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Court of Appeal Affirms a Contractor’s Right to a Hearing on a Claim of Substantial Compliance with Licensing Law

August 18, 2020

There are two certainties in life: death and the need to comply with California’s Contractors State License Law (“License Law”). But what happens if a death creates a technical violation of the License Law? A recent court of appeal case, C.W. Johnson & Sons, Inc. v. Carpenter (“C.W. Johnson & Sons”), addressed this issue and reaffirmed a contractor’s right to an evidentiary hearing on its claim of substantial compliance with the Licensing Law.

C.W. Johnson & Sons involved a residential project in which the homeowner (Carpenter) sued the flooring contractor (Johnson) for, among other things, being unlicensed during the work. There was no dispute that Johnson was properly licensed during the initial installation of the flooring. During the period in which Johnson performed warranty, repair, and corrective work, however, Johnson was technically unlicensed as its registered Responsible Managing Officer (RMO) had died and had not been replaced within 90 days as required by the License Law. As a result, and based on the allegation that Johnson was unlicensed, Carpenter sought disgorgement of all money paid to Johnson and sought to bar Johnson’s claim against Carpenter for money owed. In response, Johnson alleged that it was properly licensed at all times during the work or, at least, entitled to an evidentiary hearing to determine whether Johnson substantially complied with the License Law.

Subdivision (e) of Section 7031 of the Business and Professions Code sets forth what is known as the doctrine of substantial compliance, which is an exception to the mandatory licensing requirement for contractors. Three requirements must be met: (1) the licensee must have been duly licensed prior to the time that his or her license lapsed, (2) the licensee must have acted reasonably and in good faith to maintain licensure, and (3) the licensee must have acted promptly and in good faith to remedy the lapse in licensure once it is discovered. If any one of these requirements are not satisfied, the licensee cannot claim substantial compliance and will be deemed unlicensed. In this regard, Johnson alleged that the current RMO (Charles) believed that he was the RMO for the company at the time of the project and did not know (nor have reason to know) that Charles’ father was registered as the RMO at the time of his father’s death. Even so, as soon as Charles learned that his father was the RMO for the license, he took immediate steps to become the RMO. So while Johnson admitted there was a technical lapse in its license, it was, at all times, substantially complying with the License Law. The trial court, without an evidentiary hearing on the issue of substantial compliance, dismissed Johnson’s claims to seek compensation under the contract with Carpenter. This effectively ended Johnson’s ability to seek money from Carpenter and paved the way for Carpenter to pursue disgorgement against Johnson. The trial court also denied Johnson’s request for a hearing to determine whether or not Johnson substantially complied with the License Law.

The court of appeal reversed the decision of the trial court. Without making any determination as to the merits of Johnson’s substantial compliance defense, the appellate court found that Johnson was entitled to an evidentiary hearing because Johnson alleged the ultimate facts supporting a defense of substantial compliance. The court of appeal, however, rejected a secondary argument by Johnson that attempted to separate its claims and recover for work performed before any issues with its license existed. The court confirmed that proper licensing is an all-or-nothing proposition; any lapse in a contractor’s license during a project can be grounds for disgorgement, which makes Johnson’s claim of substantial compliance its only hope for recovery.

C.W. Johnson & Sons is a win for contractors because it affirms their right to a hearing on substantial compliance, but it is also a reminder that careful attention must be paid to the licensing requirements of the License Law. The License Law contains numerous pitfalls for contractors that if unknown or unobserved, may be fatal to a contractor’s claim for compensation or may subject a contractor to disgorgement. Given the high-stakes involved, contractors should be diligent about compliance with the License Laws or seek out advice from counsel when in doubt.

Dustin Lozano is an associate attorney at Hunt Ortmann handling complex construction and business litigation. He represents clients through all stages of litigation, including pre-litigation settlement. In addition to trial and arbitration, Mr. Lozano has successfully argued before the California Court of Appeal.  He can be contacted at lozano@huntortmann.com or 626-440-5200.

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