Unlicensed Contractor Must Return All Money Paid

The courts of appeal in California just handed down another decision that brings home the importance of having a contractor's license if your business is engaged in any activities that require a contractor license. In Goldstein v. Barak Construction, decided July 8, 2008, the contractor began work before his license was issued. During the course of the construction project, the contractor's license was finally issued. Also during the course of the project, there were Extras that were added to the job.

Now, there must have been a big disagreement between the builder and the client, because eventually the construction was left uncompleted, with both sides blaming the other for the lack of completion. So, the client sued for return of ALL of the money he had ever paid to the builder - over $300,000. That included money paid before the contractor was licensed, and after he was licensed. It included not only the money paid pursuant to the original contract but also Extras added on during the course of the project.

The trial court issued a prejudgment attachment against the contractor's assets for the entire amount. And the appellate court held that was the proper thing to do.

The Contractors' State License Law says that unless you have a contractor license at the time you begin the work, you can't make your client pay you for the materials or work that you furnished - and, in fact, the client can force you to repay any money that the client paid you, even if you used the bulk of that money to buy materials that you installed in your client's home. And this is true even if your client knows you are not licensed and says he doesn't care.

This case also clarifies that any Extras on a job are also subject to your client's right to stiff you if you were unlicensed when the original job to which those Extras relate began.

So the bottom line is that If you do work that requires a contractor license, get that license in place before you begin any portion of the work on the project that requires a license. And keep that license in place until your job is 100% complete. If you don't, not only can your client legally stiff you, but your client can also sue you to get back anything they already paid to you.

This case also highlights the failure to maintain a proper distinction between a corporate entity and your personal affairs. The court allowed the attachment both against the construction company, a corporation, and against its sole shareholder and owner, individually. Now the case doesn't disclose any of the specific facts, but simply says that the trial court found there were sufficient facts to indicate that the corporation was the individual's alter ego.

Given the lack of this contractor to comply with the letter of the Contractors State License laws, it would not surprise me to learn that he failed to comply with the corporate formalities that are required to ensure the independence of a corporation from its shareholders. But, piercing the corporate veil is a subject for another day.