Opinion ID: 2576241
Heading Depth: 1
Heading Rank: 6

Heading: Validity of agreement executed by unlicensed contractor.

Text: Niederhauser concedes MW held a valid C-51 structural steel contractor's license at all times during MW's performance of the ornamental contract. However, Niederhauser notes that MW had no valid California contractor's license when it executed the ornamental contract. [14] Niederhauser urges that an agreement for work requiring a contractor's license is illegal, void, and unenforceable from the outset if the contractor was unlicensed at the time the agreement was entered. However, we agree with MW and the Court of Appeal that one 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 he or she was not licensed when the agreement was signed. At the outset, we take note that allowing suit and recovery under such circumstances violates no express term of section 7031(a). That statute prohibits a contractor from suing for the collection of compensation for the performance of any act or contract where a license is required ... without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract. ( Ibid., italics added.) The act of executing an agreement is not one for which a contractor seeks compensation; rather, he or she pursues payment for carrying out the contract in a satisfactory manner. (See Vitek, Inc. v. Alvarado Ice Palace, Inc. (1973) 34 Cal.App.3d 586, 590, 110 Cal.Rptr. 86 ( Vitek ).) Hence, we conclude, the due licensure of which section 7031(a) speaks is due licensure while the contract itself is being performed. Niederhauser points out that, wholly apart from section 7031, the CSLL makes it a misdemeanor for any person to engage in the business or act in the capacity of a contractor within this state without having a license therefor.... (§ 7028, subd. (a), italics added.) The CSLL defines a contractor as one who, among other things, undertakes to or offers to undertake to, or ... submits a bid to engage in specified building and construction services. (§ 7026.) MW so acted in contravention of the CSLL, Niederhauser urges, when, lacking a license, it agreed to perform the services contemplated by the ornamental contract. The contract itself, Niederhauser posits, is therefore unlawful. Generally a contract made in violation of a regulatory statute is void. Under this general rule, where a law requires, for regulatory rather than revenue purposes, that one procure a license before offering or performing certain services and provides a penalty for violation, the contract of an unlicensed person to perform such services will not be upheld. (E.g., Asdourian v. Araj (1985) 38 Cal.3d 276, 291, 211 Cal.Rptr. 703, 696 P.2d 95 ( Asdourian ); see 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 491, p. 436.) This rule is based on the rationale that `the public importance of discouraging such prohibited transactions outweighs equitable considerations of possible injustice between the parties.' [Citation.] ( Asdourian, supra, at p. 291, 211 Cal.Rptr. 703, 696 P.2d 95.) The CSLL is a regulatory statute. It seeks to protect the public from incompetence and dishonesty in those who provide building and construction services and to provide minimal assurance that all persons offering such services ... have the requisite skill and character, understand applicable local laws and codes, and know the rudiments of administering a contracting business. [Citations.] ( Hydrotech, supra, 52 Cal.3d 988, 995, 277 Cal.Rptr. 517, 803 P.2d 370.) Accordingly, any number of cases, including decisions of this court, have stated that the courts will not enforce an agreement for contractor services executed by a person who was not duly licensed to perform them. (E.g., Lewis & Queen, supra, 48 Cal.2d 141, 150-151, 308 P.2d 713; Loving & Evans v. Blick, supra, 33 Cal.2d 603, 607-608, 204 P.2d 23; Gatti v. Highland Park Builders, Inc. (1946) 27 Cal.2d 687, 689, 166 P.2d 265; Holm, supra, 20 Cal.App.2d 332, 334-337, 67 P.2d 114; see General Ins. Co. v. Superior Court (1972) 26 Cal.App.3d 176, 182, 102 Cal.Rptr. 541.) However, Niederhauser has cited no modern case under the CSLL, and we have found none, which applied this principle to deny recovery where a contractor, though not licensed at the time he or she executed the agreement, was fully licensed at all times during its performance. [15] Moreover, the rule expressed by these decisions is not absolute, and many exceptions have arisen. ( Asdourian, supra, 38 Cal.3d 276, 291, 211 Cal.Rptr. 703, 696 P.2d 95.) One of these was stated in Lewis & Queen, supra, 48 Cal.2d 141, 308 P.2d 713: In some cases ... the statute making the conduct illegal, in providing for a fine or administrative discipline, excludes by implication the additional penalty involved in holding the illegal contract unenforceable. ( Id., at p. 151, 308 P.2d 713, italics added.) In Vitek, supra, 34 Cal.App.3d 586, 110 Cal.Rptr. 86, the court, after examining specific provisions of the CSLL, applied this principle to conclude that one fully licensed during performance of a contract may recover even if unlicensed when the contract was entered. Plaintiff Vitek's contractor's license had expired and was not in effect on the Friday the construction contract was signed. The license was renewed the following Monday, the day the defendant made its first payment under the contract and Vitek began work. The license remained in effect until construction was complete. The trial court later awarded Vitek judgment for amounts due under the agreement. The defendants appealed, urging that recovery was barred because Vitek had not been duly licensed at all necessary times. The Court of Appeal affirmed. The court first construed section 7031 as barring recovery only if the contractor was not duly licensed at all times during performance of a contract. Because Vitek's license had been continuously in effect during the entire period of construction, the court reasoned, section 7031 had been satisfied. ( Vitek, supra, 34 Cal.App.3d 586, 590, 110 Cal.Rptr. 86.) The court then considered whether, wholly apart from section 7031 ( Vitek, supra, 34 Cal.App.3d 586, 590, 110 Cal.Rptr. 86), the contract was illegal and void, and therefore unenforceable, because Vitek had no valid license when it was executed, contrary to the CSLL's proscription against acting as a contractor while unlicensed. Acknowledging the general rule that contracts in violation of regulatory statutes are void, the court nonetheless reasoned that the individual statute, its provisions, and its purposes, must be examined to determine whether its deterrent purposes require the voiding of otherwise fair and moral agreements. ( Id., at pp. 592-593, 110 Cal.Rptr. 86.) In this regard, the Vitek court observed that [t]he penalty provisions provided by the Legislature call for imposition of punishment for a misdemeanor where the party acts in the capacity of a contractor (§ 7028) and deny the party the right to bring or maintain [an] action [for compensation] based on performance (§ 7031). Normally, a court will not impose additional penalties for [noncompliance] with the licensing requirement. [Citations.] ( Vitek, supra, 34 Cal.App.3d 586, 592, 110 Cal.Rptr. 86, italics added.) The court reasoned that where, as here, the contract's object is not inherently wrongful or contrary to sound public policy, it will be deemed void only if it falls within the area which the Legislature intended as part of deterrence necessary to protect the public interest. ( Id., at p. 593, 110 Cal.Rptr. 86, fn. omitted.) The court conceded that the CSLL's purpose is to protect the administration of the licensing law as well as to protect the public from incompetent and untrustworthy artisans. [Citation.] ( Vitek, supra, 34 Cal.App.3d 586, 594, 110 Cal.Rptr. 86.) However, the court concluded, the Legislature had addressed the former concern solely by imposing misdemeanor sanctions for unlicensed acts other than the performance of unlicensed work, and had reserved the bar against civil suit for cases where the contractor was unlicensed during such performance. Under these circumstances, the court held, the civil bar should not be expanded beyond its explicit legislative bounds. ( Ibid. ) Gaines v. Eastern Pacific (1982) 136 Cal.App.3d 679, 186 Cal.Rptr. 421 ( Gaines ), reached a similar result. Eastern Pacific, acting as a general contractor, subcontracted concrete work for an apartment complex to Gaines. Gaines began work the next day, but Eastern Pacific did not receive its contractor's license until approximately a month later. Gaines later sued Eastern Pacific for breach of contract. Eastern Pacific cross-complained for damages arising from Gaines's alleged improper performance of its assigned work. Gaines appealed the cross-judgment in Eastern Pacific's favor, asserting Eastern Pacific's lack of licensure when the subcontract was executed. The Court of Appeal held, among other things, that Eastern Pacific's nonlicensure during the agreement's first month did not void the contract, thus precluding Eastern Pacific's recovery, because Eastern Pacific had not been called upon to perform services under the agreement, related to its counterclaim for damages, until well after its license was in place. As had Vitek, supra, 34 Cal.App.3d 586, 110 Cal.Rptr. 86, the Gaines court stressed that section 7031, by its terms, imposes a civil bar only against contractors who were not licensed at all times during their performance. ( Gaines, supra, at p. 682, 186 Cal.Rptr. 421.) In Asdourian, supra, 38 Cal.3d 276, 211 Cal.Rptr. 703, 696 P.2d 95, this court cited Vitek, supra, 34 Cal.App.3d 586, 110 Cal.Rptr. 86, in two respects pertinent to our analysis here. Plaintiff Asdourian performed three remodeling projects for defendant Araj, a real estate investor. These included work on converting a garage to a restaurant, and renovation jobs on a four-flat apartment building and a single-family home. Asdourian had personally qualified for a contractor's license, and a license had been issued to Artko Remodeling and Construction (Artko), his sole proprietorship, with Asdourian listed on the certificate as the responsible managing party. However, Asdourian technically violated the CSLL by accepting and performing the three projects in his own name, not Artko's. Moreover, in violation of statutes regulating the sale and provision of home improvements (§ 7150 et seq.), no written contracts covered the residential work. Asdourian won judgment for amounts due and unpaid on the three projects. Araj appealed, asserting that Asdourian's recovery was barred by his nonlicensure, and that any agreements for improvement of the residential properties were void, and thus unenforceable, because they were not in writing. We affirmed. Addressing the home improvement violation, the majority acknowledged the general rule that contracts in violation of regulatory statutes are invalid. However, the majority invoked Vitek, supra, 34 Cal.App.3d 586, 110 Cal.Rptr. 86, for the premise that the rule will not be applied where the penalties imposed by the Legislature exclude by implication the additional penalty of holding the contract void. ( Asdourian, supra, 38 Cal.3d 276, 291, 211 Cal.Rptr. 703, 696 P.2d 95.) As the Asdourian majority noted, the statutes in question made violation of the writing requirement a misdemeanor, but they nowhere expressly declared that a noncomplying contract was void. Though the Legislature had amended the original statutes to remove a provision explicitly stating that home improvement contracts were not void solely for failure to put them in writing, the majority concluded the Legislature had not thereby expressed an intent to invalidate all noncomplying contracts. The agreements in question, the majority noted, were not `intrinsically illegal' (i.e., wrongful in their object) ( Asdourian, supra, 38 Cal.3d 276, 293, 211 Cal.Rptr. 703, 696 P.2d 95, quoting Vitek, supra, 34 Cal.App.3d 586, 593, 110 Cal.Rptr. 86); thus, they were not automatically void, but merely voidable depending on the factual context and the public policies involved. ( Ibid. ) The majority observed that the requirement of written home improvement contracts was intended to protect unsophisticated homeowners, but defendant Araj was not unsophisticated, Asdourian performed the improvement projects fully and honestly, and denying him recovery under such circumstances would unjustly enrich Araj. ( Id., at pp. 293-294, 696 P.2d 95.) As to the licensing violation, the majority concluded that Asdourian had substantially complied with licensure requirements, because his personal qualifications were the basis of Artko's license, which was in effect at all times during the relationship between the parties. Under those circumstances, the majority reasoned, a license issued in Asdourian's own name would not have provided Araj with any greater assurance that he was dealing with an experienced, competent, and qualified contractor. ( Asdourian, supra, 38 Cal.3d 276, 286, 211 Cal.Rptr. 703, 696 P.2d 95.) [16] Noting that Asdourian used his own name when entering the transactions, in technical violation of section 7028.5 (no member of a licensed contacting business shall act individually as a contractor without having a valid license), the majority concluded that this did not prevent [Araj] from receiving the full and effective protection of the statute. ( Asdourian, supra, 38 Cal.3d 276, 285, 211 Cal.Rptr. 703, 696 P.2d 95, fn. omitted.) Moreover, the majority observed, [a]t least two courts ... have held that section 7031 does not require a license at the time of execution of a contract. ( Gaines, supra, 136 Cal.App.3d 679, 186 Cal.Rptr. 421; Vitek, supra, 34 Cal.App.3d 586, 110 Cal.Rptr. 86; see also, General Ins. Co. v. Superior Court, supra, 26 Cal.App.3d 176, 102 Cal.Rptr. 541.) These courts have noted the statute requires the contractor to prove only that he was duly licensed at all time ` during the performance of [ the ] act or contract. ' ( Vitek, supra, 34 Cal.App.3d at p. 590, 110 Cal.Rptr. 86, italics in original.) ( Id., at p. 285, fn. 7, 696 P.2d 95.) [17] We now confirm that the CSLL does not automatically void all contracts entered by unlicensed contractors. As indicated in Vitek, supra, 34 Cal.App.3d 586, 110 Cal.Rptr. 86, the statute expresses no such legislative intent. The CSLL imposes misdemeanor punishment (§§ 7028, 7028.2) and authorizes both injunctive relief (§§ 7028.3, 7028.4) and civil citations and penalties (§§ 7028.6-7028.14) against persons who act as unlicensed contractors. It also expressly bars suits to collect compensation for unlicensed work (§ 7031(a)), but does not extend the bar to persons who, though they performed while licensed, were unlicensed when they agreed to perform the work. This detailed and comprehensive enforcement scheme thus excludes by implication such an additional penalty. Indeed, the Legislature has demonstrated, elsewhere in the CSLL, that it knows how to invalidate the agreements of unlicensed contractors when it wishes to do so. Section 7028.15, subdivision (e), as amended in 1990 (Stats.1990, ch. 321, § 1, p. 1605), expressly provides that [a]ny contract awarded [by a public agency ] ... to[] a contractor who is not licensed pursuant to this chapter is void.  (Italics added.) As noted, no CSLL provision similarly treats an unlicensed contractor's agreement with a private person or entity. [18] An agreement for contractor services has no wrongful object whose enforcement is forbidden by fundamental public policy (see Civ.Code, §§ 1595, 1596, 1598), merely because the contractor was unlicensed at the moment he or she executed it. Insofar as unlicensed execution of such a contract violates the CSLL's regulatory provisions, the statute provides specified civil and criminal sanctions for such conduct. (See text discussion, ante. ) On the other hand, while the CSLL denies use of the courts to recover compensation for the unlicensed performance of contracting work, the statute nowhere extends that disability to a contractor's unlicensed agreement with a private entity. As Asdourian, supra, 38 Cal.3d 276, 211 Cal.Rptr. 703, 696 P.2d 95, and Vitek, supra, 34 Cal.App.3d 586, 110 Cal.Rptr. 86, make clear, courts will not, under such circumstances, extend the harsh sanction of forfeiture beyond the bounds set by the Legislature absent a showing that such a result is essential to effectuate the statute's protective purposes. We see no such necessity here. As indicated, the CSLL expressly provides multiple means of enforcing the general ban on acting as an unlicensed contractor, insofar as that prohibition includes the mere execution of contracting agreements while unlicensed. Though the Legislature barred recovery of compensation by unlicensed contractors under certain circumstances, it did not impose this bar against contractors who, though licensed at all times during performance of contracting work, had executed agreements for the work while unlicensed. No compelling reason exists to conclude that the public protective purposes of the CSLL can only be served by deeming such contracts illegal, void, and unenforceable on that basis alone. Courts have reached similar conclusions under analogous provisions of the real estate broker licensing statutes. Where such statutes imposed criminal and civil penalties for nonlicensure, and also barred suits for compensation for the performance of acts requiring a license unless the broker was licensed at the time the alleged cause of action arose, the decisions have consistently held that a broker who was unlicensed when he or she agreed to provide real estate services may nonetheless recover compensation if duly licensed at the time a buyer was procured. ( Fewel & Dawes, Inc. v. Pratt (1941) 17 Cal.2d 85, 90, 109 P.2d 650 [agreeing that broker may recover if licensed at time contract is performed]; McNichols v. Nelson Valley Bldg. Co. (1953) 116 Cal.App.2d 266, 271, 253 P.2d 744; Brenneman v. Lane (1927) 87 Cal.App. 414, 417, 262 P. 400; Radich v. Cernokus (1924) 65 Cal.App. 452, 454, 224 P. 124; Houston v. Williams (1921) 53 Cal.App. 267, 270-272, 200 P. 55 [where compensation statute required licensure only when cause of action arose, [b]y implication any earlier period was excluded]; see Estate of Lopez (1992) 8 Cal.App.4th 317, 324, 10 Cal.Rptr.2d 67 [where, under Probate Code, liability of decedent's estate for real estate broker's commission attached when sale was consummated, broker's cause of action against estate arose at that time; hence, despite prior lapses in licensure, broker could sue for commission if then licensed].) It is true that where contractors' licenses had lapsed during performance, pre-1989 decisions under the CSLL, applying the judicial doctrine of substantial compliance, stressed that due licensure at the time of contracting was an important factor in assuring the statute's protective purposes had been served. Thus, Latipac, supra, 64 Cal.2d 278, 49 Cal.Rptr. 676, 411 P.2d 564, explained that licensure at the time of contracting was crucial to the decisions of the other contracting party and to the prospective subcontractors and other creditors who might extend credit in reliance upon the validity of that contract. The key moment ... when the existence of the license becomes determinative is ... when the other party to the agreement must decide whether the contractor possesses the requisite responsibility and competence and whether [such other party] should, in the first instance, enter into the relationship. The license, as an official confirmation of the contractor's responsibility and experience, then plays its important role. Then, too, it serves as a basic determinant in the decision of prospective subcontractors and other creditors as to whether to extend credit to the contractor on the strength of the contract. ( Id., at p. 282, 49 Cal.Rptr. 676, 411 P.2d 564; see also, e.g., Steinwinter v. Maxwell (1960) 183 Cal.App.2d 34, 37-38, 6 Cal.Rptr. 496 [rejecting substantial compliance where contractor whose license lapsed during performance was not licensed at the time the contract was executed].) For several reasons, however, we do not find this analysis dispositive here. First, while the pre-1989 decisions suggested that nonlicensure at the time of contracting was an influential factor in assessing substantial compliance, none deemed it crucial. Asdourian, supra, 38 Cal.3d 276, 211 Cal.Rptr. 703, 696 P.2d 95, confirmed that Latipac, supra, 64 Cal.2d 278, 49 Cal.Rptr. 676, 411 P.2d 564, had declined to decide if any of the substantial compliance factors discussed therein, singly or in combination, were necessary or sufficient. ( Asdourian, supra, at p. 284, 211 Cal.Rptr. 703, 696 P.2d 95.) Asdourian then proceeded to find substantial compliance although the contractor in that case, who had agreed in his own name to perform the work for which he sought compensation, had no personal license then, or at any time during performance. ( Id., at pp. 284-286, 289, 211 Cal.Rptr. 703, 696 P.2d 95.) [19] Moreover, even if due licensure at the time of contracting favors the conclusion that the other party received the statute's full protection despite a later lapse in licensure, this does not mean nonlicensure at the time of contracting negates such protection where all performance was licensed. After all, as Latipac, supra, 64 Cal.2d 278, 49 Cal.Rptr. 676, 411 P.2d 564, suggested, one contemplating professional dealings with a contractorwhether as a client, surety, general contractor or subcontractor  presumably will consider it important to determine at the outset whether the contractor is then duly licensed. If no valid license is then in place, such a party may simply decline to enter the relationship. [20] Post-1989 statutory revisions to the substantial compliance doctrine suggest the Legislature itself does not consider due licensure at the precise moment of contracting to be crucial to the CSLL's protections. As discussed above, section 7031 allows a contractor who suffers a license lapse during performance to establish substantial compliance, under specified circumstances, if he or she held a valid California contractor's license at some time  prior to the performance of the act or contract for which compensation is sought. ( Id., subd. (e), italics added; see also id., former subd. (d).) This broad language may include a person whose previously valid license had lapsed at the time the agreement was entered, or one who did not first obtain a valid license until after the contract was signed. Niederhauser urges that upholding MW's right to recover on the ornamental steel contract, though MW had no license when that agreement was executed, would violate principles emphasized in Hydrotech, supra, 52 Cal.3d 988, 277 Cal.Rptr. 517, 803 P.2d 370. We disagree. In that case, Hydrotech, a New York manufacturer of wave-simulation machinery, agreed with defendant Wessman, the general contractor for a California water park, to design and build a surfing pool at the park using Hydrotech equipment. According to Hydrotech, it expressed concern about California license requirements, but Wessman and the water park's owner persuaded Hydrotech to proceed, promising both to arrange for help from a licensed California contractor and, in any event, to pay for the equipment and services provided by Hydrotech. Hydrotech performed the agreed work without securing the necessary California license. When a payment dispute arose, Hydrotech sued. The defendants asserted Hydrotech's nonlicensure as a bar. Hydrotech urged that the CSLL does not require a license for `isolated' or `exceptional' California transactions. ( Hydrotech, supra, 52 Cal.3d 988, 992, 277 Cal.Rptr. 517, 803 P.2d 370.) Alternatively, Hydrotech claimed that, even if section 7031 eliminates contractual or quasi-contractual claims seeking compensation for unlicensed work, the statute did not bar a fraud claim based on the defendants' false promise to pay despite their understanding that Hydrotech would do the work without a license. We rejected both arguments. Confronting the fraud issue, we reasoned that [r]egardless of the equities, section 7031 bars all actions, however they are characterized, which effectively seek `compensation' for illegal unlicensed contract work. [Citation.] ( Hydrotech, supra, 52 Cal.3d 988, 997, 277 Cal.Rptr. 517, 803 P.2d 370, italics added.) Hence, we concluded, Hydrotech could not circumvent the statute by alleging that when the illegal contract was made, the other party had no intention of performing. Section 7031 places the risk of such bad faith squarely on the unlicensed contractor's shoulders. `Knowing that they will receive no help from the courts and must trust completely to each other's good faith, the parties are less likely to enter an illegal arrangement in the first place. [Citations.]' ( Id., at p. 998, 277 Cal.Rptr. 517, 803 P.2d 370, quoting Lewis & Queen, supra, 48 Cal.2d 141, 150, 308 P.2d 713, second italics added by Hydrotech. ) Addressing the Court of Appeal's concern that denial of fraud claims would encourage general contractors to seek out and cheat unlicensed subcontractors, Hydrotech further observed that 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, supra, 52 Cal.3d 988, 998, 277 Cal.Rptr. 517, 803 P.2d 370.) As Hydrotech suggested, an offer, or acceptance of a solicitation, to perform unlicensed contract work is illegal. If the work offered or solicited is performed without a license, the contractor must rely solely on the other party's good faith for payment, and a claim for compensation will be disallowed under section 7031, regardless of the balance of equities or the manner in which the claim is framed. Proper application of section 7031, and of the other sanctions provided by the CSLL, thus rightly discourages contractors from entering arrangements for unlicensed work. But Hydrotech did not consider whether an agreement for contractor services is void and unenforceable solely because the contractor, though fully licensed at all times during performance, was not licensed when the agreement was executed. Nothing in Hydrotech stands for the proposition that the contractor is barred from recovery in such a case. Niederhauser notes that courts have concluded, under various other licensing laws, that contracts for performance of services requiring a license were illegal and void if executed by unlicensed persons. (E.g., Styne v. Stevens (2001) 26 Cal.4th 42, 51, 109 Cal.Rptr.2d 14, 26 P.3d 343 [Talent Agency Act]; Payne v. De Vaughn (1926) 77 Cal.App. 399, 404, 246 P. 1069 [architect]; see generally 1 Witkin, Summary of Cal. Law, supra, Contracts, §§ 491-493, pp. 436-439.) Of course, we express no views on statutory schemes not at issue here. But we know of no modern decision that barred a suit to recover compensation by one who, though unlicensed when a contract for services was entered, was fully licensed at all times during performance, under a statute which expressly barred recovery only for nonlicensure at the latter time. For reasons we have expressed, we are satisfied that application of the void contract principle is inappropriate in such cases under the CSLL. Accordingly, we conclude that MW is not barred from recovering compensation for its work under the ornamental contract on the sole ground that it was unlicensed when it executed that agreement.