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The importance of proper licensing for contractors
By Jennifer Therrien on September 21, 2017 at 12:52 PM

Close up of file folder with one labeled "licenses"The potential ramifications of performing construction without being properly licensed can be severe. Fines and penalties are only the tip of the iceberg. For example, in several states, a contractor that is not properly licensed is precluded from filing a mechanic’s lien. In other states, an unlicensed contractor is precluded from bringing a lawsuit to recover amounts due and owing for its work. California imposes an even harsher punishment — unlicensed contractors may be required to disgorge monies paid for work performed without a license. Finally, several states impose criminal penalties for failure to comply with licensing statutes.

As a result, it is important to examine the licensing requirements of each state and jurisdiction in which you intend to perform work. The requirements to obtain a license not only vary by state, but also by the type of work. For example, in Missouri and Illinois, although general contractors generally do not need licenses, certain specialty contractors do. Further, this investigation needs to be performed prior to bidding, as the licensing laws of many states require that a license be obtained not only to perform work in that state, but also to submit a bid for construction work in that state. The cases below highlight the importance of being properly licensed:

In Twenty-Nine Palms Enters. Corp. v. Bardos, 210 Cal.App.4th 1435 (Cal. Ct. App. 2013), a tribal corporation sought to recover in excess of $750,000 it paid to an unlicensed contractor for a road and parking lot the contractor had constructed for its casino. Although the contractor completed the work, the California Court of Appeals ordered the contractor to disgorge the entire amount paid by the tribal corporation.

In Alatriste v. Cesar’s Exterior Designs, Inc., 183 Cal.App.4th 656 (Cal. Ct. App. 2010), a homeowner contracted to have landscaping work performed at his house. At the time the homeowner contracted with the landscaper, the homeowner was aware that the contractor was not licensed but was planning to become licensed. The contractor obtained its license shortly before completing its work. The homeowner, however, filed suit against the contractor to recover all sums it paid the landscaper. The California Court of Appeals upheld summary judgment in the homeowner’s favor, and the landscaper was required to return all amounts paid by the homeowner. Notably, the court found that the homeowner’s knowledge that the contractor was not licensed was not relevant. Further, based on the language of California’s statute, the court found that the contractor was required to return the entire amount paid, even though the contractor was licensed during a portion of the work performed. See also Jeff Tracy, Inc. v. City of Pico Rivera, 240 Cal.App.4th 510 (Cal. Ct. App. 2015) (confirming that a licensed, or improperly licensed, contractor is not entitled to an offset or apportionment for the time period in which it was properly licensed).

In Earth Trades, Inc. v. T&G Corp., 108 So.3d 580 (Fla. 2013), the Florida Supreme Court reached a similar conclusion regarding knowledge about a contractor’s lack of licensure. In Earth Trades, a subcontractor brought claims against the general contractor for breach of contract, alleging nonpayment for work it had performed. The general contractor contended that the subcontractor was precluded from bringing such claims because it was not licensed. The subcontractor defended against such claims, alleging the general contractor was aware that it did not have a license. The court held that, under Florida law, the defense of in pari delicto was not available to the unlicensed subcontractor, and it upheld summary judgment in favor of the general contractor.

In multiple North Carolina cases, courts have refused to permit contractors to recover payments in excess of the allowable limit for which the contractor was licensed. This rule applied even though the original contract amount fell within the contractor’s allowable limit. The contractor was denied recovery on change order work that it performed when such change order work caused the contract to exceed the allowable limit under its license See e.g. Sample v. Morgan, 311 N.C. 717 (N.C. 1984), overruled on other grounds; McK Enterprises, LLC v. Levi, 219 N.C. 647 (Ct. App. N.C. 2012).

It is important to note that the requirement to obtain a license is separate and distinct from the requirement for a business entity to register with the state in which it is performing work. Additional penalties and prohibitions will apply if a business entity does not properly register to do business with the jurisdiction in which it is performing work.

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