SACRAMENTO — On Tuesday, August 30th, Governor Brown signed CAL SMACNA supported legislation to help protect contractors from unfair disgorgement of funds in the event of a license lapse at the Contractors State License Board (CSLB).

Honest and qualified contractors have recently been forced by the courts to “disgorge” or return to project owners millions of dollars in payments for contract performance due to technical transgressions related to their license status during the job (see examples below).

The courts admit these outcomes are unfair but claim they have no discretion and are limited in their use of the doctrine of substantial compliance when interpreting the Contractors State Licensing Law (CSLL).

AB 1793 was authored by Assemblymember Chris Holden (D-Pasadena)to address this frustration and requires the court to determine if a contractor substantially complied with the law when a contractor inadvertently, and in good faith, falls out of compliance and makes immediate corrective action.

Specifically, this bill:

  1. Permits a court to determine at an evidentiary hearing that a contractor has substantially complied with CSLB’s licensure requirements.
  2. Requires a contractor to provide evidence that he or she acted promptly and in good faith to remedy the failure to comply with licensure requirements upon learning of the failure.

CAL SMACNA appreciates Assemblymember Holden for authoring this measure to help contractors.  We are also grateful that Governor Brown recognized the need for this remedy and has signed it into law.

Current law requires that a contractor must be a ‘duly licensed contractor at all times’ while working on a contracted project in order to receive compensation (Business and Professions Code (BPC) Section 7031).

The courts have interpreted this law to deny all compensation to contractors who are in violation of the licensing requirements even though the failure to comply only occurred during a brief period during which work was performed.

In MW Erectors, Inc. v Niederhauser Ornamental and Metal Works Co., Inc., et al., the California Supreme Court held, in relevant part: “The words ‘at all times’ convey the Legislature’s obvious intent to impose a stiff all-or-nothing penalty for unlicensed work by specifying that a contractor is barred from all recovery for such an ‘act or contract’ if unlicensed at any time while performing it.” (Refer MW Erectors, Inc. v. Niederhauser Ornamental and Metal Works Co., Inc., et al., Supreme Court of California, 30 Cal.Rptr.3d 755 (2005)]

An appellate decision issued last year by the First Appellate District in San Francisco concerning disgorgement of compensation from a company that allowed its contractor’s license to lapse after a corporate reorganization and, consequently, did not strictly comply with the Contractors’ State License Law (CSLL).In Judicial Council of California v. Jacobs Facilities, Inc.(2015) 239 Cal.App.4th 882, plaintiff Judicial Council of California (Judicial Council) entered into a contract with defendant Jacobs Facilities, Inc., a wholly owned subsidiary of defendant Jacobs Engineering Group Inc., for contracted work that required licensure under the CSLL. During the course of the parties’ contract, the defendant transferred the employees responsible for performing the contract to another wholly owned subsidiary, and allowed the license for Jacobs Facilities, Inc., who remained the named contracting party for nearly a year after the reorganization, to lapse. Judicial Council sued Jacobs Engineering Group and its two subsidiaries under the CSLL seeking disgorgement under Business and Professions Code Section 7031, which requires unlicensed contractors to disgorge compensation for work that can only be performed by a licensed contractor. In reversing a lower court order that would have prevented disgorgement, the court stated:

  • [W]e acknowledge penalizing the Jacobs entities for these technical transgressions only indirectly serves the CSLL’s larger purpose of preventing the delivery of services by unqualified contractors, since the Jacobs entities were neither dishonest nor incompetent. For better or worse, however, this is beside the point. The doctrine of substantial compliance, as developed by the courts, attempted to limit the forfeiture remedy to circumstances in which that remedy served the larger statutory purpose. In that form, the doctrine was rejected by the Legislature. It is preserved in a restricted statutory form; thus, courts can no longer exercise discretion in the application of the doctrine. To avoid forfeiture for a CSLL violation, a contractor must now satisfy the terms of section 7031, subdivision (e). To the extent the contractor fails to satisfy that exception, the courts have no choice but to allow forfeiture, regardless of the nature of the violation or its relation to the larger ends of the CSLL. . . . [EMPHASIS ADDED] While we appreciate the potentially great harshness of this legislation in these circumstances, any argument for expansion of the substantial compliance doctrine must be directed to the Legislature. (Judicial Council of California v. Jacobs Facilities, Inc. (2015) 239 Cal.App.4th at 899-900 [internal citations omitted].)

This bill follows upon the court’s recommendation above for the legislature to re-visit the substantial compliance doctrine.  A full copy of the new law can be found here.