in order to better serve its original purpose
of protecting consumers from unqualified contractors, while at
the same time ensuring that licensed contractors are fairly
compensated for the work that they perform. In particular,
according to the author, this bill "aims to protect licensed
contractors from the harsh disgorgement provisions of the
(CSLL)" where a contractor "inadvertently, and in good faith,
falls out of compliance and makes immediate corrective action."
The bill also responds to a recent court decision suggesting
that the harshness of an existing rule that denies a contractor
compensation for work performed can only be addressed by the
Legislature, not the courts.
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Background: The CSLL sets out a comprehensive scheme for
licensing contractors engaged in the business of constructing,
remodeling, or repairing any structure, project, development, or
other work of improvement. The courts have held that "the
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
the applicable laws and codes, and know the rudiments of
administering a contracting business." (Hydrotech Systems v.
Oasis Waterpark (1991) 52 Cal. 3d 988, 995.) In order to ensure
that contractors doing business in California obtain and
maintain a proper license, CSLL creates substantial
repercussions for contractors who conduct business without a
license.
At issue in this measure is Civil Code Section 7031, which (a)
prohibits a contractor from bringing an action to recover
compensation for work performed if the contractor was not
licensed "at all times" during the performance of the work; and
(b) permits a person who uses the services of an unlicensed
contractor to bring an action to disgorge or recover all
compensation already paid to the unlicensed contractor. These
two provisions are two sides of the same coin. The unlicensed
contractor essentially forfeits any claim to compensation if he
or she performs contracting work without a license. Similarly,
existing law provides if a contractor records a lien to secure
payment for work performed, the lien is not enforceable unless
the contractor was licensed "at all times" during the
performance of the contract. The purpose of this provision is
clear enough: to discourage persons from offering contracting
services without a license by denying them the right to collect
compensation or allowing a person for whom the work was
performed to bring an action to recover all compensation already
paid to an unlicensed contractor.
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However, many courts and commentators, like the supporters of
this bill, have observed that the words "at all times" in
Section 7031 of the CSLL can lead to harsh and inequitable
results. That is, in order to seek or retain compensation for
work performed, the contractor must have been duly licensed "at
all times," that is, throughout the entire period of the
contract performance. If the contractor allowed a license to
lapse, even for a day, the contractor would be barred from
brining an action for any compensation, and the person for whom
the work was performed could bring an action to recover all
compensation already paid to the contractor, regardless of the
quality of the work and what portion of the work was performed
after the license had lapsed. For example, if a contractor
commenced the work while duly licensed and performed 90% of the
work before the license lapsed, the contractor would be barred
from bringing an action for any compensation; and if the person
for whom the work was performed had already made payment, that
person could bring an action to recover all of the compensation
paid to the contractor, even if the work was performed to the
client's complete satisfaction.
Under the common law of contracts, allowing the contractor's
client to avoid paying compensation while still benefiting from
the work performed was generally frowned upon because it led to
the "unjust enrichment" of one person at the expense of another.
In order to address this inequity, in the decades prior to
1990, the courts invoked the doctrine of "substantial
compliance" if strict adherence to the letter of the law would
lead to an obvious injustice and did not further the overall
purpose of CSLL. (Asdourian v. Araj (1985) 38 Cal. 3d 276.) If
the purpose of the law was to prevent unlicensed persons, who
might lack requisite skill and character from offering their
services for sale, this purpose was not furthered if a licensed
contractor doing quality work was denied any compensation just
because some part of the contract was performed during a period
when the license had lapsed. However, the ability of the courts
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to use the "substantial compliance" doctrine to reach more
equitable results was greatly restricted in 1989 when the
Legislature amended Section 7031 to say that the "judicial
doctrine of substantial compliance shall not apply to this
section," unless the contractor could prove that he or she had
been duly licensed when the performance commenced; that he or
she acted reasonably and in good faith to maintain proper
licensure, did not know that he or she was not duly licensed,
and acted promptly and in good faith to remedy the failure to
comply upon learning of the failure. (Business & Professions
Code Section 7031 (e).)
Judicial Council of California v. Jacobs Facilities: In August
of 2015, the California Court of Appeal for the First District
considered whether a contractor that satisfactorily performed a
contract while holding a license for the majority of work
performed could retain compensation for that work. This case
did not involve a simple matter of a contractor inadvertently
allowing a license to lapse; indeed, the work was arguably done
under a valid license for the entire period of the contract
performance. In this case, Jacobs Facilities, a subsidiary of
the Jacobs Engineering Group, was duly licensed when it
commenced work on buildings for the Judicial Council of
California. While Jacobs Facilities was still performing the
contract, the parent company, as part of a corporate
reorganization, transferred employees of Jacobs Facilities to
another subsidiary of the group. That new subsidiary had
obtained a license prior to the transfer, and sometime after the
transfer occurred the license for Jacobs Facilities was allowed
to lapse. While the new licensed subsidiary performed the work,
the Judicial Council of California continued to make payments
to, and was still formally under contract with, Jacobs
Facilities. When the Judicial Council learned that the license
for Jacobs Facilities had lapsed, it sued to recover all of the
compensation that it had already paid to Jacobs Facilities. At
the trial court, the jury found that Jacobs Facilities had
substantially complied with the licensing requirement by
"internally" assigning the contract and the work to the licensed
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subsidiary. The jury refused to require the contractor to
disgorge the amount (over $18 million) that the Judicial Council
had paid to Jacobs Facilities. The Judicial Council appealed.
The Court Appeal reversed the trial court ruling. While it was
true that Jacobs Facilities performed part of the work while it
was duly licensed, and the subsidiary performed the remainder of
the work while it was duly licensed, it was also true that the
Judicial Council continued making payments to Jacobs Facilities
throughout the entire period of the contract performance, even
after the license of Jacobs Facilities has lapsed. In short,
Jacobs Facilities had contracted to provide services that
required a license, allowed its license to expire, and continued
to be the named party to the contract even after the license
expired. Jacobs Facilities argued that this was merely a
"technical" violation, especially given that the subsidiary
actually performing the work was licensed, but the Court of
Appeal reasoned that this was essentially an argument for
"substantial compliance," and that Section 7031 expressly stated
that the doctrine of substantial compliance did not apply unless
the conditions specified in the statute had been met. It was not
clear, after all, that Jacobs Facilities acted "in good faith to
maintain proper licensure" or "acted promptly to reinstate the
license." Indeed it deliberately allowed the license to lapse
(albeit believing that the subsidiary license sufficed). As
such, the Court reversed the trial court ruling and remanded the
case back to the trial court to determine if the contractor had
complied with requirements in Section 7031.
The Court acknowledged the inequity of the outcome and conceded
that the result did not serve the purpose of CSLL. That
purpose, after all, was "preventing the delivery of services by
unqualified contractors," but by all accounts "the Jacobs
entities were neither dishonest nor incompetent." Its two
subsidiaries were duly licensed at the time each performed, and
the Judicial Council apparently had no complaint about the
quality of the work. The Court, however, looked to the history
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of Section 7031 and its amendments. The original statute
appeared to create an unduly harsh rule in order to ensure
compliance with licensing requirements. The courts tried to
soften this rule by applying the "substantial compliance"
doctrine. The Legislature, however, responded in 1989 by
expressly stating that the substantial compliance doctrine did
not apply unless the requirements of the statute were met. If
those requirements were not met, the contractor could not obtain
any compensation even if most of the work had been performed
while the contractor was duly licensed. The Court concluded
that the Legislature must have intended a harsh rule and it was
up to the Legislature to change it: "While we appreciate the
potentially great harshness of this legislation in these
circumstances, any argument for expansion of the substantial
compliance doctrine must be directed to the Legislature."
(Judicial Council of California v. Jacob Facilities, Inc. (2015)
239 Cal. App. 4th 882, 899-901.)
This bill effectively follows the court's advice. First, the
bill makes relatively minor changes to the "substantial
compliance" requirements. Specifically, under existing law
the court may determine that there has been substantial
compliance if, at an evidentiary hearing, it finds that the
contractor (1) had been duly licensed prior to performing the
contract, (2) acted reasonably and in good faith to maintain
proper licensure, (3) did not know or reasonably should not
have known that he or she was not duly licensed when
performance of the act commenced; and (4) acted promptly and
in good faith to reinstate his or her license upon learning it
was invalid. Under this bill the court would need to find
that the contractor (1) had been duly licensed prior to
performing the contract, (2) acted reasonably and in good
faith to maintain proper licensure, and (3) acted promptly and
in good faith to remedy the failure to comply with the
licensure requirements upon learning of the failure. The most
significant difference between the existing requirements and
the requirements under this bill appear to be the elimination
of the requirement that the contractor "did not know or
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reasonably should not have known that he or she was not duly
licensed." But this would not seem to change the requirement
significantly, because whatever the contractor knew or did not
know, under both existing law and this bill once the
contractor learns of the problem he or she must act promptly
to remedy the situation. The more substantive part of this
bill changes the existing requirement that the contractor be
licensed "at all times" in order to recover or retain any
compensation; instead, under this bill, the contractor would
be permitted to pursue and retain compensation for that
portion of the work performed while duly licensed.
Proposed Author's Amendment: As currently in print, this bill
modifies subdivisions (a) and (b) of Section 7031. Existing
subdivision (a) says that a contractor may not bring an action
to recover compensation unless he or she was duly licensed "at
all times" during the performance of the contract.
Subdivision (b) allows the person for whom the work was
performed to bring an action to recover compensation paid to a
contractor if the contractor was not duly licensed at any time
during the performance of the contract. This bill, as noted,
changes both these provisions by eliminating the requirement
that contractor can only seek or retain compensation if he or
she was duly licensed "at all times." Instead, this bill
would allow the contractor to seek and retain compensation for
the work performed while the contractor was duly licensed, but
not for any period of time that the contractor was not duly
licensed. However, the bill in print does not amend
subdivision (c) of Section 7031, which says that a lien
recorded by the contractor to secure payment is enforceable if
the contractor was not duly licensed "at all times" during the
performance of the contract. As pointed out in the analysis
prepared by the Assembly Business & Professions Committee,
which heard this bill last week, if the purpose of this bill
is to allow a contractor to be compensated for work performed
while duly licensed, then it would seem to follow that the
contractor should also be permitted to enforce a lien for the
value of the work performed while the contractor was duly
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licensed. This Committee and the author concur with that
analysis. Therefore, the author wishes to take the following
amendments, as author's amendments, in this Committee:
- On page 2, lines 23-27 amend subdivision (c) to read as
follows:
(c) A security interest taken to secure any payment for the
performance of any act or contract for which a license is
required by this chapter is unenforceable if the person
performing the act or contract was not a duly licensed
contractor at all times during the performance of the act or
contract. is enforceable for work performed while the
contractor was duly licensed.
ARGUMENTS IN SUPPORT: A coalition of several contracting,
construction, and building trade associations support this bill
because it "strikes a fair and thoughtful balance between
upholding high consumer protection within the construction
industry, while not unfairly punishing contractors who may have
an inadvertent licensing lapse due to clerical or technical
errors. They note that under existing law any individual,
corporation, or public agency that uses a contractor and "later
discovers that the contractor to be unlicensed at any time
during the project (for even just one day), to seek recovery and
disgorge from the contractor the cost of all construction
related work performed by the contractor on the project." The
coalition contends that "AB 1793 clarifies existing law to
ensure that properly licensed and law abiding construction firms
are not placed at fatal monetary risk, by limiting recovery . .
. and disgorgement amount to monies paid to the contractor for
work performed while the contractor was not properly licensed."
The coalition concludes by stressing that "nothing in this
measure allows an unlicensed contractor to seek or retain any
monies paid to them for the performance of a construction
contract while not duly licensed."
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Prior Related Legislation: SB 263 (Monning) of 2013, similar to
the bill under review, sought to modify Business & Professions
Code Section 7031 and would have permitted a contractor to
pursue payment for any work on the contract while duly licensed.
This bill was amended to address a different topic.
REGISTERED SUPPORT / OPPOSITION:
Support
Air Conditioning Sheet Metal Association
Associated General Contractors
California Association of Sheet Metal and Air Conditioning
Contractors
California Building Industry Association
California Chapters of the National Electrical Contractors
Association
California Legislative Conference of the Plumbing, Heating, and
Piping Industry
California Professional Association of Specialty Contractors
California State Building and Construction Trades Council
Construction Employers' Association
Northern California Allied Trades
Southern California Contractors Association
United Contractors
Wall and Ceiling Alliance
Western Line Constructors Chapter
Opposition
None on file
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Analysis Prepared by:Thomas Clark / JUD. / (916) 319-2334