07.20.2021 | Articles

Construction Update: California Warns Act Quickly Against Unlicensed Contractors

By Lisa D. Nicolls

Two recent California Court of Appeal decisions have held that the time to file a lawsuit to recover payments based on a contractor’s failure to be properly licensed while performing construction work is one year from completion or cessation of the work no matter when the party pursuing the claim discovered that the contractor was unlicensed.

Both decisions concern an owner’s attempt under California Business and Professions Code Section 7031 (“B&P Section 7031”) to require a construction contractor to return payments made by the owner for construction work performed by that contractor. B&P Section 7031(a) prohibits any contractor from bringing a lawsuit for collection of payment unless it was duly licensed “at all times during the performance of that act or contract.” Moreover, B&P Section 7031(b) provides that “a person who utilizes the services of an unlicensed contractor may bring an action…to recover all compensation paid to the unlicensed contractor for performance of any act or contract.” In other words, a party may “disgorge” a contractor of all compensation paid to the contractor if the contractor is unlicensed (or not duly licensed) at any time during its work, and the contractor cannot collect payment for such work performed.

In Eisenberg Vill. of Los Angeles Jewish Home for the Aging v. Suffolk Constr. Co., Inc., 53 Cal. App. 5th 1201, 1214 (2020), the Court of Appeal ruled that  a party  has  one year from the date of cessation or completion of work to bring a B&P Section 7031 claim for disgorgement. In 2007, an owner hired a contractor to construct an assisted-living facility. The contractor completed construction in 2010 and shortly thereafter problems arose at the facility. However, the owner did not file a lawsuit for B&P Section 7031 disgorgement against contractor until 2015, more than five years after the contractor completed construction. The contractor argued the B&P Section 7031 claim was a penalty and therefore subject to the one year statute of limitations under California Code of Civil  Procedure  Section 340(a). The owner argued that disgorgement was not a penalty and therefore was subject to a three or four year statute of limitation, and even if the one year statute applied, the delayed-discovery rule should apply to its claim. (This rule states that certain statutes of limitation may be extended if a party did not know it was injured and a reasonable investigation would not have discovered such injury.)

The Court of Appeal held “it is clear that the disgorgement provided in section 7031(b) is a penalty. It deprives the contractor of any compensation for labor and materials used in the construction while allowing the plaintiff to retain the benefits of that construction. And, because the plaintiff may bring a section 7031(b) disgorgement action regardless of any fault in the construction by the unlicensed contractor, it falls within the Supreme Court’s definition of a penalty: a recovery without reference to the actual damage sustained.” The Court also held the delayed-discovery rule does not apply to B&P Section 7031 claims because such claims do not require the plaintiff suffer any injury. A B&P Section 7031 claim arises (and the one-year statute begins running) “when an unlicensed contractor completes or ceases performance of the act or contract at issue.” Id. at 1215.

The Court of Appeal in San Francisco CDC LLC v. Webcor Constr. L.P., 62 Cal. App. 5th 266 (2021) agreed with Eisenberg. In Webcor, the owner hired the contractor to construct a hotel which the contractor completed, and the owner accepted, in 2009. The owner later discovered defects in contractor’s work. In 2015, a few years after discovering the defects, the owner filed a complaint against the contractor based on the defective work and then in 2017 tried to sue the contractor under B&P Section 7031 for disgorgement. The Court agreed with Eisenberg and held that the owner’s B&P Section 7031 claims were barred because “the disgorgement remedy is a penalty provision subject to the one-year statute of limitations” under Civil Procedure Section 340(a), and that “such claims accrue upon the completion or cessation of the performance of the act or contract at issue and are not subject to tolling under the delayed discovery rule.”

As a result, Eisenberg and Webcor are in agreement regarding B&P Section 7031 claims for disgorgement: (1) such claims must be brought within one year of the completion or cessation of the performance of the act or contract, and (2) the one-year period is not extended by the party’s failure to discovery an injury or damage.

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