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California Curtails Unlicensed Contractors' Recovery for Their Work

Marilyn Klinger | April 1, 2006

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Construction worker cutting steel on construction site

The California Supreme Court has come down hard on unlicensed contractors who seek to recover for their unpaid work. In MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Company, Inc., 36 Cal. 4th 412 (2005), a unanimous Supreme Court denied a subcontractor's claim seeking recovery for work performed while it was unlicensed based on the court's interpretation of California's Contractor's State License Law, Cal. Bus. & Prof. Code §7000, et seq.

In the case, Niederhauser Ornamental & Metal Works Company, Inc., entered into two subcontracts with MW Erectors, Inc. to perform certain metal subcontract work. The first subcontract was entered into on October 11, 1999, for the structural steel portion of the work (structural contract). The second subcontract for the ornamental steel portion of the work (ornamental contract) was entered into on November 12, 1999.

MW began work under the structural contract on December 3, 1999, but did not obtain a C-51 structural steel contractor's license until December 21, 1999. MW began performing work on the ornamental contract in early January 2000. When MW did not receive payment, it sued Niederhauser and Niederhauser's payment bond sureties for payment under both the structural contract and the ornamental contract.

Niederhauser moved for summary judgment, alleging that California Business and Professions Code section 7031(a) barred MW's claim. Section 7031(a) provided, at that time:

Except as provided in subdivision (d), 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 by this chapter 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…

Niederhauser claimed it was entitled to summary judgment because MW had no California C-51 contractor's license when it began performance of the structural contract and MW never obtained a California C-23 contractor's ornamental metals license for the ornamental contract.

In its opposition, MW admitted that it needed a C-51 license for its work under both contracts and that this license was not technically in place when MW began work on the structural contract, but it was in place when it started the ornamental contract. MW also admitted it never obtained a C-23 license but did not need one for the ornamental contract. MW further asserted that Niederhauser was equitably estopped to contest licensure because, in related litigation, Niederhauser had benefited by relying on MW's lack of licensure.

The trial court granted summary judgment for Niederhauser, dismissing MW's action. MW appealed. In Niederhauser's response to the appeal, it claimed, for the first time, that both contracts were illegal, void, and unenforceable because MW was unlicensed when they were executed.

The appeals court reversed entry of summary judgment. It did reject Niederhauser's new argument that the contracts were void because of MW's unlicensed status when they were executed. It reasoned that MW's right to recover depended on its licensure during its performance of the contracts even if it were unlicensed at the commencement of its work. It based that reasoning on Section 7031(a)'s language that mandates that a contractor be licensed at all times during performance of the "act or contract" for which compensation is sought. Therefore, the court of appeal reasoned that MW was only precluded from recovering for work it performed prior to securing its license. The court of appeal also determined that there remained an issue as to whether MW needed a C-23 license for the ornamental contract.

Niederhauser sought review from the California Supreme Court.

Equitable Estoppel Does Not Preclude Challenge Based on the Licensure Law

The Supreme Court quickly rejected MW's equitable estoppel argument. The court noted that Section 7031(a) explicitly precludes an unlicensed contractor from maintaining any action "at law, or in equity" to recover compensation for work performed. Therefore, Niederhauser was not equitably estopped from maintaining its action against MW.

Lack of License Precludes Recovery

In the critical portion of the opinion, the California Supreme Court reversed the appeals court and held that MW was not entitled to any recovery because it was not licensed at all times during the performance of its work. In that same vein, the court rejected MW's claim that in lieu of recovery for the entire contract, it should be able to recover for the specific work it performed after it became licensed. MW argued that the "act or contract" portion of Section 7031(a) meant that it could recover for items of work it performed after it became licensed as an alternative to full recovery under the contract. As noted above, the court of appeals had accepted this argument. The California Supreme Court flatly rejected this argument on two grounds. First, the court noted that if it were to give this meaning to Section 7031(a), it would make the statute meaningless. The legislative history of California's licensure law illustrates that the law was enacted to protect the public, not as an aid for unlicensed contractors to recover for their work. Second, the express language of the statute forecloses such an interpretation. The legislature's inclusion of "act" into the statute was meant to narrow its application, not broaden it. If the court were to read the statute to permit recovery for specific acts of work performed, it would encourage unlicensed contractors to perform work without a formal contract and then seek recovery in quantum meruit [for services rendered], for individual acts performed when they did have a license. This was not the intent of the statute.

"Substantial Compliance" Will Not Rescue an Unlicensed Contractor's Claim

As an alternative argument, MW claimed that it was in substantial compliance with California's licensing requirements because it became licensed prior to completion of its work. The California Supreme Court also rejected this claim based on the exacting language of Section 7031(d):

The judicial doctrine of substantial compliance shall not apply to this section, except that a court may determine that there has been substantial compliance with licensure requirements, for purposes of this section, if it is shown at an evidentiary hearing that the person was a duly licensed contractor during any portion of the 90 days immediately preceding the performance of the act or contract for which compensation is sought, that the person's category of licensure would have authorized the performance of that act or contract, and that noncompliance with the licensure requirement was the result of (1) inadvertent clerical error, or (2) other error or delay not caused by the negligence of the person…

The court ruled that because MW was not licensed prior to beginning work under its subcontract, but became licensed only after beginning its work, the doctrine of substantial compliance could not apply.

Performance, Not Contract Execution, Is the Key

The court ruled that a contractor may recover compensation under a contract for work requiring a license if he or she satisfied licensure requirements at all times while performing the contract, even if the contractor was not licensed when the contract was signed.

Impact of Niederhauser Decision

The Niederhauser opinion is a difficult pill to swallow for unlicensed contractors. The case further punctuates California's strict statutory division between licensed and unlicensed contractors and underscores the need for proper licensing documentation at the outset of any project. The high court has eviscerated any judicial "grey area" regarding recovery for unlicensed contractors. The ruling means that unlicensed contractors who enter into contracts to perform work do so at their own peril. The California Supreme Court has severely curtailed or eliminated any previous exceptions, permitting recovery in certain situations. The courts cannot compel owners, contractors, or their sureties to pay for contracting work that an unlicensed contractor performs.

Credit must be given to Colin McCarthy of Sedgwick, Detert, Moran & Arnold's Orange County office's Surety/Construction Practice for the thorough research and creative analysis in this commentary.

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