BILL ANALYSIS Ó
AB 1793
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CONCURRENCE IN SENATE AMENDMENTS
AB
1793 (Holden)
As Amended August 2, 2016
Majority vote
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|ASSEMBLY: | 78-0 |(May 12, 2016) |SENATE: | 37-0 |(August 11, |
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Original Committee Reference: B. & P.
SUMMARY: Requires a court to find that a contractor is in
substantial compliance with licensure requirements if prescribed
evidentiary standards are met. Specifically, this bill:
1)Permits a court to determine at an evidentiary hearing that a
contractor has substantially complied with licensure
requirements, as specified.
2)Requires a contractor to provide evidence that he or she acted
promptly and in good faith to remedy the failure to comply
with licensure requirements upon learning of the failure, in
addition to other specified requirements.
The Senate amendments delete authorization for a contractor to
retain compensation for only the portion of work performed while
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he or she was duly licensed in the event that action is brought
against the contractor for a lapse in licensure, and instead
delete the requirement for a contractor to provide evidence that
he or she 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.
FISCAL EFFECT: None. This bill is keyed non-fiscal by the
Legislative Counsel.
COMMENTS: Purpose. This bill is author-sponsored. According
to the author, "[This bill] aims to protect licensed contractors
from the harsh disgorgement provisions of the Contractors' State
License Law [(CSLL)]. This bill requires the court to determine
if a contractor substantially complied with the law when a
contractor inadvertently, and in good faith, falls out of
compliance and makes immediate corrective action."
Background. The CSLL permits an individual that hires a
contractor, and later discovers the contractor to be unlicensed,
to seek recovery for the cost of all construction-related work
performed by the unlicensed contractor. In cases in which a
previously valid contractors' license simply expired, the
contractors may assert in defense that they made a "good faith"
effort to comply with the licensing requirements and corrected
their licensure status immediately upon discovering a lapse.
In the Contractors' State License Board's (CSLB's) 2014 Sunset
Review Report, submitted as part of its sunset review by the
Legislature, the CSLB stated, "existing law requires that a
contractor must be a 'duly licensed contractor at all times'
while working on a contracted project in order to receive
compensation (Business and Professions Code (BPC) Section 7031).
The CSLB indicates that the courts have interpreted the
provisions of BPC Section 7031 to deny all compensation to
contractors who are in violation of the licensing requirements
even though the failure to comply occurred during a brief period
during which work was performed."
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The terms "duly licensed" (as used in subdivision (a)) and
"unlicensed" are not defined in CSLL, but are decisive terms
under BPC Section 7031. Consequently, the legal profession
lacks clear guidelines when judging the license status of a
contractor, and the disgorgement provisions authorized by
subdivision (b) are being misinterpreted and maliciously applied
for personal gain, even when there is no issue regarding the
quality of work performed. CSLB claims that the application of
this statute in this manner may facilitate "unjust enrichment"
to public agencies, prime contractors, and/or
commercial/industrial project owners, an unacceptable outcome
within the spirit of the law.
The CSLB sponsored SB 263 (Monning), of 2013 to modify BPC
Section 7031, which would have provided that a contractor may
pursue payment for any work on the contract while duly licensed,
but preclude payment for work performed in a classification in
which the contractor was not licensed, was under license
suspension, or was under an expired or inactive license when the
work was performed. The amendments to BPC Section 7031 were
removed in part because of the Senate Committee on Judiciary's
concerns about weakening the consumer protection provided by
this section. That bill was substantially amended to address an
unrelated topic.
The 2008 Housing Crisis. As a result of the 2008 housing crisis
in California, large segments of the state's construction
industry underwent a period of mergers, acquisitions and
corporate reorganizations. Oftentimes, the newly merged or
reorganized firms would internally shift or obtain new
contractors' licenses while allowing the valid license for the
defunct entity to lapse upon its expiration. Through the normal
course of construction related payment disputes, customers
started challenging the validity of contractor licenses
following mergers or corporate reorganizations. Plaintiffs
sought to force construction firms to disgorge millions of
dollars in revenue despite a firm's maintaining a valid license
at all times, albeit not the license listed on the contract when
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the contract first commenced.
According to the author, "A California appellate court ruled
that although a reorganizing construction firm internally
transferred construction work from one subsidiary with a valid
contractors' license to another, the failure to maintain or
explicitly transfer the original license of the entity listed on
the construction contract violated the CSLL. Although no
construction work was performed without a valid license and the
parent company remained consistent, the court ordered the firm
to disgorge all revenue from the contract."
State Litigation. In MW Erectors, Inc. v Niederhauser
Ornamental and Metal Works Co., Inc., et al., the California
Supreme Court held, in relevant part: "The 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."
(Refer MW Erectors, Inc. v. Niederhauser Ornamental and Metal
Works Co., Inc., et al., Supreme Court of California, 30
Cal.Rptr.3d 755 (2005)]
In Judicial Council of California v. Jacobs Project Management,
Co., the appellate court acknowledged that penalizing
construction firms for "a technical transgression only
indirectly serves the CSLL's larger purpose of preventing the
delivery of services by unqualified contractors." As a result
of this decision, the firm nearly lost nearly $20 million in
revenue resulting from the work performed between the lapse of
the license and a renewal of the construction contract under the
new subsidiary's name."
Analysis Prepared by:
Gabby Nepomuceno / B. & P. / (916) 319-3301 FN:
0003836
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