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Timestamp: 2019-04-25 00:40:59+00:00

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HYDROTECH SYSTEMS, LTD., Plaintiff and Appellant, v. OASIS WATERPARK et al., Defendants and Respondents.
Sanger & Stein and Rick M. Stein for Plaintiff and Appellant.
Schlecht, Shevlin & Shoenberger, John C. Shevlin, Alvarado, Rus & McClellan and Joel S. Miliband for Defendants and Respondents.
Section 7031 of the Business and Professions Codefn. 1 states that one may not sue in a California court to recover "compensation" for "any act or contract" that requires a California contractor's license, unless one "alleges and proves" he was duly licensed at all times during the [52 Cal. 3d 992] performance. We granted review to decide two questions. The first is whether section 7031 permits an unlicensed nonresident to sue upon an "isolated transaction" in California where "exceptional circumstances" exist, even though there was no substantial compliance with California's licensing law. The second-an issue of potentially broad importance-is whether section 7031 bars an unlicensed contractor's fraud action against the person for whom the work was done.
We conclude, as did the Court of Appeal, that section 7031 contains no implied exception for foreign entities, isolated transactions, or other "exceptional" circumstances. We also hold, contrary to the Court of Appeal, that the statute bars an unlicensed contractor's claim for fraud when the primary deceit alleged is a false promise to pay, and the damages primarily consist of, or are measured by, the price or value of the work and materials furnished. Any other result would circumvent the clear statutory policy of deterring unlicensed contract work. We therefore affirm in part and reverse in part the decision of the Court of Appeal.
Plaintiff Hydrotech Systems, Inc. (Hydrotech), a New York corporation, manufactures and installs patented equipment designed to simulate ocean waves. Hydrotech claims that its product, and its skills at installing and maintaining the equipment are unique. Defendant Oasis Waterpark (Oasis), a California corporation, owns and operates a water-oriented amusement park in Palm Springs. Defendant Wessman Construction Company, Inc. (Wessman), was Oasis Waterpark's general contractor for construction of the park.
In July 1985, Hydrotech contracted with Wessman to design and construct in the park a 29,000-square-foot "surfing pool" using Hydrotech wave equipment. The total contract price was $850,000. Wessman was entitled to hold back specified portions of this amount pending satisfactory completion and operation of the pool.
In its fraud count, Hydrotech alleged as follows: Because it was concerned about licensing problems, Hydrotech wished only to sell and deliver its equipment and to avoid involvement in design or construction of the pool. However, Oasis insisted that Hydrotech's unique expertise in design and construction was essential. To induce Hydrotech to contract for these services, and "in response to repeated queries by Hydrotech," defendants promised that Wessman would arrange for a California contractor to "work with" Hydrotech on any construction activities which required a California license. Defendants also promised to pay in full for Hydrotech's wave equipment and for "associated equipment and services." In reasonable reliance on these promises, which defendants never intended to honor, Hydrotech furnished equipment and services in full compliance with its contract. Had Hydrotech known defendants' promises were false when made, it would not have performed under the contract, and therefore suffered damage according to proof.
Defendants demurred on grounds, inter alia, that the complaint failed to allege Hydrotech possessed a California contractor's license. Hydrotech conceded it had no California license. However, Hydrotech asserted that it sought only unpaid amounts for sale of equipment, for which a license was not required.fn. 2 In the alternative, Hydrotech claimed that application of section 7031 was unnecessary and unjust because Hydrotech possesses unique expertise in its field and provided construction services only at its customer's insistence. Hydrotech also argued that section 7031 does not bar tort actions for fraud.
The trial court sustained Wessman's demurrer to the written-contract count but granted Hydrotech leave to amend. The demurrers to all other causes of action in Hydrotech's complaint were sustained without leave to amend. The trial court entered an order dismissing all defendants save Wessman from the action.
The Court of Appeal rejected the former argument but accepted the latter. It reversed that portion of the trial court's judgment which dismissed Hydrotech's fraud count, but affirmed the dismissal of Hydrotech's complaint in all other respects.
1. Section 7031 applies despite the "exceptional circumstances" of this transaction.
[3a] Hydrotech renews its contention that the "exceptional circumstances" of its dealings with Oasis make application of section 7031 unnecessary and unjust. Hydrotech points to its allegations that it reluctantly provided construction services on a one-time basis only because Oasis solicited its specialized wave-generation expertise, which was available nowhere else. Hydrotech argues that the "isolated" provision of such specialized services by a mere subcontractor should be deemed exempt from section 7031. The law, however, is otherwise.
Section 7026 provides that, for purposes of the license requirements, "a contractor is any person, who undertakes to or offers to undertake to ..., or does himself or by or through others, construct ... any ... structure, project, development or improvement, or to do any part thereof, ... whether or not the performance of [such] work ... involves the addition to or fabrication into any [such] structure, project, development or improvement ... of any material or article of merchandise. The term contractor includes subcontractor and specialty contractor." (Italics added.) The numerous express exemptions from the licensing law (§ 7040 et seq.) do not include foreign contractors, isolated transactions, or "unique" building services and capabilities.
Section 7031 advances this purpose by withholding judicial aid from those who seek compensation for unlicensed contract work. The obvious statutory intent is to discourage persons who have failed to comply with the licensing law from offering or providing their unlicensed services for pay.
[3b] Hydrotech concedes that it had no California license, yet seeks contract compensation for activities which required such a license. It simply urges that California courts have recognized "exceptional circumstances" in which literal application of section 7031 would not further the purposes of the licensing law.
Hydrotech also begs the question by suggesting that Oasis' need for its unique skills should exempt it from section 7031. As noted, the licensing law achieves its protective purpose by requiring that a contractor's competence and qualifications, however unique, be examined and certified by the expert agency charged with the law's enforcement.
We therefore conclude, as did the Court of Appeal, that Hydrotech has alleged no "exceptional circumstances" which would exempt it from the operation of section 7031.
2. Section 7031 bars Hydrotech's fraud claim.
The Court of Appeal accepted Hydrotech's alternative claim that even if section 7031 eliminates contractual and quasi-contractual claims seeking "compensation" for unlicensed work, it does not bar Hydrotech's recovery of tort damages arising from defendants' fraud which induced Hydrotech to contract and perform. Defendants assert that the Court of Appeal thus erred. We agree.
 Hydrotech alleges that it was induced to enter and perform an illegal contract by a false promise to pay; that it would not have performed had it known the promise was false when made; and that it therefore suffered damage "according to proof." The complaint states no facts suggesting that the "damage" to be proven and recovered is anything other than that asserted elsewhere in the complaint-i.e., the unpaid contract balance or its quantum meruit equivalent.
In sum, Hydrotech proposes that defendants' unenforceable promise to pay for illegal work is actionable because defendants made the promise in bad faith. Such transparent pleading cannot be used to avoid section 7031.
The Court of Appeal concluded that disallowance of fraud claims like Hydrotech's would contravene the protective policies of the licensing law by encouraging professional contractors such as Wessman to seek out unlicensed subcontractors, secure in the knowledge that the work obtained would not have to be compensated. Justice Broussard expresses similar concerns that such a result would encourage the cheating of unlicensed contractors. (Conc. and dis. opn. of Broussard, J., post, at pp. 1003, 1006, 1008.) We are not persuaded, however. A general contractor may be disciplined for subcontracting with knowledge that the subcontractor is unlicensed. (§ 7118.) Moreover, the unusual circumstances of this case aside, it is unlikely that a rational general contractor would intentionally risk liability for claims that the subcontractor's unlicensed subcontractor had performed substandard work.
In any event, the statutory disallowance of claims for payment by unlicensed subcontractors is intended to deter such persons from offering their services, or accepting solicitations of their work. That policy applies regardless of whether the other party's promise to pay for the work was honest or deceitful.
Hydrotech relies heavily on three Court of Appeal decisions suggesting in particular contexts that section 7031 does not bar an unlicensed contractor's claims for fraud. We are not persuaded that those cases control our ruling here.
In Grant v. Weatherholt, supra, 123 Cal. App. 2d 34, owners of undeveloped land persuaded plaintiff, who was not a licensed contractor, to invest in a development venture. Plaintiff advanced funds, performed improvement work, and furnished materials, based on promises that his compensation would be credited toward the purchase price of a homesite. The owners had represented that the land was free of encumbrances, though in fact it was subject to a $25,000 deed of trust. When the deed of trust was foreclosed, plaintiff sued for breach of contract and also sought tort damages for defendants' false representation of the state of title.
The judgment of the Court of Appeal is reversed insofar as it upholds Hydrotech's cause of action for fraud, and affirmed in all other respects.
Lucas, C. J., Mosk, J., and Kennard, J., concurred.
Concurring and Dissenting.-I agree with the majority insofar as they hold that Business and Professions Code section 7031 (hereafter section 7031) bars plaintiff's actions for breach of contract, breach of implied contract, and money due and owing.
However, I must dissent from the determination that the fraud cause of action is also barred. The language of section 7031 has been repeatedly construed by the Courts of Appeal to permit actions for fraud, and the Legislature, despite amending the code section in other respects, has not changed the crucial language. Under the reenactment rule this should end the case. In any event, sound policy requires that the section should not be construed to bar any fraud claims. The majority's holding, barring some fraud claims but not others, not only rewards fraudulent wrongdoers, but defeats the protective policies of the code section by encouraging intentional wrongdoers to seek out and hire unlicensed contractors, secure in the knowledge that the work need not be compensated.
The complaint clearly alleges a fraudulent scheme whereby defendants with the intent of avoiding payment under their contract insisted that Hydrotech Systems, Inc. (Hydrotech), known to be unlicensed, engage in contracting work for which a license was required. This is not a case where Hydrotech solicited work in California. Hydrotech did not hold itself out as licensed to contract for the design and construction of the pool. Indeed, Hydrotech refused to engage in contracting work. Hydrotech sought only to sell wave-making equipment and sought to avoid involvement in design or construction. Defendants insisted that Hydrotech's unique expertise in design and construction was essential and refused to contract without Hydrotech's services. All parties were aware that Hydrotech had a licensing problem. To induce Hydrotech to perform, defendants promised, in addition to paying for the equipment, that arrangements would be made for a California contractor to "work with" Hydrotech on any construction activities which required a California license. Defendants never intended to, and did not, perform their promises. In reliance on defendants' false promises, Hydrotech furnished the equipment and services in full compliance with the contract. Now defendants, who solicited the contracting services aware that Hydrotech could not lawfully engage in them, seek unjust enrichment because Hydrotech succumbed to their fraudulent promises.
Until today, it was settled that section 7031 did not preclude actions for fraud. (Pickens v. American Mortgage Exchange (1969) 269 Cal. App. 2d 299, 302-304 [74 Cal. Rptr. 788]; Brunzell Constr. Co. v. Barton Development Co. (1966) 240 Cal. App. 2d 442, 446 [49 Cal. Rptr. 667]; Grant v. Weatherholt (1954) 123 Cal. App. 2d 34, 42-44 [266 P.2d 185].) In the leading case of Grant v. Weatherholt, supra, the court reasoned: "Plaintiff's cause of action for fraud is not 'for the collection of compensation for the performance of any act or contract for which a license is required.' Plaintiff's right is the outgrowth of the deceit practiced upon him by the defendants. The validity or invalidity of his contract does not affect that right. Proof of the contract under the cause of action for fraud was merely proof of the circumstances under which plaintiff's services were rendered and his money was expended.
The reasoning is unanswerable. The majority characterize the reasoning of Pickens, Brunzell Constr. Co. and Grant as "dicta" (maj. opn., ante, at p. 1000), but this is the basic reasoning of the cases.
The reenactment rule requires us to follow these cases. " 'Where a statute has been construed by judicial decision, and that construction is not altered by subsequent legislation, it must be presumed that the Legislature is aware of the judicial construction and approves of it.' (People v. Hallner (1954) 43 [52 Cal. 3d 1005] Cal.2d 715, 719 [277 P.2d 393]; People v. Fox (1977) 73 Cal. App. 3d 178, 181 [140 Cal. Rptr. 615].)" (Wilkoff v. Superior Court (1985) 38 Cal. 3d 345, 353 [211 Cal. Rptr. 742, 696 P.2d 134].) Section 7031 has been repeatedly amended since the 1954 decision in Grant v. Weatherholt (Stats. 1957, ch. 845, § 1, p. 2067; Stats. 1961, ch. 1325, § 1, p. 3105; Stats. 1965, ch. 681, § 1, p. 2059; Stats. 1989, ch. 368, § 1, No. 4 Deering's Adv. Legis. Service, p. 1262), and it has never provided that fraudulent wrongdoers may take advantage of the section or that denial of access to the courts in cases of fraud is one of the penalties imposed for violation of the licensing law.
Even if the reenactment rule were not controlling, the reasoning of the cases is compelling.
Moreover, sound policy requires that we do not go beyond the legislative determination that contract and implied contracts are barred by section 7031. The purpose of the section is the enforcement of the contractor's licensing law. The purpose is accomplished under the code by denying the unlicensed contractor the fruits of his labor and unjustly enriching the other party. The Legislature has thus established severe sanctions and forfeitures. (Asdourian v. Araj (1985) 38 Cal. 3d 276, 282 [211 Cal. Rptr. 703, 696 P.2d 95].) To further the purpose of deterring unlicensed contractors, the Legislature has provided that the unlicensed contractor may not recover in a contract action or implied contract action. It has never provided that fraudulent wrongdoers may be rewarded under the statute or that unlicensed people may not recover for fraud.
As the Court of Appeal pointed out in the instant case, the purpose of section 7031 is frustrated by holding that fraudulent wrongdoers may escape their debts by asserting the bar of section 7031. As stated above, the purpose of section 7031 is to deter unlicensed persons from engaging in contracting. Allowing fraudulent wrongdoers to obtain the substantial penalties and forfeitures and be unjustly enriched can only encourage owners and contractors to engage in fraudulent schemes to hire unlicensed persons in anticipation that, when the debts come due, they can turn their backs and refuse to pay in reliance on section 7031. As in the instant case, California contractors and owners will be encouraged to seek out and employ unlicensed out-of-state contractors in the hope of obtaining services without paying for them. We should not encourage such wrongdoing. On the other hand, the legislative policy of deterrence is not furthered by denying recovery for fraud. Unlicensed contractors are not encouraged to undertake the unlawful activity by the remote possibility that, if unpaid, they might be able to prove fraud.
In view of the language of section 7031, its consistent construction by the Courts of Appeal, and its history, it is apparent that the Legislature has balanced the dangers of encouraging fraud against the violation of the licensing statute and concluded against rewarding the fraudulent. We should accept its judgment.
The majority rely at length on Lewis & Queen v. N. M. Ball Sons (1957) 48 Cal. 2d 141 [308 P.2d 713] (maj. opn., ante, at pp. 997, 999, 1000-1001), but fail to point out that the court expressly stated that it was enforcing the terms of the statute and need not consider whether the harshness of the forfeiture, the evil of unjust enrichment, and avoidance of encouraging illegal conduct counselled in favor of enforcing the illegal contract. (48 Cal.2d at pp. 151-152.) In the course of its discussion, the court expressly recognized that in some cases "effective deterrence is best realized by enforcing the plaintiff's claim rather than leaving the defendant in possession of the benefit." (48 Cal.2d at p. 151.) In short, Lewis & Queen avoided the question whether courts in the absence of a statutory provision imposing a forfeiture penalty would refuse to enforce the illegal contracts violating the licensing law.
The case is of little help to the majority. The majority go beyond the words of the statute, as we have seen. Thus, the majority must show that [52 Cal. 3d 1007] "effective deterrence is best realized" by leaving the defendant in possession of the benefit. They fail to do so.
The majority appear to take the position that the provisions of section 7031 will be rendered meaningless if an unlicensed contractor can avoid them by alleging fraud. The argument is not a new one. Prior to this court's decision in Tenzer v. Superscope, Inc., supra, 39 Cal. 3d 18, a few Court of Appeal decisions had reasoned that if a plaintiff, by the transparent device of pleading an intention not to perform at the time of entering into a contract, could avoid statutory provisions designed to prevent fraud like the statute of frauds, the statute would be ineffective. However, mere pleading of fraud is not sufficient; the plaintiff must also prove fraud. In Tenzer the court pointed out that the argument in the Court of Appeal decisions assumes the inability of a jury to distinguish between an unkept but honest promise to perform and one which the promisor never intended to perform. As Justice Kaus observed in Southern Cal. etc. Assemblies of God v. Shepherd of Hills etc. Church, supra, 77 Cal. App. 3d 951, 958, footnote 3: "The law is otherwise. (People v. Ashley (1954) 42 Cal. 2d 246, 263-264 [267 P.2d 271].)" (39 Cal.3d at p. 29.) In Tenzer, the court concluded that the argument that actual fraud must be permitted to effectuate a statute designed to prevent fraud was invalid and disapproved the contrary cases. (39 Cal.3d at pp. 29-31.) In urging that the courts must grant rewards to those who engage in fraudulent conduct, the majority are seeking to resurrect the cases disapproved in Tenzer.
In fairness to the majority, I must recognize that they do not propose to prohibit all actions for fraud brought by an unlicensed contractor. The majority conclude that the proper result was reached in each of the cases, Grant, Brunzell, and Pickens, where the Courts of Appeal held that the cause of action for fraud by an unlicensed contractor was not barred by section 7031. (Maj. opn., ante, at p. 1001.) The majority state that the distinction between those fraud cases and the instant one is that "the primary fraud alleged in each case was external to the construction work as such ...." (Maj. opn., ante, at p. 1001.) I am not sure what the distinction is. In each case the claim was that the owner or contractor did not intend to perform. In each case the plaintiff was seeking to recover damages so far as appears measured by the falsely promised performance.
If the distinction sought to be made is between fraud cases where the interest protected is collateral to the licensing law and those where the code section is intended as the instrument of fraud, the majority's priorities are misplaced, and even were we to apply them, the majority reach the wrong result on the facts of the case. As between fraudulent wrongdoers who seek to take advantage of their victims on the basis of section 7031 and those [52 Cal. 3d 1008] who indulge in other fraudulent conduct, the law should be most concerned with those whose fraudulent schemes seek to take advantage of the statute. Secondly, under the allegations of the complaint, plaintiff sought to sell its wave-making product to defendant without contracting to do the installation. The sale obviously would not involve a violation of the contractor's licensing statute. It was the defendants who insisted that plaintiff engage in the installation of the product and undertake work requiring a license. When the lack of a contractor's license was raised, it was the defendants who promised to arrange for a licensed contractor, never intending to perform their promises. The basic agreement was for the sale of the equipment, and under the test apparently established by the majority, the construction and supervision services appear to be collateral.
I cannot agree that we should reward fraudulent parties and I would affirm the judgment of the Court of Appeal.
FN 1. All further statutory references are to the Business and Professions Code unless otherwise indicated.
FN 2. Hydrotech has not renewed this contention on appeal.
FN 4. Oasis demurred specially on the additional ground that the complaint failed to show Hydrotech's capacity to sue because it did not allege that Hydrotech, as a foreign corporation conducting "intrastate business," had obtained the required "certificate of qualification" from the Secretary of State. (Corp. Code, §§ 2105, 2203, subd. (c).) The Court of Appeal concluded it did not have to reach the qualification issue because it had held that Hydrotech's contract claims were barred in any event by section 7031. This analysis overlooks the fact that the appellate court did exempt Hydrotech's fraud claim from section 7031. Nonetheless, the qualification issue is not presented by this appeal. Unless the governing statute states otherwise, a complaint need not allege the plaintiff's capacity to sue. If lack of capacity does not appear on the face of the complaint, it cannot be raised by demurrer, but is a special plea in abatement. (See, e.g., Traub Co. v. Coffee Break Service, Inc. (1967) 66 Cal. 2d 368, 370 [57 Cal. Rptr. 846, 425 P.2d 790]; Haley & Co. v. McVay (1924) 70 Cal. App. 438, 440 [233 P. 409]; 5 Witkin, Cal. Procedure (3d ed. 1985) Pleading, §§ 1055-1056, pp. 470-471.) Hydrotech's complaint does not disclose on its face that Hydrotech has conducted "intrastate business" as defined by statute (see Corp. Code, § 191, subd. (c)(8)), or that it failed to obtain any required certificate. Thus, no further discussion of the qualification issue is warranted.
FN 8. In support of its premise that licensing statutes do not bar tort claims by the unlicensed person, Grant cited In re Dennery (1891) 89 Cal. 101 [26 P. 639], Ralph v. Lockwood (1882) 61 Cal. 155, Thompson v. Byers (1931) 116 Cal. App. 214 [2 P.2d 496], and Reeves v. First Nat. Bank (1912) 20 Cal. App. 508 [129 P. 800]. None of those cases construed section 7031, however. Rather, all were concerned with the statute barring suit by a business on its contracts or transactions under a fictitious name, until a fictitious-name certificate has been obtained. (§ 17918 [formerly Civ. Code, § 2468].) The two statutory schemes are materially distinct. Failure to comply with the fictitious-name statutes does not make the parties' promises, agreements, and transactions invalid as such. Noncompliance merely prevents a fictitiously named business from enforcing obligations owed to it until it places on record its true nature and ownership. The object of section 17918 is simply to ensure that those who do business with persons operating under a fictitious name will know the true identities of "'the individuals with whom they are dealing or to whom they are giving credit or becoming bound.' " (Asdourian v. Araj, supra, 38 Cal.3d at p. 289, fn. 8, quoting Levelon Builders, Inc. v. Lynn (1961) 194 Cal. App. 2d 657, 662-663 [15 Cal. Rptr. 582].) The statute's purpose is not served by extending its protection to one who committed a tort against a fictitiously named business. On the other hand, because of the dangers of incompetence and dishonesty, it is illegal to perform compensated work without a required license; the inducement or consideration offered for the work is thus invalid and unenforceable ab initio. (See Lewis & Queen, supra, 48 Cal.2d at pp. 151-154.) That the inducement was falsely offered should make no difference.
FN 11. Nor can Hydrotech claim tort damages stemming from reasonable reliance on false promises that Oasis and Wessman would arrange for a licensed California contractor to "work with" Hydrotech on the pool project. Even if such an arrangement might then have "substantially complied" with the licensing requirements, Hydrotech chose to perform unlicensed contracting activities despite the obvious absence of the promised California licensee.
FN 1. The concurring opinion implies that recent cases have repudiated the reenactment rule. However, in the cases cited, either there was no reenactment (People v. Daniels (1969) 71 Cal. 2d 1119, 1127-1128 [80 Cal. Rptr. 897, 459 P.2d 225, 43 A.L.R.3d 677]) or the provisions changed in the reenactment were entirely unrelated to the provision previously construed (Moradi-Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal. 3d 287, 300-301 [250 Cal. Rptr. 116, 758 P.2d 58]; Cianci v. Superior Court (1985) 40 Cal. 3d 903, 922-923 [221 Cal. Rptr. 575, 710 P.2d 375]).

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