Since 1991 it has been a rule that before enforcing a contract, a mechanics lien, a stop notice or any other claim, a claimant must prove that it was properly licensed throughout a construction project. The California Supreme Court even held that a contractor could not recover from an owner for fraud unless the contractor could prove that it was duly licensed during the time the project was built. (Hydrotech Systems, Ltd. v. Oasis Waterpark)

After that decision, the court came under fire for its decision and the legislature adopted statutory changes to address some of that criticism by adopting an exception to the harsh rule of Hydrotech. Under that exception an unlicensed contractor can enforce a claim if it shows that it (1) had been duly licensed as a contractor in this state prior to the performance of 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 contract commenced, and (4) acted promptly and in good faith to reinstate his or her license upon learning it was invalid. This relieved some of the sting of the decision in Hydrotech.

But the legislature added some sting of its own to the unlicensed contractor. Under a 2003 amendment to Business and Professions Code §7031, someone who uses the services of an unlicensed contractor may bring a lawsuit to recover all compensation paid to the unlicensed contractor.

Now the supreme court appears ready to modify its 1991 ruling as well. Recently the California Supreme Court agreed to review the case of W Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. In that case, a subcontractor on a large commercial project failed to complete the application process and obtain a contractor's license before signing two separate contracts.

The subcontractor's contract was terminated before the projects were completed and without the subcontractor having obtained full payment of amounts it claims were due under the contracts. When the subcontractor filed a lawsuit seeking compensation, the general contractor filed a motion for summary judgment, based on the subcontractor’s failure to comply with licensing requirements. The trial court granted the motion for summary judgment, meaning that the subcontractor was not permitted to take its case to trial. The subcontractor claims the trial court made an error granting the motion, because it had substantially complied with the applicable licensing requirements by obtaining a Class C-51 license before the completion of the first contract and before undertaking work pursuant to the second contract.

The Court of Appeal ruled that the license law permits the subcontractor to recover compensation for the acts performed while licensed and, that being the case, the contract is neither illegal nor void. As applied to this case, section 7031 does not bar the subcontractor from seeking compensation for all acts performed under the first contract while the subcontractor was licensed. Therefore, summary judgment with respect to the first contract was improper.

The Court of Appeal noted that with regard to the second contract the parties agreed that the subcontractor held the Class C-51 license during the entire period of performance. Therefore, as long as the Class C-51 license was the proper license with respect to the work to be performed under that contract, the license law would not prevent the subcontractor from collecting compensation and the contract is not void.

The Supreme Court has agreed to review this decision to resolve conflicting decisions among the Courts of Appeal. Look here for further developments.

Disclaimer: The foregoing is not intended as legal advice. The facts and circumstances of any case requires the review of an attorney familiar with real estate and/or construction law. Before taking any action, please consult with your counsel.