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California Contractor Laws & Requirements

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At Law Office of Steven R. Lovett, we have been advising contractors and subcontractors on their rights and responsibilities for 40 years. This page is meant to inform contractors and subcontractors of principle laws and requirements that affect them on a daily basis. It is not legal advice. In order to learn how the law affects you and to discuss your legal situation with a dedicated Los Angeles construction attorney, contact the Law Office of Steven R. Lovett. We provide cost-effective yet high-quality legal representation.

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The Strict Licensure Requirement

Among other things, the Contractors State License Law states a general rule that, regardless of the merits of the claim, a contractor may not maintain any action, legal or equitable, to recover compensation for "the performance of any act or contract" unless he or she was duly licensed " at all times during the performance of that act or contract." California Business and Professions Code Section 7031 (a). Section 7031(a) bars a person from suing to recover compensation for any work he or she did under an agreement for services requiring a contractor's license unless proper licensure was in place at all times during such contractual performance.

In the case of Opp v. State Paul Farm Fire & Marine Insurance Co. (2007) 154 Cal.App.4th 71, a licensed contractor whose unlicensed corporation entered into a subcontract with a general contractor could not sue to recover compensation even though the contractor's license number appeared on all documents relating to the contract. The corporation was the contracting party and since it was unlicensed, recovery was barred by the Business & Professions Code Section 7031.

In a similar situation in Asdourian v. Araj, 38 Cal. 3d 276 (1984), the California Supreme Court has held that the contractor is unlicensed for purposes of proceeding under the contract. The substantial performance exception used as a saving clause, in this case, has since been repealed by the Legislature. See also MW Erectors, Inc. v. Niederhauser Ornamental (2005), 36 Cal.4th 412, which holds that a contractor must be licensed at all times during the performance of the contract and cannot recover for individual acts performed during licensure. Licensing during execution is irrelevant.

Changes to Lien Releases

Effective July 1, 2012, there have been changes in California to the prescribed forms for Conditional Waiver and Release Upon Progress Payment and for Unconditional Waiver and Release Upon Progress Payment. Any enforceable releases after this date must substantially comply with these revisions. The revisions make it clear that the lien releases only apply to release mechanics lien, stop notice, and bond rights and not the underlying contract rights between the parties.

In addition, the amendments make it clear that the lien releases do not affect retentions retained before or after the release date, extras furnished before the release date for which payment has not been received, or extras or items furnished after the release date. Significantly, the amendments make it clear that if there is a written change order which has been fully signed by both parties, rights based upon work performed or items furnished under the change orders are covered by the release unless specifically reserved by the claimant in the release.

Significantly, subsection (b) of Civil Code section 8124 provides that whether the release is conditional or unconditional, the lien is invalid if the payment is not actually received.

Owner's Measure of Damages

The California Supreme Court held in Ehrlich v. Menezes that where a contractor's negligence causes a homeowner only economic injury and property damage (not physical injury), only contract damages lie and a claim for emotional distress is precluded. The available damages for defective construction are thus limited to the cost of repairing the home, including lost use or relocation expenses, or the diminution in value.

When a contractor, subcontractor or design professional is found liable to the owner for defective construction, the measure of damages has always been either diminution in value or the cost of restoration, whichever is less. The owner cannot receive both diminution in value and restoration costs since that would constitute a double recovery. However, in 1990, the court of appeal held in Orndorff v. Christiana Community Builders that if the homeowner has a "personal reason" for repairing construction defects in his home, the owner may be awarded the costs to repair the home, even if that cost is greater than a loss in value to the property created by the defects.

Limitation on Liability

In Markborough California v. Superior Court, the California court of appeal sanctioned a construction professional limiting liability to the amount of the construction fee. Even though the provision in question was in a standard form contract, it was mailed with a cover letter that stated: "If the contract documents were acceptable to you, we can begin work as soon as we receive a copy of the signed contract. We would, of course, have to approve any requested changes for proceeding." This provision suggested that the customer was not stuck with the contract and liability clause but had the opportunity to make changes.

The contract in question contained a limitation of liability clause limiting the engineer's liability to the greater of $50,000 or to the engineer's consulting fee. The engineer was paid $67,640 for its services and this provision was effective to limit any claim for errors and omissions to $67,640. Given the fact that the plaintiff claimed over 5 million dollars in expenses to remedy the design problem in issue, this was a very significant provision. The court probably would not have upheld this provision, however, absent some evidence that the contract was negotiable. In addition, based upon the court's application of Civil Code section 2782.5, it is unlikely such a provision would be upheld in another type of contract.

Ten-Day Stop Work Notice

If an original contractor is not paid all moneys owed on a written contract within 35 days from the date payment is due, and there is no dispute over performance, the contractor can serve a 10-day stop work order. At least 5 days before serving the notice, the contractor must post a notice of intention to file a stop-work notice on the job site and the main office of the job site. The contractor must also serve all subcontractors hired by the contractor. If the contractor does so, it is not responsible for damages or delays arising from the stoppage. If the payment is not made in 10 days, the contractor can file an expedited action for a judicial determination of liability. California Civil Code § 8832.

Construction Managers

California Business and Professions Code Section 7026.1(b) includes a consultant to an owner builder within the definition of a contractor. Nevertheless, a construction manager need not have a contractor's license on a private project according to the Fifth Day, LLC v. Bolotin case, 172 Cal. App. 4th 419 939.

Indemnity Clauses

A type I indemnity agreement will protect the person to be indemnified ("indemnitee") from liability, regardless of the active negligence of the indemnitee. A type I clause generally has a provision that the indemnity shall apply regardless of any active and/or passive negligent act or omission of the owner or contractor.

A type II indemnity will protect the indemnitee from liability arising from the indemnitee's passive negligence or vicarious liability, but not from the indemnitee's active or concurrent negligence.

Civil Code 2782(a) prohibits indemnity agreements in construction contacts that purport to indemnify against liability for the sole negligence or willful misconduct of the indemnitee.

Civil Code 2782(b) prohibits indemnity agreements in construction contracts with public agencies that purport to impose liability on the indemnitor from the active negligence of the public agency.

Residential construction contracts and amendments that indicate a general contractor or subcontractor is to be held harmless for construction defects, injury or negligence are legally unenforceable as of January 1, 2008. California Civil Code Section 2782.

Retention and Progress Payments for Private Works

California Civil Code Section 8812 requires the owner to pay retention within 45 days of completion, and for the contractor to pay subs within 10 days of receipt of retention, or they are subject to a 2 percent penalty per month on the improperly withheld amount, in lieu of interest. The prevailing party shall also be entitled to attorney's fees.

California Civil Code Section 8800 requires payment of progress payments within 30 days or the amount is subject to the same penalty as above.

Retention to General Contractor for Public Works

Public Contract Code Section 7107 requires retention to be released within 60 days after completion of project. Failure to do so subjects the entity to a 2% per month penalty per month in lieu of interest, plus attorneys' fees.

Contact a Los Angeles construction lawyer by e-mail or call us for a free telephonic consultation to discuss your legal needs as a contractor or subcontractor.

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