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Disgorging an Unlicensed Contractor - B&P Code 7031: A Primer

The Contractor State Licensing Law, codified in Business & Professions Code §§ 7000 et seq. (“CSLL”), is a legislative mandate governing the construction business in California that is “designed to protect the public from incompetent or dishonest providers of building and construction services.”  (Alatriste v. Cesar's Exterior Designs, Inc. (2010) 183 Cal.App.4th 656, 664.)[1]   Section 7031(b) allows one who utilizes an unlicensed contractor to “recover all compensation paid to the unlicensed contractor.”  Section 7031(a) and (b) state as follows: 

"(a) Except as provided in subdivision (e), 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, except that this prohibition shall not apply to contractors who are each individually licensed under this chapter but who fail to comply with Section 7029.

(b) Except as provided in subdivision (e), 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."

The plain language of § 7031(b) limits the recovery to compensation paid to the unlicensed contractor.  Section 7031 is a regulatory statute designed to discourage persons who are not licensed from offering their services for pay.  (Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 995.)  “The CSLL encourages licensure by subjecting unlicensed contractors to criminal and civil penalties.  The criminal provisions state it is a misdemeanor for a person without a license or an exemption to act in the capacity of a contractor.  (§ 7028, subd. (a).)  The civil penalties affect the unlicensed contractor's right to receive or retain compensation for unlicensed work.”  (White v. Cridlebaugh (2009) 178 Cal.App.4th 506, 518.)

The California Supreme Court and Appellate Courts across the state are consistent in applying the disgorgement penalty under § 7031(b) solely to the unlicensed contractor, and no one else.  For example: 

“We conclude the authorization of recovery of ‘all compensation paid to the unlicensed contractor for performance of any act or contract’ (§ 7031(b), italics added) means that unlicensed contractors are required to return all compensation received without reductions or offsets for the value of material or services provided.”  (White, supra, at 520-521.)  (Underline added.)

The intent of Section 7031(a) is to "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."  (MW Erectors, Inc. v. Niederhauser Ornamental and Metal Works Co, Inc. (2005) 36 Cal.4th 412, 426.)  (Underline added.)

Section 7031 applies "despite injustice to the unlicensed contractor."  (Hydrotech Systems, supra, at 995.)

“The purpose of section 7031 is to deter unlicensed contractors from recovering compensation for their work.”  (E.J. Franks Construction, Inc. v. Sahota (2014) 226 Cal. App. 4th 1123, 1129.)  (Underline added.)

“In denying recovery to unlicensed contractors[,] courts have rationalized the harsh impact on some competent, but unlicensed, persons by deferring to the legislative determination that deterrence outweighs the cumulative effect of the penalty suffered by the contractor and the unjust enrichment obtained by the property owner.  (Executive Landscape Corp v. San Vicente County Villas IV Assn (1983) 145 Cal.App.3d 496, 498.)  (Underline added.)

“To accomplish that aim, section 7031 denies a contractor ‘access to the courts to recover for the fruits of his labor … when he violates the statute.’”  (Pacific Caisson & Shoring, Inc. v. Bernards Bros. Inc. (2011) 198 Cal.App.4th 681, 687.)  (Underline added.)

The Legislative intent of § 7031 further confirms the fact that disgorgement is narrowly tailored to target only unlicensed contractors.  As explained in White, supra, at 519-520:

"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….  Thus, unlicensed contractors are not able to avoid the full measure of the CSLL's civil penalties by (1) requiring prepayment before undertaking the next increment of unlicensed work or (2) retaining progress payments relating to completed phases of the construction."  (Underline added.)                   

Section 7031 is not intended to discourage those who hire unlicensed contractors, but rather to discourage unlicensed contractors from performing work without a license.  (See Id.)

While § 7031 is a harsh penalty, the legislature provides a “substantial compliance” exception in § 7031(e).  The court may determine that there has been substantial compliance if it is shown at an evidentiary hearing 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.

For any additional questions, or to schedule a meeting with HLG, please contact (619) 231-9800.

[1] Section 7026 states a contractor’s license is required for any work on a building or structure in excess of $500.  Work costing less requires no license.