BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015-2016 Regular Session
AB 1793 (Holden)
Version: May 4, 2016
Hearing Date: June 28, 2016
Fiscal: No
Urgency: No
TH
SUBJECT
Contractors: License Requirements: Recovery Actions
DESCRIPTION
This bill would modify conditions under which a contractor may
bring an action to recover compensation for the performance of
an act or contract regulated by the Contractors' State License
Law.
BACKGROUND
The Contractors State License Board (CSLB) within the Department
of Consumer Affairs (DCA) licenses and regulates approximately
300,000 contractors in California pursuant to the Contractors'
State License Law (CSLL). Under that law, a person engaged in
the business or acting in the capacity of a contractor must be a
"duly licensed contractor at all times" while working on a
project for which a license is required in order to receive
compensation for that work. (See Bus. & Prof. Code Sec. 7031.)
The California Supreme Court, reviewing this provision, has
found that "[s]ince the CSLL was adopted in 1939 . . . [this
provision] has declared that, except as expressly otherwise
provided, a contractor may not sue to collect compensation for
performance of any act or contract requiring a license without
alleging that he or she was duly licensed at all times during
the performance of that act or contract." (MW Erectors, Inc. v.
Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36
Cal.4th 412, 425 [internal quotation marks omitted].) "In
1989," the Court notes, this provision "was amended to make
clear that the bar extends to actions in law or equity and
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applies regardless of the merits of the cause of action." (Id.)
According to the Court:
[t]he words "at all times" convey the Legislature's obvious
intent to impose a stiff all-or-nothing penalty for unlicensed
work by specifying that a contractor is barred from all
recovery for such an "act or contract" if unlicensed at any
time while performing it. This all-or-nothing philosophy is
directly at odds with the premise that contractors with lapses
in licensure may nonetheless recover partial compensation by
narrowly segmenting the licensed and unlicensed portions of
their performance. (Niederhauser, 36 Cal.4th at 426.)
In 2003, the Legislature revised the conditions under which
contractors with lapsed licenses may bring actions to recover
compensation due for the performance of unlicensed work. AB
1386 (Horton, Ch. 289, Stats. 2003) authorized a court to apply
the judicial doctrine of substantial compliance to allow an
action for recovery to proceed where a previously licensed
contractor: (1) acted reasonably and in good faith to maintain
proper licensure; (2) did not know or reasonably should not have
known that he or she was not duly licensed when performance of
the act or contract commenced; and (3) acted promptly and in
good faith to reinstate his or her license upon learning it was
invalid.
This bill would authorize a contractor to recover compensation
for the performance of any act or contract for work performed
during a time when the contractor was duly licensed, thereby
allowing contractors with lapsed licenses to receive partial
compensation by segmenting the licensed and unlicensed portions
of their performance.
CHANGES TO EXISTING LAW
Existing law , the Contractors' State License Law, regulates the
licensure and performance of persons engaged in the business or
acting in the capacity of a contractor. (Bus. & Prof. Code Sec.
7000 et seq.)
Existing law specifies that "contractor" is synonymous with
"builder" and refers to any person who undertakes to or offers
to undertake to, or purports to have the capacity to undertake
to, or submits a bid to, or does himself or herself or by or
through others, construct, alter, repair, add to, subtract from,
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improve, move, wreck or demolish any building, highway, road,
parking facility, railroad, excavation or other structure,
project, development or improvement, or to do any part thereof,
as specified. (Bus. & Prof. Code Sec. 7026.)
Existing law provides that it is a misdemeanor for any person to
advertise for construction work or a work of improvement covered
by the Contractors' State License Law unless that person holds a
valid license in the classification so advertised, except that a
licensed building or engineering contractor may advertise as a
general contractor. (Bus. & Prof. Code Sec. 7027.1.) However,
a person who is not licensed may advertise for construction work
or a work of improvement only if the aggregate contract price
for labor, material, and all other items on a project or
undertaking is less than five hundred dollars ($500), and he or
she states in the advertisement that he or she is not licensed.
(Bus. & Prof. Code Sec. 7027.2.)
Existing law provides that, unless exempted, it is a misdemeanor
for a person to engage in the business of, or act in the
capacity of, a contractor within this state if the person is not
licensed. (Bus. & Prof. Code Sec. 7028.)
Existing law provides that no person engaged in the business or
acting in the capacity of a contractor may bring or maintain any
action, or recover in law or equity in any action, in any court
of this state 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 a duly licensed contractor
at all times during the performance of that act or contract,
regardless of the merits of the cause of action brought by the
person, except as specified. (Bus. & Prof. Code Sec. 7031(a).)
Existing law states, except as provided, a person who utilizes
the services of an unlicensed contractor may bring an action in
any court of competent jurisdiction in this state to recover all
compensation paid to the unlicensed contractor for performance
of any act or contract. (Bus. & Prof. Code Sec. 7031(b).)
Existing law provides that a security interest taken to secure
any payment for the performance of any act or contract for which
a license is required 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. (Bus. &
Prof. Code Sec. 7031(c).)
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Existing law states that the judicial doctrine of substantial
compliance shall not apply where the person who engaged in the
business or acted in the capacity of a contractor has never been
a duly licensed contractor in this state. However, the court
may determine that there has been substantial compliance with
licensure requirements if it is shown that the person who
engaged in the business or acted in the capacity of a
contractor: (1) had been duly licensed as a contractor in this
state prior to the performance of 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 performance of the act or contract
commenced; and (4) acted promptly and in good faith to reinstate
his or her license upon learning it was invalid. (Bus. & Prof.
Code Sec. 7031(e).)
This bill would instead provide that no person engaged in the
business or acting in the capacity of a contractor, may bring or
maintain any action, or recover in law or equity in any action,
in any court of this state 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 a duly licensed
contractor during the performance of that act or contract for
which compensation is sought, regardless of the merits of the
cause of action brought by the person.
This bill would instead provide that a person who utilizes the
services of an unlicensed contractor may bring an action in any
court of competent jurisdiction in this state to recover all
compensation paid to the unlicensed contractor for performance
of any 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.
This bill would instead provide that 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 enforceable
for work performed while the contractor was duly licensed.
This bill would instead provide that the judicial doctrine of
substantial compliance shall not apply where the person who
engaged in the business or acted in the capacity of a contractor
has never been a duly licensed contractor in this state.
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However, the court shall determine that there has been
substantial compliance with licensure requirements under this
section if it is shown that the person who engaged in the
business or acted in the capacity of a contractor: (1) had been
duly licensed as a contractor in this state prior to the
performance of the act or 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.
This bill makes other conforming changes to existing law.
COMMENT
1.Stated need for the bill
The author writes:
AB 1793 clarifies existing law to ensure that courts provide
back payments or deny disgorgement for any construction work
performed by an entity that possess a valid license. This
bill authorizes a contractor to retain compensation for the
portion of the work performed while the contractor was duly
licensed. Additionally, AB 1793 requires California courts to
find that a contractor is in substantial compliance with a
contract, and is entitled to compensation, so long as:
the contractor held a valid license when initially
contracting for service;
the contractor acted in "good faith" to maintain a valid
license at all times while performing the work; and
the contractor acted promptly and in good faith to
remedy any errors or deficiencies in the license
immediately upon learning of any issue.
California's construction industry remains a dynamic industry
that creates thousands of good paying jobs across the state.
When a general contractor is forced to disgorge millions of
dollars in revenue, it results in financial hardship for all
workers on a project, including subcontractors, plumbers,
electricians, and other skilled craftsmen. Providing the
flexibility for future growth and expansion is essential for
the preservation of this vital sector of the California
economy. AB 1793 will ensure that properly licensed
contractors do not lose millions in revenue because of
technical errors that inadvertently occur during a corporate
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restructuring.
1.Softening consequences of licensure lapses
This bill responds, in part, to an appellate decision issued
last year by the First Appellate District in San Francisco
concerning disgorgement of compensation from a company that
allowed its contractor's license to lapse after a corporate
reorganization and, consequently, did not strictly comply with
the Contractors' State License Law (CSLL). In Judicial Council
of California v. Jacobs Facilities, Inc. (2015) 239 Cal.App.4th
882, plaintiff Judicial Council of California (Judicial Council)
entered into a contract with defendant Jacobs Facilities, Inc.,
a wholly owned subsidiary of defendant Jacobs Engineering Group
Inc., for contracted work that required licensure under the
CSLL. During the course of the parties' contract, the defendant
transferred the employees responsible for performing the
contract to another wholly owned subsidiary, and allowed the
license for Jacobs Facilities, Inc., who remained the named
contracting party for nearly a year after the reorganization, to
lapse. Judicial Council sued Jacobs Engineering Group and its
two subsidiaries under the CSLL seeking disgorgement under
Business and Professions Code Section 7031, which requires
unlicensed contractors to disgorge compensation for work that
can only be performed by a licensed contractor. In reversing a
lower court order that would have prevented disgorgement, the
court stated:
[W]e acknowledge penalizing the Jacobs entities for these
technical transgressions only indirectly serves the CSLL's
larger purpose of preventing the delivery of services by
unqualified contractors, since the Jacobs entities were
neither dishonest nor incompetent. For better or worse,
however, this is beside the point. The doctrine of
substantial compliance, as developed by the courts, attempted
to limit the forfeiture remedy to circumstances in which that
remedy served the larger statutory purpose. In that form, the
doctrine was rejected by the Legislature. It is preserved in
a restricted statutory form; thus, courts can no longer
exercise discretion in the application of the doctrine. To
avoid forfeiture for a CSLL violation, a contractor must now
satisfy the terms of section 7031, subdivision (e). To the
extent the contractor fails to satisfy that exception, the
courts have no choice but to allow forfeiture, regardless of
the nature of the violation or its relation to the larger ends
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of the CSLL. . . . 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. Jacobs Facilities, Inc. (2015) 239 Cal.App.4th
at 899-900 [internal citations omitted].)
By restricting the disgorgement provision of the CSLL to apply
only for those periods during which a contractor was unlicensed,
this bill arguably avoids the harsh consequences visited upon
contractors who fail to maintain their license for technical
reasons and otherwise stand to lose the entirety of their
contracted compensation under existing law.
2.Segmenting licensed and unlicensed performance
In addition to softening the potential consequences that arise
in cases of technical non-compliance with the CSLL (discussed in
Comment 2), the changes proposed in this bill would additionally
allow for the segmentation of periods of compliance and
non-compliance with respect to disgorgement of compensation from
unlicensed contractors. Under existing law, Section 7031 of the
Business and Professions Code prevents a contractor from
bringing an action to recover compensation for the performance
of any act or contract where a license is required without
alleging that he or she was a duly licensed contractor at all
times during the performance of that act or contract, regardless
of the merits of the cause of action brought by that contractor.
The requirement that a licensed contractor must be licensed at
all times in order to claim compensation "convey[s] the
Legislature's obvious intent to impose a stiff all-or-nothing
penalty for unlicensed work by specifying that a contractor is
barred from all recovery for such an "act or contract" if
unlicensed at any time while performing it." (Niederhauser, 36
Cal.4th at 426.)
Fourteen years ago, this Committee considered AB 2693 (Wyman,
2002), which, like this bill, would have provided that an action
against an unlicensed contractor for recovery of monies paid to
the unlicensed contractor is limited to payments made for work
done during the time the contractor was unlicensed. The
Committee's analysis of that bill stated:
The bill would provide that the right of action against
unlicensed contractors would apply only to payments made for
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work done during the time the contractor was actually
unlicensed. Supporters argue that existing law creates the
potentially unfair scenario where a license inadvertently
lapses for a brief period of time, and the contractor's
customers are entitled to recovery of all payments made on the
job.
Existing law already provides for a substantial compliance
defense for licensed contractors, if three factors are met:
a) that the contractor had been duly licensed prior to the
performance of the act/contract, b) the contractor acted
reasonably and in good faith to maintain proper licensure, and
c) did not know or reasonably should not have known that he or
she was not duly licensed. The existing defense appears to
cover most of the situations supporters describe, with two
possible exceptions.
First, supporters cite the situation where a surety company
maintaining a licensee's mandatory license bond goes out of
business. Committee staff is informed by CSLB staff that only
three surety companies have gone out of business since the
inception of the CSLB, and that in two of those situations
sufficient advance notice was given to licensees to seek new
bonds. In the other instance, CSLB, through administrative
action, protected the licensees' licenses from expiring until
new bonds could be obtained. In addition, CSLB staff informs
Committee staff that they are close to finalizing a memorandum
of understanding (MOU) with the Insurance Commissioner to
provide for advance notice of sureties that are going out of
business. As a result, it appears that subcontractors are
adequately protected from this scenario.
Second, supporters cite the situation where a license lapses
because of the death of a partner. This scenario is resolved
by a separate section of the bill described in Comment 3
[omitted].
As a result, the scenarios cited by proponents do not appear
to necessitate the bill's limitation on existing law. In
addition, the bill's language would reduce the liability of
contractors who knowingly started jobs while an application
was pending, as well as contractors who knowingly continued
work on jobs even after their license had expired. In
addition, the bill's language would reduce the deterrent
effect the existing broad liability has on unlicensed
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contractors. (Sen. Com. on Judiciary, Analysis of Assem. Bill
No. 2693, as amended April 15, 2002, pp. 5-6.)
The Committee may wish to consider whether more targeted changes
that would not result in the segmentation of licensed and
unlicensed performance for the purpose of recovery actions, and
that would not undermine the deterrent effect existing law has
toward unlicensed contractors, would be more appropriate and
more protective of consumers.
Suggested Amendments :
eliminate the segmentation provisions from this bill and
instead liberalize the ability of reviewing courts to apply
the doctrine of substantial compliance
Support : Air Conditioning Sheet Metal Association; Air
Conditioning Trade Association; American Fire Sprinkler
Association; Associated Builders and Contractors, San Diego
Chapter; Associated General Contractors; California Association
of Sheet Metal and Air Conditioning Contractors National
Association; 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; Construction Employers Association;
Northern California Allied Trades; Plumbing - Heating - Cooling
Contractors Association of California; Southern California
Contractors Association; State Building and Construction Trades
Council, AFL-CIO; United Contractors; Wall and Ceiling Alliance;
Western Line Constructors Chapter; Western Electrical
Contractors Association
Opposition : None Known
HISTORY
Source : Jacobs Engineering
Related Pending Legislation : None Known
Prior Legislation :
SB 263 (Monning, 2013) would have clarified penalties for
persons engaged in the business or acting in the capacity of a
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contractor to also include a person who has never been a
licensed contractor, or a person who was licensed but who acts
under a license that is inactive, expired, revoked, or under
suspension for any reason. This bill would have stated that
entering into a contract with any person when that contract is
performed during a period in which that person's license was
inactive, expired, revoked, or under suspension is a cause for
discipline if the purpose of the contract is for that person to
perform an act subject to licensure under the law. This bill
was amended to address a different subject.
AB 1386 (Horton, Ch. 289, Stats. 2003) revised the conditions
under which contractors with lapsed licenses may bring an action
to recover compensation due for the performance of work, or
defend against an action to recover compensation previously paid
for the performance of work. Specifically, this bill authorized
a court to determine that a contractor substantially complied
with licensure requirements if the contractor was previously
licensed and both (1) did not know, or reasonably should not
have known, that he or she was not licensed when performing acts
subject to licensure, and (2) acted promptly and in good faith
to reinstate his or her license upon learning it was invalid.
AB 2693 (Wyman, 2002) would have, among other things, provided
that an action against an unlicensed contractor for recovery of
monies paid to the unlicensed contractor is limited to payments
made for work done during the time the contractor was
unlicensed.
AB 678 (Papan, Ch. 226, Stats. 2001) authorized persons who use
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 contract.
Prior Vote :
Senate Business, Professions and Economic Development Committee
(Ayes 8, Noes 0)
Assembly Floor (Ayes 78, Noes 0)
Assembly Judiciary Committee (Ayes 10, Noes 0)
Assembly Business and Professions Committee (Ayes 16, Noes 0)
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