In early 2026, a California appeals court reversed a summary judgment ruling in AVL Test Systems Inc. v. Hensel Phelps Construction Co. The case grew out of a large public works project in Riverside, California, where Hensel Phelps was the prime general contractor and AVL Test Systems was a subcontractor hired to supply and install specialized vehicle emissions testing equipment. When a payment dispute arose, Hensel Phelps argued it did not owe AVL anything because AVL had performed contractor work without holding a valid California contractor’s license.
California’s Contractors State Licensing Law (CSLL) is serious: under Business and Professions Code section 7031, an unlicensed contractor generally cannot sue to get paid — no matter how good the work was. Hensel Phelps leaned on that rule hard. AVL fired back by arguing it was exempt because its equipment never became a “fixed part of the structure” — meaning the testing systems were free-standing units that could be removed, not permanent improvements to the building. The trial court sided with Hensel Phelps and dismissed AVL’s claims.
The appeals court disagreed. The key question — whether AVL’s equipment was permanently fixed to the building — is a factual dispute, not something a judge can decide on paper. Both sides had experts who reached opposite conclusions. AVL’s expert said the equipment could be removed without damaging the building; Hensel Phelps’s expert said the opposite. Because the experts conflicted, a jury has to sort it out at trial. The case was sent back to the lower court.
What This Means for General Contractors
If you are a general contractor, this case is a cautionary tale. The CSLL cuts both ways. Yes, you can potentially use an unlicensed subcontractor’s status as a defense to payment claims. But if a court decides the subcontractor’s work falls under a licensing exemption — because their equipment was not truly fixed to the structure — that defense disappears. Hensel Phelps went from a clean summary judgment win to facing a full trial, which is expensive and uncertain.
Three practical steps can protect you. First, check a subcontractor’s license before signing any contract — do not take their word for it. Verify directly through the Contractors State License Board (CSLB) website and keep a record. Second, do not assume specialty equipment suppliers are automatically outside the CSLL. Whether something like an HVAC system, a testing apparatus, or security equipment counts as a “fixed part of the structure” depends on the specific facts — and experts can disagree. Third, build strong licensing warranties and indemnification clauses into every subcontract so that if a licensing problem surfaces, the financial exposure shifts to the subcontractor, not you.
The bottom line: a licensing question that sounds simple — is this equipment fixed to the structure or not? — can turn into a full-blown jury trial. Getting ahead of it with proper vetting and a well-drafted contract is far cheaper than finding out at trial.
What This Means for Equipment Rental Companies
Equipment rental companies should pay attention too. If your team not only delivers equipment but also installs it — bolting it to a concrete pad, connecting it to electrical systems, or integrating it into a building’s infrastructure — you may be doing contractor work without realizing it. The moment that happens, you could be subject to CSLL licensing requirements. And as AVL shows, whether your equipment “became” a fixed part of the structure is a question a jury decides, not you. Audit the installation services you routinely provide, figure out whether they cross the line into contractor work, and talk to a construction attorney about whether you need a CSLB license. Getting licensed costs far less than losing a payment claim over a licensing technicality.
The Eleven-Factor Test: What Makes Equipment a “Fixed Part of the Structure”?
Courts decide whether installed equipment qualifies as a “fixed part of the structure” by looking at a combination of factors — no single one is decisive:
- The manner in which the item is attached to the realty
- The character of the item and its adaptation to the use or purpose of the realty
- The intention of the party making the annexation
- The relationship between the parties (e.g., owner vs. tenant vs. contractor)
- Whether the item was specifically constructed or adapted for use at the premises
- The extent to which the item can be removed without damage to the realty or to the item itself
- The value of the item relative to the value of the realty
- The nature and duration of the trade or business being conducted on the realty
- Whether the item was financed or purchased separately from the structure
- The degree to which the item serves the structure versus a portable operational purpose
- Any express or implied agreement between the parties regarding ownership and removal rights
Because this analysis is so fact-specific, even sophisticated parties with the same set of project
documents can reach opposite conclusions — exactly what happened here. That is why it pays to address licensing questions before a project starts, not after a payment dispute blows up.
John Darling is a Senior Shareholder with Hunt Ortmann Nieves Darling Mah Klein & Lozano, Inc. His practice involves a wide array of construction industry matters such as bidding disputes, scheduling and delay issues, construction defect, mechanics lien, defective plans and specifications, change orders and claims resolution. His broad range of experience includes public and private works projects ranging from mass grading, subterranean construction, steel, concrete and wood frame structures, schools, office buildings, apartment buildings and home construction.
Patricia J. Wolfe is a Shareholder with Hunt Ortmann Nieves Darling Mah Klein & Lozano, Inc. Her practice encompasses the representation of owners, developers, general contractors and subcontractors on private and public works projects. She has litigated matters relating to construction delay and defect claims, bid protests, mechanic’s lien and business disputes.
