All builders know they must be properly licensed. Under Business and Professions Code 7031, an unlicensed contractor may not go to court to recover compensation even if the job was fully performed. Worse yet, an unlicensed contractor may have to reimburse the owner for monies previously paid under the contract.

The usual unlicensed contractor court case involves a technical glitch with the license – like an individual builder forms a corporation and neglects to put the license in the corporate name. Or the contractor forms a partnership and neglects to get a new partnership license. The results can be catastrophic.

UNLICENSED CONTRACTOR SUES

Panterra GP is a licensed general contractor. Panterra GP is the general partner of Panterra Development. The parties intended that Panterra GP would perform renovation work at the Studio Movie Grill in Bakersfield.

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Despite this intent, Movie Grill drafted a contract that listed Panterra Development as the contractor for the project. Panterra Development is not a licensed contractor; however as noted, its general partner Panterra GP is.

You know what happens next.

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Panterra GP completed the work but had to sue for more than $2.6 million which was not paid by Movie Grill. Movie Grill claimed no money was due because Panterra Development was an unlicensed contractor. Even worse, Movie Grill counter-sued seeking disgorgement of more than $7 million previously paid to Panterra Development.

WHO WAS THE CONTRACTOR?

Panterra GP held the building permits and obtained a Certificate of Occupancy. Panterra GP was licensed and did the work, not Panterra Development.

The trial court ruled in favor of Movie Grill which amounted to a $9.6 million windfall. The trial court focused on Panterra Development being the contractor named in the contract. End of discussion.

COURT OF APPEAL RULING

The Fifth Appellate District Court of Appeal went back and forth and ultimately found a way to compensate the builder by ruling the contract was reformed to reflect the true intent of the parties: Panterra GP was the licensed contractor. Panterra GP prevails at the pleadings stage and is entitled to take its case to trial.

A dissenting judge ruled for Movie Grill finding the builder written in the contract, Panterra Development, was not licensed; and no sleight of hand allowing the contract to be reformed changes that Panterra Development was not licensed.

PORTER’S CRYPTIC TAKE

I really dislike these Business and Professions Code section 7031 cases where the owner receives a perfectly built project, but due to some technical glitch in the license, the builder does not get paid and sometimes must reimburse money previously paid by the owner. The public policy is to require all builders to be licensed. I get that. But the draconian nature of 7031 results in hardship and unjust enrichment – at least if the failure to be licensed is due to a mere paper technicality.

Jim Porter is an attorney with Porter Simon licensed in California and Nevada, with offices in Truckee and Tahoe City, California, and Reno, Nevada. Jim’s practice areas include: real estate, development, construction, business, HOAs, contracts, personal injury, accidents, mediation and other transactional matters. He may be reached at porter@portersimon.com or http://www.portersimon.com