Caveat Contractor

Last summer, the Second District Court of Appeal decided the case of Advantec Group, Inc. v. Edwin’s Plumbing Co., Inc., 153 Cal. App. 4th 621 (2007), 2007 Cal. App. LEXIS 1205. Although there was really nothing earthshattering in either the facts or the applicable law, the trial court’s rulings may have forever changed trials in which validly licensed contractors seek compensation.

Advantec, the developer of a multi-unit apartment building, hired Edwin’s pursuant to a written subcontract to provide plumbing services. Prior to the completion of the work Advantec terminated Edwin’s from the project. Advantec sued Edwin’s and its license bond surety, Surety Company of the Pacific, for breach of contract. The license bond cause of action was eventually dismissed. Edwin’s filed a cross-complaint for breach of contract and related causes of action. Edwin’s alleged it was a licensed contractor. Advantec filed a general denial in which it denied “each and every allegation” of the cross-complaint pursuant to Code of Civil Procedure §431.20 but did not, specifically challenge Edwin’s license status by way of an affirmative defense challenging Edwin’s license status.

When the pricipal of Edwin’s began testifying, he was asked if he was a licensed contractor, Advant objected, pursuant to Business and Professions §7031, that Edwin’s licensure had to be proved by way of a verified certificate. The court tenatively sustained the objection but allowed the testimony to continue. The Court stated it planned to preclude Edwin’s from introducing evidence regrading its licensure other than that which is required by §7031, a verified certificate of licensure from the Contractors’ State License Board.

Edwin’s attorney requested a continuance to permit her to obtain a verified certificate. Advantec’s attorney represented to the Court that to obtain the certificate would take at least two weeks. The Court refused to continue the case but agreed to hear further argument the following day.

The record is unclear as to whether Edwin’s attempted to obtain the certificate, represent to the Court that it had submitted a request for one or advise the Court how long it would take to obtain it. The writer is presuming that none of these were attempted.

Edwin’s attorney argued that the issue of its licensure constituted “new matter” relating to Edwin’s capacity to sue under Code of Civil Procedure §431.20 and as such, was required to be pled as a separate affirmative defense in Advantec’s Answer. Edwin’s attorney argued that because of Advantec’s failure to do so, the defense was waived. After Edwin’s rested its case the Court granted Advantec’s motion for nonsuit on the cross-complaint based upon the failure of Edwin’s to produce proof of licensure.

There were two issues on appeal. The first being whether of not a General Denial Answer without a separate affirmative defense as to licensure was sufficient to put Edwin’s license status at issue requiring Edwin’s to obtain and offer a verified certificate of licensure from the Contractors’ State License Board (“CSLB”). The second issue on appear was whether the trial court erred by refusing to grant Edwin’s a continuance to procure the verified certificate.

On the first issue, the Court of Appeal ruled that a General Denial was sufficient to put Edwin’s licensure at issue. The Court of Appeal first discussed §7031(a) and its requirement that to maintain any action for compensation a contractor must allege “…that he or she was a duly licensed contractor at all times during the performance of the act of contract…”. The Court went on to §7031(d) which states “If licensure or proper licensure is controverted, then proof of licensure pursuant to this section shall be made by production of a verified certificate of licensure from the Contractors’ State License Board which establishes that the person or entity fringing the action was duly licensed in the proper classification of contractors at all times during the performance of any act or contract covered by the action… When licensure or proper licensure is controverted, the burden of proof to establish licensure or proper licensure shall be on the licensee.”

After noting that read together, the subdivisions required the a contractor to produce a certificate of licensure, the Court went on to examine the nature of a General Denial Answer concluding that it puts in issue all material allegations of the Complaint and that the allegation of licensure was a material allegation which was therefor controverted by a General Denial. The Court, after a lengthy discussion of other cases involving nonlicensure issues, concluded that although the issue of licensure could have been raised by a separate affirmative defense it need not be.

In its opinion, the Court noted, “Although we announce for the first time in this case the rule that a general denial sufficiently controverts an allegation of licensure, when read together the statues at issue §§ 7031 and 431.30) plainly dictate this result.”

The Court went on to discuss the issue of whether Edwin’s should have been given a continuance to permit it to obtain the required verified certificate from the CSLB and based its upholding the denial on four bases: (1) the discretion of the trial court; (2) the importance of deterring unlicensed persons from engaging in the contracting business which outweighs any harshness between the parties relying on Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal 3d.988, 277 Cal Rptr., 517, probably the seminal case in nonlicesure which applied nonlicensure as a bar to recovery of compensation “regardless of the equities” (supra at 997) and Lewis & Queen v N.M. Ball & Sons (1957) 48 Cal 2d. 141, 152, 308 P.2d. 713; (3) that by the time the continuance was requested that the [jury] trial had already consumed four days which may have resulted in a mistrial; and (4) the burden was on Edwin’s to obtain the certificate prior to trial.

Let’s examine, a little more closely, what happened here.

Prior to Advantec Group most construction attorneys, including the writer, when the issue of licensure was not raised as a separate affirmative defense, felt it was sufficient, as did most Judges, to provide proof of licensure by way of a copy of the current contractor’s license and a print out of the current license status from the CSLB website. As no case prior to Advantec held that a General Denial Answer put licensure in issue, it was generally believed that a verified certificate was not required. The Advantec Court’s interpretation of general denials in conjunction with contractor claims, changed “the rules” by:

(1) allowing a General Denial Answer to put licensure in issue, meaning that in virtually every case where a contractor sues for compensation, licensure is now in issue. In addition, this places the burden now squarely on litigants (theoretically, even small claims court), their attorneys and the CSLB to process and produce the verified certificates;

(2) refusing to “do equity” by allowing Edwin’s time to procure the verified certificate. Although §7031(d) places the burden on the Contractor to establish proper licensure, it certainly does direct the trial court harshly refuse time to procure a certificate, particularly in a situation like Edwin’s where the contractor was actually licensed and due to “first impression” interpretation of the law relating to general denials, was not prepared to produce the certificate. It appears that Edwin’s was properly licensed, in direct contrast to the previous §7031 cases including Hydrotech and many others where the contractor simply wasn’t licensed or wasn’t licensed in California. Next, the Advantec Court used it’s own method of weighing the equities and concluded that it was more important to complete the jury trial then do equity ; and

(3) the Court’s refusal to grant a continuance to give Edwin’s time to obtain a verified certificate from the CSLB may not have been an abuse of discretion but from the facts of the case, as reported, appears to have been a poor and unnecessarily harsh decision. While there is no way to know from the facts stated in the opinion whether or not Edwin’s would have prevailed on its Cross-Complaint, it should, in this writer’s opinion, have been given the chance.

§7031(a) requires contractors to be properly licensed at all times during the performance of the act or contract and §7031(d) requires a verified certificate if this is controverted, but prior to the Advantec case how was Edwin’s or any other contractor seeking recovery or their attorneys to know this?

The writer’s own experience with this issue and the Advantec case could have come to a similarly unfair result. In August, 2007, just after the Advantec opinion was published by before I was aware of it, I was in trial. Soon after beginning the trial, when I asked my client about being a licensed contractor, the same objection was raised and Motion for Nonsuit asserted under the Advantec case.

Unlike Edwin’s, my client was fortunate. Between the time the Court recessed for lunch and reconvened at 1:30 p.m. we were able to contact the CSLB, obtain a verified certificate, have it faxed to a fax machine in the snack shop with a copy to the Judge’s chambers thereby overcoming the objection and the Motion. Fortunately, my client, who had been licensed for approximately 50 years, went on a substantial win in its case. But what if it hadn’t have been able to obtain the verified certificate? Another great inequity would have occurred.

Is this the kind of result our legislature intended? I don’t believe so. The legislature and our Courts have been consistently busy interpreting, revising and rewriting §7031 since it was enacted. The Courts, for years, carved out exceptions to being properly licensed for “substantial compliance”, which was later restricted by the legislature statutorily in several iterations. The trend in changes to §7031 over many years has been to severely limit the doctrine of substantial compliance.

In it’s present iteration, “substantial compliance only applies if all three requirements of subdivision (e) are met. (See Construction Financial v. Perlite Plastering Co. (1997) 53 Cal.App.4th 170, 176-177at pp. 180, [reviewing legislative history of section 7031]; see also Pacific Custom Pools, Inc. v. Turner Construction Co. (2000) 79 Cal.App.4th 1254, 1261-1262 [trend of legislative changes has been to narrow available exceptions to §7031’s bar on actions by unlicensed contractors].)

While the statutory policy embodied in the Contractors License Law is acceptably intended to discourage persons who have failed to comply with the licensing law from offering or providing their unlicensed services for pay.” (Hydrotech, supra, 52 Cal.3d at p. 995.) Because of the strength and clarity of this policy” the Supreme Court has observed also acceptably to the writer that “§7031 applies despite injustice to the unlicensed contractor.” §7031 represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties, and that such deterrence can best be realized by denying violators the right to maintain any action for compensation in the courts of this state. See Great West Contractors, Inc. v. WSS Industrial Construction, Inc. – filed March 28, 2008, publication ordered April 28, 2008, Second District, Div. Eight Cite as 2008 SOS 2494.

But here is where this writer disagrees. Even the present version, in §7031(e) and (f) is only intended to apply to those, unlike Edwin’s who have “…never been a licensed contractor in this state.” Edwin’s was licensed and there is nothing in the record to indicate it was anything but properly licensed. This writer does not believe that either the legislature or the Courts intended the harsh policy of §7031, appropriately intended to prevent unlicensed individuals from acting as contractors and/or recovering compensation for work illegally performed, to extend its harshness to prevent a properly licensed contractor, who had been licensed for over 15 years, to have a chance to recover for work legally performed.

Decisions such as Advantec do not happen in a vacuum. They have serious, sometimes enormous life changing results for all involved. While it appears that the Court ruled harshly, particularly in a situation like Advantec, where Edwin’s only offense was not to obtain a verified certificate confirming it was licensed, the fact that the case was being tried before a jury coupled with the “bad” timing for Edwin’s by being a Cross-Complainant were obviously the overriding factors is not giving Advantec time. Unfortunately, Advantec still sets a harsh precedent particularly when prior to the Advantec opinion on appeal, it was not thought that a General Denial Answer was sufficient to controvert the allegation of being properly licensed and raise the issue of licensure. Hopefully, when this issue next arises, if it does in the context of a bench trial, or at least at the beginning of a jury trial and the trial Judge will, for example, continue the case and give the contractor time to obtain the verified certificate or finish trying the case and take the case under submission giving the contractor a specific amount of time to obtain the verified certificate, serve it on opposing counsel and hold a subsequent hearing on that issue, if needed.

Whether the Advantec was or was not a good decision, it is certainly a wake up call to allattorneys who represent contractors. Caveat contractor!