There are two lessons here. The first is an unlicensed contractor may not offset material costs for a job against a property owner’s Business and Professions Code 7031 (b) disgorgement claim. The second is enforcement of a 2001 law permitting property owners to take unlicensed contractors to court to recover all the money paid to them.

While the lessons may sound rather drastic, it is unfortunately true that if you wish to do business as a contractor you must be licensed at all times without any lapses. At least that’s what building contractor Terry Criddlebaugh found out the hard way.

The facts are a bit boring, perhaps even laughable when you examine them deeply. Terry was not licensed and had actually been trying to use the license of another contractor that was out of the country; a contractor that had assigned his license to Terry. Now on the surface that sounds like it would work, but it didn’t.

The actual registered owner of the company Terry was representing was Robert Diani. However he’d been an absentee officer and had turned over the work responsibilities to Terry. Diani left the country in 2004 and only returned to the U.S. twice and only had active control of the building company prior to leaving the country. Terry had never held a California contractor’s license. Because Diani was absent, he let Terry use his contractor’s license under the auspices of Diani’s company.

The problem was that when Diani’s company got its contractor’s license it had to qualify through a responsible managing officer (Diani) or a responsible managing employee who was eligible to get the same license.

If the managing officer isn’t associated with the licensed company, it has 90 days to replace the person. If the person is not replaced the contractor’s license is suspended automatically. In this case, the Diani company wasn’t qualified for a contractor’s license because Diani wasn’t actively in the construction business after 2004, Terry didn’t have a contractor’s license and there was no replacement put into Diani’s position.

So, here was a home built and one that exceeded the White’s expectations, but that didn’t matter. White was happy but he nonetheless sued Terry to recover all monies invested in the home because he found out that Terry had no contractor’s license.

This particular case is another in a series since 1990 and the Hydrotech Systems, Ltd. v. Oasis Waterpark, supra, 52 Cal.3d at p. 997 case. California courts have been interpreting the California Contractor’s law to say that the importance of licensing for a contractor is similar to other professionals like lawyers and accountants.

The California Supreme Court broadly interprets section 7031: “it bars a person from suing to recover compensation for any work done under an agreement for services requiring a contractor’s license, unless proper licensure was in place at all times.” In essence, the statute’s position that justice be done regardless of the equities is justified by how important it is to deter violations of licensing requirement. (WSS Industrial Construction, Inc. v. Great West Contractors, Inc., supra, 162 Cal.App.4th at p. 596.)

Section 7031 (b) deals with people who use unlicensed contractors regularly whether or not they have paid for the unlicensed work. People who have not paid are protected from lawsuits. On the other hand those who do pay may recover all they paid under this 2001 addition to section 7031.

Before the White vs. Criddlebaugh case, a lawyer recovered $3.5 million in paid fees in a similar case, MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412, 419. The White case goes one step further and says even if the construction job was the most outstanding in the world and the material will last 50 years or more, an unlicensed contractor will not be reimbursed for it. To put this another way, the White case extends the consequences of the Business and Professions Code 7031b’s disgorgement to even prevent the unlicensed contractor from recovering out-of-pocket costs expended on the job – in this case material.

This case also raised the question of whether or not compensation under section 7031 (b) may be reduced by offsets for “materials and services or by claims for indemnity and contribution.” The court concluded unlicensed contractors must return all compensation received without reductions or offsets for the value of material or services provided. (Goldstein v. Barak Construction (2008) 164 Cal.App.4th 845, 856.)

While this may seem nitpicky in the extreme there is sense in the decision. It’s a fact of life that there are cases where unlicensed contractors perform substandard work which ultimately may mean demolition of what was initially built by the unlicensed contractor in order to correct it.

The harsh results express a strong public policy intended to send a message. The message being that if you are unlicensed at any moment from the time you sign a contract to do work for which a contractor’s license is required through the time of completion of the job, you just gave the client free material and labor and built them their dream house as a gift – and even if they knew all along you were unlicensed. So, be aware that if a contractor is unlicensed, even for a fleeting moment, the same kind of decision may apply.

Wait, there’s more. Fight in court and you also get to pay the property owner’s legal fees and costs. On the other hand, if you are licensed, contractors have a formidable array of weapons they can bring to bear in order to get paid for their efforts.

While there are sometimes clearly inequitable results from such a harsh rule, it is more than offset against the circumstances where the contractor has never been licensed and has little clue on how to build a doghouse let alone a custom Beverly Hills chateau. At least that’s what this lawyer thinks.

Roni Balint writes for the Law Office of Alan M. Insul. The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.

If you’re hugely successful in expanding your business into foreign countries and deal with manufacturers and suppliers beware you don’t exploit cheap labor.

While it might be “the in thing to do,” expanding a business into foreign countries and hiring manufacturers and suppliers right on the spot, you need to watch that you do not exploit local labor. If you do, and insist they follow “your” notions of minimum labor standards, working conditions and health benefits; chances are you might wind up as a party to a nasty lawsuit later, just the very thing that happened to retail giant Wal-Mart, Inc.

Now you may think it odd that U.S. lawyers are representing plaintiffs in foreign exotic countries, however it appears to be a growing legal trend. They are doing this because the foreigners can sue U.S. companies in the United States. Perhaps this is the wave of the future; the legal industry relying more on imports over domestic sources to stay in business.

Just the Facts Ma’am!

The plaintiffs are workers of foreign companies that sell goods to Wal-Mart Stores, Inc. They collectively brought claims against the retail giant based on working conditions in each of their employer’s factories. The basis of the claims was that a code of conduct included in Wal-Mart’s supply contracts with these foreign companies stated that the suppliers had to meet basic labor standards.

The standards insisted foreign suppliers adhere to local laws and local industry standards relating to working conditions like discrimination, child labor, forced labor, hours and pay and something called a right of inspection. The right of inspection clause stated: “Wal-Mart or a third party designated by Wal-Mart will undertake on-site inspection of production facilities, to implement and monitor said standards. Any supplier which fails or refuses to comply with these standards or does not allow inspection of production facilities is subject to immediate cancellation of any and all outstanding orders, refuse [sic] or return [sic] any shipment, and otherwise cease doing business [sic] with Wal-Mart.”

Wal-Mart promotes itself to the public as a corporate entity that improves the lives of its suppliers’ employees and won’t stand for any violations of their standards. The plaintiffs argue that Wal-Mart doesn’t properly monitor the suppliers and that standards are honored more in the breach than in actuality. They further alleged inspectors are coerced to produce positive reports for those not in compliance and that the short deadlines and low prices of Wal-Mart’s contract conditions forces suppliers to violate the standards to meet the agreements.

And the Contentions Are

The plaintiffs offer four legal theories that attempt to establish that Wal-Mart’s standards and California common law provides obligations that may be enforced by foreign workers against Wal-Mart. Those theories are that the plaintiffs are third-party beneficiaries of the standards contained in Wal-Mart’s supply contracts; Wal-Mart is the plaintiffs’ joint employer and they negligently breached a duty to monitor the suppliers and protect plaintiffs from the suppliers’ working conditions and finally that Wal-Mart was unjustly enriched by the plaintiffs’ mistreatment.

And the Court Said

Re: Third-party beneficiary contracts: the Court set out the oft quoted rule that a person will be entitled to sue on a contract as “an intended [third party] beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties.” Furthermore it is accepted that “contract interpretation is a question of law that the court reviews de novo.”

The court felt that Wal-Mart’s supplier agreement didn’t obligate them to inspect and a workplace’s standards violation has no consequence if there were no inspection. Therefore, Wal-Mart didn’t obligate itself with a duty owed to the supplier’s workers as 3rd party beneficiaries of the supplier contracts between Wal-Mart and its foreign based suppliers.

Re: Wal-Mart was the direct employer of the foreign based supplier’s employees. The court stated that “in order to be a direct employer, they must be determined to have the right to control and direct people’s activities or the manner/method used to perform those activities.” In addition any finding as to the right to control workers requires a comprehensive and “immediate level of ‘day to day’ authority over employment decisions.”

The agreement that Wal-Mart could monitor the work environment was already determined not to create a duty to carry that out. Therefore, this can’t rise to the level of control over method or manner necessary since Wal-Mart didn’t assume the obligation.

Re: Wal-Mart is liable in tort to the workers for negligently supervising the supplier’s facilities and their working conditions.

The court said that “Negligence requires a duty owed by defendant to plaintiff which is alleged to have been breached.” And further that “Wal-Mart did not owe the plaintiffs a common-law duty to monitor Wal-Mart’s suppliers or to prevent the alleged intentional mistreatment of the plaintiffs by the suppliers. Without such a duty, the plaintiffs’ negligence theories do not state a claim.”

Re: Wal-Mart was unjustly enriched because it knowingly profited from their suppliers substandard labor practices.

The court’s response to this contention was that “A person who has been unjustly enriched at the expense of another is required to make restitution to the other.” California’s approach to unjust enrichment is consistent with this general understanding. And in addition, “The fact that one person benefits another is not, by itself, sufficient to require restitution. The person receiving the benefit is required to make restitution only if the circumstances are such that, as between the two individuals, it is unjust [emphasis added] for the person to retain it.”

The lack of any prior relationship between Wal-Mart and its supplier’s employees precludes the application of the unjust enrichment theory to recover. As you can see, this case was very nearly a case of no good deed goes unpunished and is a warning shot fired at other entrepreneurs and large corporations to watch their step when dealing in foreign countries.…… at least that’s what this lawyer thinks.

Roni Balint writes for the Law Office of Alan M. Insul. The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.