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California's Draconian Section 7031 (Disgorgement)

Updated: Feb 15

The several states treat unlicensed contractors differently. For example, in Florida, unlicensed contractors can't sue for breach of contract; in Texas, most contractors aren't even required to be licensed (at the state level). But California takes the strictest approach I've seen.


Who is "unlicensed"?


In California, contractors have to take active steps to qualify for a Contractors State License Board ("CSLB") license before working as a contractor. Contractors must pass an examination or show that they have worked a minimum number of years. Contractors seeking a license must have certain types of insurance, bonds, etc. It is not always a simple process. It takes time and costs money, often excluding otherwise perfectly capable workers.


For that reason, an unlicensed contractor is anyone doing work for which a license is required.


If you don't have a CSLB license and you charge $10,000.00 to replace your neighbor's HVAC, you are "unlicensed." If you have an HVAC license but you charge $10,000.00 to complete a new roof (for which a roofing license is required), you are "unlicensed." If you have an HVAC license, but you do a one-year project, and your license is suspended for two months of that project, you are "unlicensed" during those months.


No Right to File Suit in Law or Equity


In California, individuals acting as a contractor without a license cannot sue for breach of contract for their work. They can't sue for unjust enrichment (often called a quasi-contract claim).


California codifies this extreme approach as Bus. & Prof. Code section 7031. Section 7031 states that no person acting as 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." Bus. & Prof. Code section 7031(a). So if you are not licensed, you cannot sue someone for breach of contract ("in law") or unjust enrichment ("or equity") (I covered the differences between the two here).


Disgorgement


But worse than that, California unlicensed contractors can be disgorged of any funds they received from the property owner!


Section 7031 continues: "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." Bus. & Prof. Code section 7031(b) (emphasis added).


This means that the property owner can sue the unlicensed contractor for everything they paid, simply because the contractor was not licensed at the time. So not only can you not sue the owner for what the owner failed to pay you, you will have to pay them back everything they did pay to you.


Why have this rule?


It's a consumer protection rule. The idea is that the licensure requirements protect property owners, as unlicensed contractors are more likely to harm the property, to use poor practices, result in poor workmanship, or injure others. The purpose is to deter those who lack (in the CSLB's and legislature's estimation) the knowledge, skill, or experience that contracting demands.


That said, it is unclear why this particularly harsh rule is necessary. Other states don't seem to have the problems that this rule seeks to deter.


Are there exceptions?


There are exceptions, but they are very, very limited.


Subsection 7031(e) provides a safe harbor for contractors if certain requirements are satisfied. A court may find that the "unlicensed" contractor was in substantial compliance with the licensure requirement if all of the following are satisfied: (1) the contractor was licensed as a contractor in California prior to performance, (2) the contractor acted reasonably and in good faith to maintain proper licensure, and (3) the contractor acted promptly and in good faith to remedy the failure to comply with the licensure requirements upon learning of the failure.


Another "exception" is for joint ventures. Joint ventures may be licensed if all of its constituents are licensed. If a joint venture fails to obtain a license, it is still exempted from Section 7031. Bus. & Prof. Code section 7029. I say "exception," because the constituents still have licenses, just not the joint venture itself.


The only other exception would be for handymen. California does not require a license for those performing work for less than $500.00. Bus. & Prof. Code section 7027.2.


There is no exception for good workmanship. There is no exception for the hiring party being satisfied with the improvement. There is no exception where the hiring party suffered no injury.


What if the hiring party knows that the contractor isn't licensed?


It does not matter.


See Judicial Council of California v. Jacobs Facilities, Inc. (2015) 239 Cal. App. 4th 882 ("...an unlicensed contractor is subject to forfeiture even if the other contracting party was aware of the contractor's lack of a license, and the other party's bad faith or unjust enrichment cannot be asserted by the contractor as a defense to forfeiture").


It's consumer protection; what makes that "draconian"?


Consumer protection claims often involve elements of harm and causation. That is, did someone do something prohibited, and did that action cause them harm? There are no such elements here.


Moreover, a contractor could, in theory, act completely in good faith believing that he or she has the right license. And a homeowner could act in bad faith, knowing the contractor's license is temporarily suspended, or that the contractor has inadvertently done work in an area for which the contractor does not have a license. The homeowner can sit back, watch the contractor perform, and then refuse to pay. The same homeowner can then sue for all the money that the homeowner had already paid.


If that weren't enough, Section 7028 makes it a crime to contract without a license. For example, " first conviction for the offense described in this section is punishable by a fine not exceeding five thousand dollars ($5,000) or by imprisonment in a county jail not exceeding six months, or by both that fine and imprisonment." Bus. & Prof. Code section 7028(b).


I stand by the word "draconian," as it has actually been applied to Section 7031 in case law. See American Sheet Metal, Inc. v. Em-Kay Engineering Company, Inc. (E.D. Cal. 1979) 478 F. Supp. 809, 814.


What is the statute of limitations for a disgorgement claim?


One year. Code Civ. Proc. section 340(a). See Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, Inc. 53 Cal.App.5th 1201.

Do any other states have this rule?


Not to my knowledge. In Texas, even unlicensed contractors can enforce mechanic's liens. The disgorgement rule seems to be particular to California.


Conclusion


California's approach to unlicensed contractors is exceptionally harsh. This is all the more true as there is apparently little need for the severity of it (see states like Texas that only require licenses for a handful of trades). It might be a good target for occupational licensing reformers.

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