CACI 4560 Recovery of Payments to Unlicensed Contractor—Essential Factual Elements (Bus. & Prof. Code, § 7031(b))

New June 2016; Revised November 2020, May 2021

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Give this instruction in a case in which the plaintiff seeks to recover money paid to an unlicensed contractor for service performed for which a license is required. (Bus. & Prof. Code, § 7031(b).) Modify the instruction if the plaintiff claims the defendant did not perform services or supervise construction, but instead agreed to be solely responsible for completion of construction services. (See Vallejo Development Co. v. Beck Development Co. (1994) 24 Cal.App.4th 929, 940 [29 Cal.Rptr.2d 669].) For a case brought by a licensed contractor or an allegedly unlicensed contractor for payment for services performed, give CACI No. 4562, Payment for Construction Services Rendered—Essential Factual Elements. (See Bus. & Prof. Code, § 7031(a), (e).)

The burden of proof to establish licensure or proper licensure is on the licensee. Proof must be made by producing a verified certificate of licensure from the Contractors State License Board. When licensure or proper licensure is controverted, the burden of proof to establish licensure or proper licensure is on the contractor. (Bus. & Prof. Code, § 7031(d).) Omit the final bracketed paragraph if the issue of licensure is not contested.

A corporation qualifies for a contractor’s license through a responsible managing officer (RMO) or responsible managing employee (RME) who is qualified for the same license classification as the classification being applied for. (Bus. & Prof. Code, § 7068(b)(3).) The plaintiff may attack a contractor’s license by going behind the face of the license and proving that a required RMO or RME is a sham. The burden of proof remains with the contractor to prove a bona fide RMO or RME. (Buzgheia v. Leasco Sierra Grove (1997) 60 Cal.App.4th 374, 385−387 [70 Cal.Rptr.2d 427].) Whether an RMO or RME is a sham can be a question of fact. (Jeff Tracy, Inc. v. City of Pico Rivera (2015) 240 Cal.App.4th 510, 518 [192 Cal.Rptr.3d 600].)

•Action to Recover Compensation Paid to Unlicensed Contractor. Business and Professions Code section 7031(b).

•Proof of Licensure. Business and Professions Code section 7031(d).

•“Contractor” Defined. Business and Professions Code section 7026.

•“The purpose of the licensing law is to protect the public from incompetence and dishonesty in those who provide building and construction services. The licensing requirements provide minimal assurance that all persons offering such services in California have the requisite skill and character, understand applicable local laws and codes, and know the rudiments of administering a contracting business.” (Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 995 [277 Cal.Rptr. 517, 803 P.2d 370], internal citations omitted.)

•“Because of the strength and clarity of this policy, it is well settled that section 7031 applies despite injustice to the unlicensed contractor. ‘Section 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. [Citation.] …’ ” (Hydrotech Systems, Ltd., supra, 52 Cal.3d at p. 995, original italics.)

•“The current legislative requirement that a contractor plaintiff must, in addition to proving the traditional elements of a contract claim, also prove that it was duly licensed at all times during the performance of the contract does not change this historical right to a jury trial.” (Jeff Tracy, Inc., supra, 240 Cal.App.4th at p. 518, fn. 2.)

•“[T]he courts may not resort to equitable considerations in defiance of section 7031.” (Lewis & Queen v. N. M. Ball Sons (1957) 48 Cal.2d 141, 152 [308 P.2d 713].)

•“In 2001, the Legislature complemented the shield created by subdivision (a) of section 7031 by adding a sword that allows persons who utilize unlicensed contractors to recover compensation paid to the contractor for performing unlicensed work. Section 7031(b) provides that ‘a person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract’ unless the substantial compliance doctrine applies.” (White v. Cridlebaugh (2009) 178 Cal.App.4th 506, 519 [100 Cal.Rptr.3d 434], internal citation omitted.)

•“It appears section 7031(b) was designed to treat persons who have utilized unlicensed contractors consistently, regardless of whether they have paid the contractor for the unlicensed work. In short, those who have not paid are protected from being sued for payment and those who have paid may recover all compensation delivered. Thus, unlicensed contractors are not able to avoid the full measure of the CSLL’s civil penalties by (1) requiring prepayment before undertaking the next increment of unlicensed work or (2) retaining progress payments relating to completed phases of the construction.” (White, supra, 178 Cal.App.4th at p. 520.)

•“In most cases, a contractor can establish valid licensure by simply producing ‘a verified certificate of licensure from the Contractors’ State License Board which establishes that the individual or entity bringing 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.’ [Contractor] concedes that if this was the only evidence at issue, ‘then—perhaps—the issue could be decided by the court without a jury.’ But as [contractor] points out, the City was challenging [contractor]’s license by going behind the face of the license to prove that [license holder] was a sham RME or RMO.” (Jeff Tracy, Inc., supra, 240 Cal.App.4th at p. 518.)

•“[T]he determination of whether [contractor] held a valid class A license involved questions of fact. ‘[W]here there is a conflict in the evidence from which either conclusion could be reached as to the status of the parties, the question must be submitted to the jury. [Citations.] This rule is clearly applicable to cases revolving around the disputed right of a party to bring suit under the provisions of Business and Professions Code section 7031.’ ” (Jeff Tracy, Inc., supra, 240 Cal.App.4th at p. 518.)

•“We conclude the authorization of recovery of ‘all compensation paid to the unlicensed contractor for performance of any act or contract’ means that unlicensed contractors are required to return all compensation received without reductions or offsets for the value of material or services provided.” (White, supra, 178 Cal.App.4th at pp. 520−521, original italics, internal citation omitted.)

•“[A]n unlicensed contractor is subject to forfeiture even if the other contracting party was aware of the contractor’s lack of a license, and the other party’s bad faith or unjust enrichment cannot be asserted by the contractor as a defense to forfeiture.” (Judicial Council of California v. Jacobs Facilities, Inc. (2015) 239 Cal.App.4th 882, 896 [191 Cal.Rptr.3d 714].)

•“Nothing in section 7031 either limits its application to a particular class of homeowners or excludes protection of ‘sophisticated’ persons. Reading that limitation into the statute would be inconsistent with its purpose of ‘ “deterring unlicensed persons from engaging in the contracting business.” ’ ” (Phoenix Mechanical Pipeline, Inc. v. Space Exploration Technologies Corp. (2017) 12 Cal.App.5th 842, 849 [219 Cal.Rptr.3d 775].)

•“By entering into the agreements to ‘improve the Property’ and to be ‘solely responsible for completion of infrastructure improvements—including graded building pads, storm drains, sanitary systems, streets, sidewalks, curbs, gutters, utilities, street lighting, and traffic signals—[the plaintiff] was clearly contracting to provide construction services in exchange for cash payments by [the defendants]. The mere execution of such a contract is an act ‘in the capacity of a contractor,’ and an unlicensed person is barred by section 7031, subdivision (a), from bringing claims based on the contract. [¶] … [¶] … Section 7026 plainly states that both the person who provides construction services himself and one who does so ‘through others’ qualifies as a ‘contractor.’ The California courts have also long held that those who enter into construction contracts must be licensed, even when they themselves do not do the actual work under the contract.” (Vallejo Development Co., supra, 24 Cal.App.4th at pp. 940–941, original italics.)

•“[Contractor] has not alleged one contract, but rather a series of agreements for each separate task that it was asked to perform. It may therefore seek compensation under those alleged agreements that apply to tasks for which no license was required.” (Phoenix Mechanical Pipeline, Inc., supra, 12 Cal.App.5th at p. 853.)

•“Section 7031, subdivision (e) states an exception to the license requirement of subdivision (a). Subdivision (e) provides in part: ‘[T]he court may determine that there has been substantial compliance with licensure requirements under this section if it is shown at an evidentiary hearing that the person who engaged in the business or acted in the capacity of a 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.’ ” (C. W. Johnson & Sons, Inc. v. Carpenter (2020) 53 Cal.App.5th 165, 169 [265 Cal.Rptr.3d 895].)

•“[I]t 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.’ ” ’ Accordingly, we hold that [Code Civ. Proc., §] 340, subdivision (a), the one-year statute of limitations, applies to disgorgement claims brought under section 7031(b).” (Eisenberg Village of Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, Inc. (2020) 53 Cal.App.5th 1201, 1212 [268 Cal.Rptr.3d 334], internal citation and footnote omitted.)

•“[W]e hold that the discovery rule does not apply to section 7031(b) claims. Thus, the ordinary rule of accrual applies, i.e., the claim accrues ‘ “when the cause of action is complete with all of its elements.” ’ In the case of a section 7031(b) claim, the cause of action is complete when an unlicensed contractor completes or ceases performance of the act or contract at issue.” (Eisenberg Village of Los Angeles Jewish Home for the Aging, supra, 53 Cal.App.5th at pp. 1214–1215, internal citation omitted.)