Can a Licensed General Contractor Obtain Compensation for Work Performed by an Unlicensed Subcontractor?
The appeal in the recent case of Kim v. TW Construction, Inc. involved a dispute between a married couple (respondents Sally Kim and Dai Truong) and their former general contractor, appellant TWA Construction, Inc. and TWA’s owner, appellant Keith Tai Wong, whom they hired to construct a home on a wooded lot.
During the early stages of the construction project, a subcontractor hired by Wong for tree trimming services damaged a large eucalyptus tree that was partly owned by Kim and Truong’s neighbor.
The neighbor brought suit against Kim and Truong for damage to her property resulting from the work on the eucalyptus tree, which precipitated the litigation that eventually resulted in the appeal.
After the neighbor filed suit, Kim and Truong filed a cross-complaint against TWA for comparative negligence, breach of contract, express contractual indemnity, equitable indemnity, and other claims.
TWA in turn filed a cross- complaint against Kim and Truong alleging breach of contract and other claims. The complaint and cross-complaints proceeded to trial before a single jury.
During trial, Kim, Truong, and TWA settled the suit with the neighbor, which was not at issue in the appeal. The suits involving respondents’ and TWA’s cross-complaints continued before the jury.
TWA presented no evidence at trial that the subcontractor who worked on the eucalyptus tree was licensed to perform tree trimming work.
Relevant to the appeal, the jury returned special verdicts finding TWA was 100 percent at fault for the neighbor’s damages and that Kim had paid TWA $10,000 for the tree trimming services performed by TWA’s subcontractor.
The trial court entered judgment in favor of Kim for $10,000 on Kim’s cross-complaint and also in favor of Kim and Truong on their cross-claims against TWA.
On appeal, TWA contended the judgment must be reversed because the trial court erred in its interpretation of the relevant licensing statute, Business and Professions Code section 7031.
In addition, Wong asserted the trial court misinterpreted the construction agreement, and substantial evidence did not support the jury finding that Kim paid TWA $10,000 for tree trimming.
For the reasons discussed below, the appellate court affirmed the judgment.
Kim purchased real property located in a wooded area of Los Gatos (property), and they planned to build a home and a bridge on the property. As part of the project, they sought to remove some trees, including a large eucalyptus tree (the eucalyptus).
The eucalyptus straddled the property line between their property and the property of their neighbor, Joan Todd. Kim and Truong did not at first understand that the eucalyptus was partially on Todd’s property and that they needed her permission to remove it.
They assumed they could remove the eucalyptus because they had received permits from the county to do so.
In February 2015, Truong and Kim first met with Wong to discuss hiring TWA as the general contractor to build their home.
Wong was an experienced contractor, and served as Kim and Truong’s only point of contact with TWA during the events at issue here.
TWA held a Class A (general engineering) and Class B (general building) license during all relevant times. Truong recalled showing Wong the eucalyptus in February 2015 and telling him they wanted it removed.
Wong and Kim executed a written construction agreement (construction agreement).
The construction agreement included provisions fixing the contract price at approximately $1.6 million, detailing the scope of work (including site work, bridge work, and the house and retaining walls), stating that all work would be performed by licensed individuals, indemnifying Kim from and against, inter alia, claims and damages arising from any negligence of TWA or its employees or subcontractors in performing work under the construction agreement, and addressing attorney and expert fees.
Although the parties disputed whether tree removal was encompassed within the construction agreement or addressed in a separate agreement, it is undisputed that Wong agreed as part of the overall project to remove the eucalyptus.
To perform the tree work, Wong hired an individual named Marvin Hoffman, whom Wong did not previously know and had located on the Web site “Craig’s List.”
Wong testified that he had paid Hoffman $400 by check and $16,000 in cash, although he did not have proof of the cash payments. When he hired Hoffman for the project, Wong had not verified Hoffman’s licensure status and could not recall whether he asked Hoffman about it. Wong believed Hoffman was a professional tree trimmer because Hoffman had a truck, trailer, and a large saw.
On the same day Wong executed the construction agreement, Hoffman began removing the eucalyptus. Before Hoffman and his crew had finished removing the tree, Todd (the neighbor) told Hoffman’s workers to stop. Todd also contacted the police. Work on the eucalyptus tree ceased.
Following this incident, Truong and Kim continued for a period of time to use TWA as their general contractor. Ultimately, however, the only work TWA did on the property was related to erosion control (performed by Wong himself) and on the trees (performed by Hoffman).
Later Truong and Kim terminated the contract with Wong, informing him they could not secure a construction loan using TWA as the contractor.
Truong and Kim eventually hired another contractor to complete the project. Kim paid TWA $16,000 for its work on the project.
Todd brought suit against Truong and Kim for negligence, trespass, and other claims related to the work on the eucalyptus tree. Todd later amended her complaint to add TWA as a defendant.
Kim and Truong filed a cross-complaint against TWA for comparative negligence, breach of contract, express contractual indemnity, equitable indemnity, and other claims.
Their operative cross-complaint alleged, inter alia, that TWA was required to indemnify them for the amount of any judgment or settlement they might be compelled to pay in the lawsuit with Todd. The cross-complaint included a claim that TWA was expressly required to indemnify Kim under the terms of the written construction agreement.
TWA then filed a cross-complaint against Kim and Truong. TWA’s operative cross-complaint alleged breach of contract based on the written construction agreement and sought damages, including lost profits. TWA also asserted an indemnification claim for Todd’s lawsuit against TWA.
The trial court inquired of TWA’s counsel whether Hoffman was employed by TWA. TWA responded that it did not contend that Hoffman was a TWA employee. TWA did not suggest it had any evidence that Hoffman had been licensed or make any offer of proof on the subject.
The trial court found that section 7031 applied here where suing general contractor seeks compensation for services of a purported unlicensed subcontractor under a subcontract between the general and subcontractor.
The trial court ruled that section 7031 barred TWA from collecting compensation for services performed by the subcontractor for the tree trimming if, in fact, the subcontractor was unlicensed at the relevant time.
The ruling in effect allowed Kim and Truong to claim the money paid for the unlicensed contractor should be disgorged and disallowed TWA from presenting a claim for money owed for the tree removal work performed by an unlicensed subcontractor. The ruling did not explicitly bar any party from bringing evidence at trial as to whether Hoffman was licensed.
The jury trial occurred in two phases and lasted eight days. Phase 1 addressed Todd’s suit against Kim, Truong, and TWA for damage to the trees on her property. Todd called as witnesses Kim and an expert, who was a certified arborist. The arborist generally testified that the tree removal work that had been done on the eucalyptus was unprofessional and fell below the standard of care.
Phase 2 of the jury trial addressed the claims in the cross-complaints. The jury heard testimony from Wong, Kim, and Truong, and one expert witness (Gary Ransone), who testified in support of Kim and Truong’s case-in-chief.
Ransone, who was a general contractor, opined that it was simple to verify whether a subcontractor is properly licensed and insured by going to the Contractors’ State License Board Web site.
Ransone estimated the verification process takes approximately two minutes.
The court entered judgment in favor of Truong and Kim in the amount of $18,196 on their cross-claims against TWA based on contributory negligence and indemnity and on Kim’s separate cross-claim for express contractual indemnity. The judgment ordered TWA to disgorge the $10,000 paid for the tree trimming work performed by TWA’s unlicensed subcontractor.
Pursuant to the terms of the construction agreement, the trial court issued a postjudgment order awarding Kim $137,821 in attorney fees and $22,505.16 in expert witness fees. The order also awarded Truong and Kim, as the prevailing parties, $18,273.59 in costs and denied TWA’s motion to tax costs.
Appellants TWA and Wong collectively raise three claims against the judgment. TWA and Wong (together, appellants)contend the trial court erred as a matter of law in its pretrial ruling on the application of section 7031.
Appellants argued the ruling effectively caused TWA to forfeit its claim for compensation from respondents for the tree work. Further, Wong asserted the written construction agreement did not include tree removal and therefore Kim’s claims for indemnity and attorney fees based on that agreement cannot stand.
In addition, Wong maintained substantial evidence does not support the jury’s finding that Kim paid TWA $10,000 for tree services. Wong also challenged the postjudgment order awarding attorney fees to Kim and acknowledged that this issue rises and falls with his contractual claim.
Section 7031 is part of the Contractors’ State License Law (§ 7000 et seq.), and it imposes strict and harsh penalties for a contractor’s failure to maintain proper licensure.
Among other things, the Contractors’ State License Law states a general rule that, regardless of the merits of the claim, a contractor may not maintain any action, legal or equitable, to recover compensation for the performance of any act or contract unless he or she was duly licensed at all times during the performance of that act or contract.
At the time of the trial court’s ruling, section 7031, subdivision (a) stated in pertinent part that no person engaged in the business or acting in the capacity of 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 by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract, regardless of the merits of the cause of action brought by the person.
If licensure is controverted, the plaintiff must prove, by producing a verified certificate of licensure from the Contractors’ State License Board, that it held all necessary licenses during performance of the work.
Subcontractors are governed by the licensing law. (§ 7026.) Both owners and general contractors are entitled to protection against illegal subcontract work by unlicensed persons. Hence, an unlicensed subcontractor may not recover compensation for his work from either the owner or the general contractor.
The California Supreme Court had not directly addressed the factual situation presented here as applied to section 7031(a), where a licensed general contractor seeks compensation from an owner for work performed by an unlicensed subcontractor.
Section 7031 bars all actions, regardless of the equities and however they are characterized, which effectively seek compensation for illegal unlicensed contract work.
Thus, if the primary relief sought is compensation for the unlicensed work, then section 7031 bars the action, and courts may not resort to equitable considerations in defiance of section 7031.
The plain meaning of the subdivision (a) provision in section 7031, as construed by the California Supreme Court, is that, except as expressly otherwise provided, a contractor may not sue to collect compensation for performance of any act or contract requiring a license without alleging that he or she was duly licensed at all times during the performance of that act or contract.
To narrowly construe section 7031(a) to allow TWA’s claim for compensation to proceed under the circumstances here (thus reversing the trial court’s order) would undermine certain other provisions of the statutory scheme governing contractor licensing and contravene the policy behind the statute.
The essence of TWA’s claim is that Hoffman’s licensure status was legally irrelevant because it is undisputed that TWA was itself licensed to perform the task in question.
However, from precedent, California law contains a strong policy barring actions that effectively seek compensation for unlicensed work. Section 7031 accomplishes this policy purpose by denying a contractor access to the courts to recover for the fruits of his labor when he violates the statute.
Furthermore, it is clear that an unlicensed subcontractor may not recover compensation for his work from either the owner or the general contractor.
To nevertheless enable a contractor to recover compensation for the performance of unlicensed work, simply because the work was accomplished by hiring a subcontractor, would circumvent the purpose of section 7031.
It would render meaningless the section 7031 bar and expansive definition of contractor to include work performed by or through others.
Section 7031 bars even a licensed general contractor in California from bringing an action for compensation for an act or contract performed by an unlicensed subcontractor where a license is required.
Therefore, TWA did not satisfied its burden of demonstrating error in the trial court’s pretrial ruling applying section 7031.
Therefore, the judgment was affirmed.
LESSONS:
1. This is another example of the need to obtain a survey regarding the property lines for any issues relative to the property lines.
2. Only licensed and insured contractors should be hired and their credentials carefully vetted by review of the information from the Contractor's State License Board, and inquiry of the contractor.
3. If the primary relief sought is compensation for the unlicensed work, then section 7031 bars the action, and courts may not resort to equitable considerations in defiance of section 7031.
4. Section 7031 bars even a licensed general contractor in California from bringing an action for compensation for an act or contract performed by an unlicensed subcontractor where a license is required.