How Small Mistakes Can Have Serious Consequences Under California's Contractor Licensing Laws.
February 15, 2018 —
Eric Reed - Myers, Widders, Gibson, Jones & Feingold, LLPIn construction, some risks have nothing to do with how well a contractor executes a project. Licensing problems is one of these risks. Even a brief lapse caused by an unintentional administrative error can give the CSLB grounds to discipline a contractor, or enable a customer to seek disgorgement and other remedies provided by Business and Professions Code section 7031. This article discusses five tips for mitigating the liabilities associated with licensing problems.
Tip 1: Take workers' compensation insurance very seriously. Workers’ compensation insurance problems can trigger license suspension in California. Business and Professions Code section 7125.4 calls for automatic suspension if a contractor cannot provide proof of workers’ compensation insurance for any period of time. This is particularly serious for residential remodelers who claim exemption for workers’ compensation but are later discovered – usually during litigation with a homeowner – to have “off the books” workers helping them. Courts can declare the contractor retroactively unlicensed under these circumstances and order it to disgorge,
i.e., to pay back, every penny paid by the customer for the entire project (even for materials). (Bus. & Prof. Code, § 7031, subd. (b);
Wright v. Issak (2007) 149 Cal.App.4th 1116.) The contractor will also find itself unable to collect any amounts owed to it by the customer. (Bus. & Prof. Code, § 7031, subd. (a).)
Tip 2: Watch out for licensing confusion after a merger or acquisition. The economic downturn of 2008 and 2009 resulted in consolidation throughout the building industry. The newly merged or acquired entities often allowed redundant licenses to expire, assuming they could complete all pending projects under the umbrella of the acquiring company's license. Many learned this was a mistake the hard way. Armed with the California Supreme Court's opinion in
MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412, customers began refusing to pay invoices and demanding disgorgement under Business and Professions Code section 7031 because the original contractor did not maintain licensure “at all times.” Many of these customers succeeded.
Tip 3: If a license suspension has occurred or is imminent, prepare to prove substantial compliance. Section 7031(a) and (b) give a disgruntled or indebted customer every incentive to capitalize on a contractor's licensing problems. Subdivision (e) is where a contractor must turn to protect its interests if this happens. It allows the contractor to prove “substantial compliance” with licensing requirements and avoid (a)’s and (b)’s sharp edges if it can show the following:
(1) The contractor “had been duly licensed as a contractor in this state prior to the performance of the act or contract”;
(2) It “acted reasonably and in good faith to maintain proper licensure”; and
(3) It “acted promptly and in good faith to remedy the failure to comply with the licensure requirements upon learning of the failure.”
The Court of Appeal confirmed in
Judicial Council of California v. Jacobs Facilities, Inc. (2015) 239 Cal.App.4th 882 that a contractor, upon request, is entitled to a hearing on these three factors before it is subjected to disgorgement under Section 7031(b). The legislature amended Section 7031 shortly after the Court of Appeal published this case. The Assembly’s floor analysis went so far as to directly quote the opinion’s observation that penalizing a construction firm for “technical transgressions only indirectly serves the Contractors Law’s larger purpose of preventing the delivery of services by unqualified contractors.” (Assem. Com. on Bus. and Prof., Off. of Assem. Floor Analyses, analysis of Sen. Holden's No. 1793 (2015-2016 Reg. Sess.) as amended August 2, 2016, p. 2.) This echoed an industry consensus that clarifying the law was needed to ensure that properly licensed and law-abiding construction firms were not “placed at fatal monetary risk by malicious lawsuits motivated by personal gain rather than consumer protection.” (Assem. Com. on Judiciary, com. on Assem. Bill No. 1793 (2015-2016 Reg. Sess.), pp. 6-7.)
Unfortunately, existing law does not give many examples of what it means to act “reasonably and in good faith to maintain proper licensure” or to act “promptly and in good faith” to fix license problems. A practical approach is for a contractor to work backwards by assuming it will need to prove substantial compliance at some point in the future. Designated individuals within the organization should have clear responsibility over obtaining and renewing the proper licenses and should keep good records. If necessary, these designees can testify about the contractor's internal policies and their efforts to fix licensing problems when they arose. For example, if the suspension resulted from not providing the CSLB proof of workers’ compensation insurance, the designee can testify about the cause (a broker miscommunication, transmission error,
etc.) and produce documents showing how he or she worked promptly to procure a certificate of insurance to send CSLB. Saved letters, emails, and notes from telephone calls will provide designees and their successors with an important resource months or years down the line if a dispute arises and the contractor is required to reconstruct the chronology of a licensing glitch and prove its due diligence.
Tip 4: Don't sign new contracts unless all necessary licenses are active and any problems are resolved. A recently-formed contractor should not begin soliciting and signing contracts until all required licenses are confirmed as “active.” The first requirement of substantial compliance – being “duly licensed as a contractor in this state prior to the performance of the act or contract” – cannot be met by a contractor that first obtains its license mid-project. (Bus. & Prof. Code, § 7031, subd. (e)(1);
Alatriste v. Cesar’s Exterior Designs (2010) 183 Cal.App.4th 656.) A licensed contractor should also consider refraining from signing new contracts if there is any reason to believe its license might be suspended in the near future – especially if the suspension will be retroactive. Having a suspension on record at the time of contracting may complicate the question of whether the contractor was “duly licensed . . . prior to performance” for the purposes of substantial compliance.
Tip 5: Any judgment against a contractor can cause license suspension if not handled promptly and correctly. The Business and Professions Code authorizes the CSLB to suspend the license of a contractor that does not pay a construction related court judgment within 90 days. The term “construction related” is interpreted to include nearly all types of disputes involving a contractor. (16 Cal. Code Reg. 868;
Pacific Caisson & Shoring, Inc. v. Bernards Bros. Inc. (2015) 236 Cal.App.4th 1246, 1254-1255.) This means a contractor should treat a judgment against it for unpaid office rent, for example, as one carrying the same consequences as one arising from a construction defect or subcontractor claim. The contractor should also not assume that filing an appeal, or agreeing with the other side to stay enforcement, automatically excuses the 90-day deadline in the eyes of the CSLB. It does not. A contractor must notify the CSLB in writing before this period expires, then post bond for the amount of judgment, if it wishes to delay payment for any reason. (Bus. & Prof. Code, § 7071.17, subd. (d).) A suspension may result if it does not. This applies even to small claims judgments.
Recent case law and the 2016 amendments to Business and Professions Code section 7031 provide some solace to those caught in the dragnet of California's licensing laws. But avoiding these problems altogether is preferable. Consider licensing the foundation of a successful business and deserving of the same attention as the structures a contractor builds.
Eric R. Reed is a business and insurance litigator in the Ventura office of Myers, Widders, Gibson, Jones & Feingold, LLP.
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Eric Reed, Myers, Widders, Gibson, Jones & Feingold, LLPMr. Reed may be contacted at
ereed@mwgjlaw.com
Construction Termination Issues Part 4: What to Do When They Want to Fire You, the Architect or Engineer
August 14, 2023 —
Melissa Dewey Brumback - Construction Law in North CarolinaWhat if you are told that your own design services are no longer needed or welcome on a project? Can they do that? What happens then? How do you protect yourself.
As you probably realize, while rare, the Owner does have the legal right to fire you “for cause”. See B101 §9.4, as long as the Owner gives you 7 days written notice. In fact, the Owner can terminate your contract for any reason at all (maybe you root for the wrong basketball team?) by terminating you for convenience (i.e., for any reason whatsoever) under B101 §9.5, again with 7 days written notice.
As with
Contractor terminations, the money you get when fired for convenience is much greater than when you are terminated for cause. If you are fired “for convenience”, you get paid for all services previously rendered as well as termination expenses, including anticipated profit on the value of services not performed. See B101 §9.7.
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Melissa Dewey Brumback, Ragsdale LiggettMs. Brumback may be contacted at
mbrumback@rl-law.com
President Obama Vetoes Keystone Pipeline Bill
February 26, 2015 —
Angela Greiling Keane - Bloomberg(Bloomberg) -- President Barack Obama issued his third veto Tuesday to reject legislation that would allow construction of the Keystone XL pipeline, escalating a battle over the project with Republicans in Congress.
Notice of the long-expected veto was released without fanfare via a message to the Senate just hours after the bill formally arrived at the White House. The Senate has agreed to hold a vote on overriding the veto no later than March 3.
Obama has repeatedly said a State Department review of the TransCanada Corp. project -- which would carry crude oil produced in Alberta, Canada, south through the U.S. -- should proceed before a decision is made on whether to allow construction of the $8 billion pipeline.
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Angela Greiling Keane, Bloomberg
Court Rules that Damage From Squatter’s Fire is Not Excluded as Vandalism or Malicious Mischief
April 15, 2015 —
Valerie A. Moore, Christopher Kendrick, and Colin T. Murphy – Haight Brown & Bonesteel LLPIn Ong v. Fire Insurance Exchange (No. B252773, filed 4/3/15), a California appeals court ruled that a vacancy exclusion limited to damage caused by “vandalism or malicious mischief” did not bar coverage for damage to a vacant property caused by a warming fire purposely started by a transient that got out of control and spread to other parts of the property.
In Ong, the insured’s rental premises had been vacated by tenants and the utilities turned off. Nearly two years later, the insured submitted a claim for fire damage that had just occurred. An investigator reported finding signs that a squatter had been living in the building, stating that: “[I]t appears the fire may have been initiated as the result of an uncontrolled warming fire started by an unauthorized inhabitant.” The investigator found firewood and a mattress, and concluded that holes burned in the floor were the result of the squatter attempting to throw burning wood out the door when the fire got out of control.
The policy excluded vandalism as follows: “We do not cover direct or indirect loss from: . . . 4. Vandalism or Malicious Mischief, breakage of glass and safety glazing materials if the dwelling has been vacant for more than 30 consecutive days . . . just before the loss. A dwelling under construction is not considered vacant.” The term “Vandalism” was not defined in the policy. The insurer denied coverage based on the exclusion, stating: “Our investigation indicates that this loss was the result of vandalism. A trespasser entered the vacant dwelling and intentionally set a fire on the kitchen floor.”
Reprinted courtesy of Haight Brown & Bonesteel LLP attorneys
Valerie A. Moore,
Christopher Kendrick and
Colin T. Murphy
Ms. Moore may be contacted at vmoore@hbblaw.com.
Mr. Kendrick may be contacted at ckendrick@hbblaw.com
Mr. Murphy may be contacted at cmurphy@hbblaw.com
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Unfair Risk Allocation on Design-Build Projects
June 13, 2022 —
Brian Perlberg, Executive Director of ConsensusDocs Coalition & AGC Senior CounselThe AGC annual convention included a session entitled “Who’s on the Hook for Design Defects in Design-Build Projects.”
Fox Rothschild’s Dirk Haire, Les Synder of Infrastructure Construction Brightline West, and David Hecker of Kiewit presented. Attendees crowded into a standing-only room because more and more builders are facing design liability, especially design-builders on large infrastructure projects. The presentation highlighted how some owners abuse the submittal process on design-build jobs to make changes without compensating the builder with more time, money, or both. One project took a sample of owner comments and extrapolated that just one project generated over 15,000 submittals and generated over 110,000 comments of “concern” or “preference.”
Certain owner-representatives and attorneys for owners have oversold the risk allocation transfer aspect of design-build. The Spearin Doctrine protects a builder from design documents containing errors by entitling them to receive equitable compensation. The design-build project delivery method erodes potential Spearin protections. Ways that an owner may retain some design responsibility and bring Spearin protections back into play for a builder include the following:
- Accuracy of reports prepared by owner’s outside consultants
- Owner’s design approval process
- Viability of owner’s stated design and project criteria
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Brian Perlberg, ConsensusDocs
New York Appellate Team Obtains Affirmance of Dismissal of Would-Be Labor Law Action Against Municipal Entities
August 12, 2024 —
Lewis Brisbois NewsroomNew York, N.Y. (July 11, 2024) - In Charlot v. City of New York, ___ A.D.3d ___, 2024 NY Slip Op 03161 (2d Dep’t 2024), New York Associate Dean Pillarella, a member of the Appellate Practice, recently obtained an affirmance of the lower court’s dismissal of the plaintiff’s action against the City of New York (“the City”) for failure to timely serve a notice of claim. New York Partner Meghan Cavalieri, a member of the Construction Practice, and her team authored and argued the initial motion to dismiss.
The plaintiff alleged to have sustained injuries as a result of a construction-site accident on December 8, 2020, on City-owned property in the course of the construction of a school by the New York City School Construction Authority. N.Y. General Municipal Law (“GML”) § 50-e(1)(a), requires service of a notice of claim within 90 days after the claim arises as a condition precedent to the commencement of a tort action. The plaintiff served no notice of claim until June 2021 and commenced an action in January 2022, alleging violations of N.Y. Labor Law §§ 240(1), 241(6), and 200. Given the plaintiff’s failure to comply with GML § 50-e(1)(a), Meghan and her team rejected the notices of claim as untimely. The plaintiff then moved for leave to deem the notices of claim timely served nunc pro tunc. In response, Meghan and her team opposed the motion and cross-moved to dismiss the action.
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Lewis Brisbois
Edinburg School Inspections Uncovered Structural Construction Defects
April 11, 2018 —
David Suggs – Bert L. Howe & Associates, Inc.Yesterday, the Herald reported that six schools and a nursery have been affected by construction defects in Edinburg. For every eight properties inspected by council, one was found to share analogous issues which caused “a wall to collapse at a city primary school in 2016.” Furthermore, over the course of eighteen months, inspectors will observe more buildings across Edinburg in order to guarantee their “structural safety.”
At Oxgangs Primary School, during Storm Gertrude in January 2016, nine tons of masonry fell from the side of a building. The Herald reported 17 other schools across Edinburg closed due to safety concerns. All schools closed were part of the “same private finance initiative.” Moreover, there have been 20 other examples of defects found that are alike, in which checks were “carried out at public buildings.”
Christine Jardine, a Scottish Liberal democrat who represents Edinburg West, states that the findings were “scandalous,” and “simply not good enough.” In addition, Jardine points out that the council is responsible for buildings to meet the highest of standards, and proper checks are necessary, in order to ensure the safety of their children. Lastly, Jardine suggests that the Scottish government should no longer rely on the funding from local authority. Instead, she proposes that the government must be accountable for “improving council funding.”
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Real Estate & Construction News Roundup (11/8/23) – New Handling of Homelessness, Decline in Investments into ESG Funds, and Shrinking of a Homebuyer’s Dollar
December 11, 2023 —
Pillsbury's Construction & Real Estate Law Team - Gravel2Gavel Construction & Real Estate Law BlogOur latest roundup includes two large flood control projects in New Jersey, how residential REITs could benefit from higher interest rates, how the downfall of WeWork could cause expansive collateral damage, and more!
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Pillsbury's Construction & Real Estate Law Team
