For nearly 80 years, California Civil Code Section 7031 has barred contractors from using the courts to collect payment if they were unlicensed at any time while performing their services. Responding to the perceived injustice of this harsh penalty, the California Supreme Court created a “substantial compliance” exception to this prohibition in the case of Latipac, Inc. v. Superior Court (1966) 64 Cal. 2d 278, allowing contractors to recover if they had a licensed contractor oversee the project despite being in technical violation of the law. After several court rulings greatly expanded this policy, the California legislature amended the statute in 1989 to negate this judicial doctrine in toto, and set up its own standard for substantial compliance by statutory amendments adopted in 1991 and 1993.
The California legislature has revisited of late the conditions for allowing recovery for substantial compliance, paring back the criteria that contractors must satisfy in order to be able to collect, and giving the courts more discretion with regard to allowing such relief. As originally set forth in Civil Code Section 7031(e), a court must allow an unlicensed contractor to recover in the event it found that the contractor (1) was licensed before performing the work, (2) acted reasonably and in good faith to maintain its license, (3) did not know or reasonably should not have known that it was not licensed when performing the work, and (4) acted promptly and in good faith to reinstate the license upon learning of its lapse.
Effective January 1, 2017, Assembly Bill 1793 amends Section 7031(e) to revise these standards and their application. Under that legislation, if a court finds that the contractor (1) had been duly licensed as a contractor in this state prior to the performance of the act or contract, (2) acted reasonably and in good faith to maintain proper licensure, and (3) acted promptly and in good faith to remedy the failure to comply with the licensure requirements upon learning of the failure, the court may allow recovery by an unlicensed contractor.
Viewed in its totality, the amendment of Section 7031(e) by Assembly Bill 1973 is a mixed bag for unlicensed contractors and their unhappy clients. On the one hand, the amendment eliminates a murky requirement that arguably added little of value, either to the protection of the public or to the assistance of the “innocent” unlicensed contractor. On the other hand, leaving the granting of relief to the discretion of the court without providing any guidance to the courts for the exercise of that discretion makes for further uncertainty.
The bottom line for contractors is this: The facts and circumstances surrounding a contractor’s unlicensed status will matter in the eyes of the courts, so contractors would be well advised to closely monitor the status of their licenses to avoid lapses and eliminate this problem altogether, and to remember that the courts will have latitude in evaluating their conduct in determining whether to grant them relief. Given that Section 7031(b) grants those persons who have made payments to an unlicensed contractor the right to recover those payments in court, the negative results of license gaps seem too high to be cavalier about them.