BILL ANALYSIS
AB 678
Page 1
Date of Hearing: April 24, 2001
ASSEMBLY COMMITTEE ON JUDICIARY
Darrell Steinberg, Chair
AB 678 (Papan) - As Introduced: February 22, 2001
SUBJECT : UNLICENSED CONTRACTORS
KEY ISSUE : SHOULD AN INDIVIDUAL WHO USES THE SERVICES OF AN
UNLICENSED CONTRACTOR BE SPECIFICALLY AUTHORIZED TO BRING AN
ACTION TO RECOVER FEES ALREADY PAID TO THE UNLICENSED CONTRACTOR
EVEN THOUGH THE CONTRACTOR HAS FULLY PERFORMED AND THE
INDIVIDUAL MAY KNOW THE CONTRACTOR IS UNLICENSED?
SYNOPSIS
This Measure Allows Individuals Who Use The Services Of An
Unlicensed Contractor To Bring An Action To Recover All
Compensation Already Paid To The Unlicensed Contractor.
According To The Author, The Measure Is Intended To Further
Encourage Unlicensed Contractors To Become Licensed, Consistent
With Existing Law. However, The Measure Arguably Allows
Individuals Who Use Unlicensed Contractors To Be Unjustly
Enriched By Permitting Them To Recover Compensation Already Paid
Despite The Fact That The Contractor Has Fully Performed And
Despite Knowing That The Contractor Is Unlicensed. An Author's
Amendment To Address This Concern Is Contained In The Analysis.
SUMMARY : Seeks to authorize 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.
EXISTING LAW :
1)Prohibits unlicensed contractors from bringing an action to
collect compensation for the performance of any act or
contract, regardless of the merits of the cause of action
brought by the unlicensed individual. (Business and
Professions Code section 7031. All further statutory
references are to this code.)
2)Requires anyone who contracts to do construction work to be
licensed by the Contractors' State License Board if the total
AB 678
Page 2
price of the job is $500 or more and provides that contracting
without a license shall be a misdemeanor. (Sections 7048 and
7028.)
FISCAL EFFECT : The bill as currently in print is not keyed
fiscal.
COMMENTS : This bill, sponsored by Judge Quentin Kopp, would
specifically allow an individual who had used the services of an
unlicensed contractor to bring an action to recover all
compensation already paid to the unlicensed contractor for
performance of any act or contract. In commenting on the need
for the measure, the author states:
Our state's policy since 1939 reflects in Section 7031 of
the Business and Professions Code the intent of the
Legislature that the public be protected from unqualified
contractors. Since 1939, a contractor must be licensed by
the state in order to recover the value of services
rendered with or without a written contract. Licensing
requirements provide minimal assurance that all persons
furnishing construction services in our state possess the
requisite skill and character, understand pertinent local
laws and codes, and know the rudiments of administering a
contracting business. The Legislature had determined that
the importance of deterring unlicensed persons from
engaging in the building or contracting business outweighs
any harshness to an unlicensed party who provides services
and then cannot collect compensation.
According to the sponsor, this measure is intended to address
the recent case of Cooper v. Westbrook Torrey Hills, LP (2000)
81 Cal. App. 4th 1294, in which the court, in an unpublished
portion of the opinion, referred to Section 7031(a) prohibiting
an unlicensed contractor from recovering fees, but not requiring
any refund of compensation already paid to the contractor.
Cooper relied on Culbertson v. Cizek (1964) 225 Cal. App. 2d
451, 473, in which the court permitted the unlicensed contractor
to offset "as a defense against sums due the plaintiffs any
amounts that would otherwise be due Cizek under his contract."
This measure is intended to clearly state that those using the
services of unlicensed contractors are entitled to bring an
action for recovery of compensation paid.
The sponsor further explains the purpose of the bill, stating:
AB 678
Page 3
Section 7031(a) of [the Business and Professions] code
requires any contractor suing for money due on a
construction contract to allege that he or she was a duly
licensed contractor at all times during performance of the
work or contract. In AB No. 678, the question has been
raised as to whether a person for whom work was performed
by an unlicensed contractor would be entitled to recover
compensation paid the unlicensed contractor if the person
receiving the services knew the contractor was unlicensed .
By a parity of reasoning from the state of the law
respecting Section 7031(a), knowledge of the status of an
unlicensed contractor is irrelevant to the recovery of
compensation from the unlicensed contractor. California
courts have unmistakably ruled that in any action by an
unlicensed contractor to recover for the value of a
contractor's services rendered or contractual provision,
the unlicensed contractor cannot recover money even if the
person for whom the work was performed knew the contractor
was unlicensed. Hydrotech Systems, Ltd. v. Oasis Waterpark
(1991) 52 Cal. 3d 988, 997-998; Vallejo Development Co. v.
Beck Development Co., Inc. (1994) 24 Cal. App. 4th 929,
941; see also Pickens v. American Mortgage Exchange (1969)
269 Cal. App. 2d 299, 302 and Cash v. Blackett (1948) 87
Cal. App. 2d 233. ?
AB No. 678 constitutes an additional and consistent
legislative determination that such deterrence can best be
realized by compelling violators to return all compensation
received from providing their unlicensed services. That
rationale is reflected in the judicial decisions involving
rejected attempts by unlicensed contractors to obtain
payment based on knowledge of their unlicensed status by
persons sued for non-payment of services rendered. That
policy is furthered in AB No. 678 by specifically
recognizing the capacity of an owner to recover money
already paid an unlicensed contractor, even if the person
knew the contractor was unlicensed. (Emphasis in
original.)
Unjust Enrichment. According to the author, this bill is
intended to protect the public and encourage unlicensed
contractors to become licensed by specifically authorizing an
individual who has used the services of an unlicensed contractor
to bring an action to recover all compensation already paid to
AB 678
Page 4
the unlicensed contractor for performance of any act or
contract.
Under the bill, individuals may bring such an action even if the
contractor has fully performed and even if they knew the
contractor was unlicensed. In that case, those using the
unlicensed contractor have not been harmed in any way, but are
nevertheless authorized to sue to recover compensation paid. As
a result, those using unlicensed contractors are arguably
unjustly enriched because they are able to reap the benefits of
the work done by the unlicensed contractor and are then
authorized by statute to sue to recover from the contractor all
compensation paid. Furthermore, those who knew that the
contractor they were employing was unlicensed arguably have
"unclean hands," but under this bill they would still be allowed
to recover.
On the other hand, the author argues that the Legislature has
intended that the public be protected from unqualified
contractors by requiring that all contractors be licensed. In
order to ensure that this requirement is met, current law
specifically prohibits unlicensed contractors from bringing an
action to collect compensation for the performance of any act or
contract, regardless of the merits of the cause of action
brought by the unlicensed individual. In Hydrotech Systems,
Ltd. v. Waterpark , supra., the court stated "Again, the
Legislature recently underscored its insistence on a strict
application of section 7031 despite the balance of equities.
The 1989 amendments make clear that an unlicensed contractor may
not recover either 'in law or equity,' and that suit is barred
'regardless of the merits of the cause of action ?'" As a
result, the sponsor notes, the measure "is not only consistent
with the historical policy of our state but strengthens that
policy substantially."
Author's Amendment. Committee staff discussed with the sponsor
whether the bill unfairly results in unjustly enriching an
individual who uses an unlicensed contractor knowing that the
contractor is unlicensed and then sues to recover compensation
paid, despite the full performance of the contractor. The
sponsor has agreed the bill should be amended to preclude those
individuals who use the services of an unlicensed contractor
from being able to recover compensation already paid if they
knew that the contractor was unlicensed.
AB 678
Page 5
The language of this author's amendment is limited to the
individual's actual knowledge of whether or not the contractor
is licensed, rather than constructive knowledge of that fact.
As a result, the concern may be raised that individuals will
purposely remain ignorant as to whether or not a contractor they
are employing is licensed. The Committee may therefore wish to
discuss with the author and the sponsor whether the bill should
be amended to also preclude individuals from being able to
recover compensation if they "should have known" that the
contractor was unlicensed.
REGISTERED SUPPORT / OPPOSITION :
Support
Judge Quentin Kopp (sponsor)
Opposition
None on file
Analysis Prepared by : Saskia Kim / JUD. / (916) 319-2334