Contractor Licensing Case Limits Disgorgement Remedy in CA

Wednesday, September 30, 2020

Contractors performing work in California are required to be licensed by the California State License Board (“CSLB”). Cal. Bus. & Prof. Code §7065. Apart from sole proprietors, contractors are usually licensed by means of “qualifiers,” i.e., officers or workers who take a licensing examination and meet different necessities to turn into licensed on behalf of the contractor’s firm. Contractors who carry out work in California with out being correctly licensed are topic to a world of harm, together with civil and legal penalties (see, e.g., Cal. Bus. & Prof. Code §§ 7028, 7028.6, 7028.7, 7117, and Cal. Labor Code §§ 1020-1022), and the lack to take care of a lawsuit to recuperate compensation for his or her work. Cal. Bus & Prof. Code § 7031(a); Hydra Tech Techniques Ltd. v. Oasis Water Park, 52 Cal.third 988 (1991).

However arguably the worst ramification of not being property licensed is that established in Enterprise & Professions Code Part 7031(b), which offers that any one who makes use of the companies of an unlicensed contractor might convey an motion for the return of all compensation paid for the efficiency of the work, generally often called “disgorgement.” This treatment is especially harsh (usually described as “draconian”) as a result of it makes no allowance for the truth that an unlicensed contractor will probably have already paid out the majority of its compensation to its subcontractors, suppliers and distributors, however nonetheless will be ordered to disgorge all compensation.

Given the complexity of California’s contractor license legislation, the disgorgement penalty threatens not simply contractors who willfully evade licensing, but in addition those that inadvertently fail to maintain their license present, those that are improperly licensed for the particular work they’re performing, and those that don’t meet specific underlying licensing necessities, e.g., failure to take care of employees compensation insurance coverage until actually exempt, and (arguably) failure of the qualifying agent to have ample supervision and management of his or her employer’s or principal’s building operations. Mission homeowners, particularly, have used disgorgement actions as each a sword and a protect in disputes with their common contractors.

In a brand new opinion addressing problems with “first impression” (i.e., by no means dominated on beforehand), Eisenberg Village of the Los Angeles Jewish House for the Ageing v. Suffolk Building Firm, Inc. (2nd App. Dist, B297247), filed August 26, 2020, the Court docket makes two vital holdings. The primary is that the time during which a disgorgement motion will be introduced (often called the statute of limitations) is just one 12 months. The second is that this one-year statute of limitation begins to run (accrue) on the date contractor’s work ceases — not from the date when the license violation is found. The premise for the primary holding is that disgorgement is each a legal responsibility created by statute and a penalty, and subsequently falls below Code of Civil Process Part 340(a), a one 12 months statute of limitations. The premise for the second holding is that the invention rule of accrual is predicated in fairness, whereas a disgorgement declare is just not meant to compensate claimant for any damage, however to punish the unlicensed contractor, and subsequently is just not topic to equitable concerns.

This ruling is a big win for contractors as a result of it considerably limits the time throughout which they’re uncovered to attainable disgorgement for non-licensure or for license violations that equate to non-licensure. In distinction, it deprives unwary homeowners of the flexibility to claim a disgorgement declare until they turn into conscious of the licensing violation inside one 12 months of the mission’s completion (although homeowners retain the flexibility to claim different causes of motion for longer intervals, e.g., two years for negligence, 4 years for breach of contract, and many others.).

In mild of Eisenberg, on the outset of a mission, a prudent proprietor will verify who the license qualifier is for its common contractor and doc his or her involvement within the mission from starting to finish (since sure supervisorial necessities should be met by an worker qualifier to ensure that the license to be legitimate). On the finish of a mission, a prudent proprietor can even assessment its contractor’s license standing from the date of the bid by means of closing completion. Not all homeowners will convey a disgorgement motion in opposition to an unlicensed contractor who carried out a mission nicely. However few will wish to forfeit their proper to convey such an motion by ready greater than a 12 months following closing completion to determine whether or not they have the grounds to take action.