ConstructionPro Week, Volume: 3 - Issue: 26 - 06/27/2014

Should Licensing Problems Justify Owner Nonpayment?

By Bruce Jervis


Most state licensing statutes make proper licensing a precondition to the contractor’s right to recover compensation for construction work. The reason is obvious. This is a very effective, low-cost way for the state to ensure compliance with its licensing laws. Project owners are quick to raise licensing deficiencies as a defense to a payment claim.


This poses a challenge to contractors. Even when acting in good faith, a license may lapse, the scope of work may exceed licensing limitations, or changes in company structure may raise questions. And owners are aggressive – some would say cynical – in exploiting licensing problems.


In a recent California case, a licensed sole proprietor incorporated his business during a construction project and obtained a reissued contractor license in the corporation’s name. The project owner attempted – unsuccessfully – to avoid payment on the grounds the contractor had not been licensed “at all times” as required by the statute.


The project owner in this case was unsuccessful in avoiding its payment obligations, but in many cases owners succeed. Do you believe every glitch in a contractor’s licensing status should justify owner nonpayment? Have you seen situations where owners knowingly did business with improperly licensed contractors and then used that status as leverage? I welcome your comments.



So the Owner's should get their project done for free because there was a glitch in the contractor's licensing status? That's nonsense. A glitch is different then out and out doing business - construction work without a license. The law needs to change.
Posted by: Kim McMahon - Friday, June 27, 2014 11:15 AM

The situation as described should not warrant non payment since the individual was licensed in one or another during the entire job.

However, I do believe that if you are not licensed at the onset of the project contract being written you forfeit payment for the job. Unlicensed contractors take a serious bite out of available work.
Posted by: Ed - Friday, June 27, 2014 11:20 AM

California State contractor licensing law in particular overreaches and conflicts with the Commerce Clause of the U.S. Constitution by denying an out of state vendor's right to collect payment for materials that happen to become permanently installed in California. A Supreme Court ruling on this matter is called for.

Posted by: Henry Obermeyer - Friday, June 27, 2014 11:21 AM

Having sat on both sides of the fence as a Building Official and a contractor in Virginia I have seen the unlicensed vs the lapsed license. Virginia requires the Building Official to verify licenses before the issuance of a permit.(failure to do so can be a misdemeaner to the issuer) If a license is lapsed then the permit is held until a temp or renewed license is issued by the state. The easiest 'GET AROUND" is for the owner to obtain the permit under the guise of performing the work themselves. Only when issues or problems arise do the owners try to force license violations to their advantage. Local jurisdictions also may require local business licenses prior to issuance of a permit. Virginia also requires some form of a a written contract between the owner and contractor. No fail safe is 100% but it is still a matter of unscrupulous contractors and owners trying to save a penny or avoid following the laws of the land. Licenses can provide a level of protection for both sides of the owner/contractor relationship.
Posted by: Keith Stevens - Friday, June 27, 2014 11:24 AM

Owners spend more time and resources figuring out ways not to pay than planning for the project itself sometimes....just add this to the list. An exact quote from one of my developer clients in Philadelphia that he preached to his children "A dollar borrowed is a dollar earned, another dollar not paid to your contractor, is another dollar earned" Nice, huh?
Posted by: James DiMezza - Friday, June 27, 2014 11:34 AM

In the early 1990's while working as a sub for a builder in Rocky Mount, NC, four members of the same bridge group each invoked this provision against my contractor, driving him into bankruptcy and costing me approximately 70,000.00 principal and 18,000.00 attorney fees which yielded no recovery. In each case the contract exceeded his license only after changes (at first minor and then significant). The last owner took it a step further by transferring ownership of the real property to his wife during the project. Being younger and more naïve at the time, I was surprised that people like this existed, especially in a small town.

Years later in Raleigh, NC,I was caught once more, an affluent owner took the builder over this license limit and refused to pay. When I tried to collect directly from the owner he had the most capable trial lawyer in town (a Family friend) push back. That one cost me Approximately 25,000 dollars but I did waste any additional money on an attorney.

Hooray for the state saving money
Posted by: George Browske - Friday, June 27, 2014 12:10 PM

The owner should not be the benefactor in any way just from lack of licensing. While I agree that the state or local agency should be able to restrict the right to recovery of compensation in order to "ensure compliance with its licensing laws", the restriction should end when the contractor complies with the law and pays the fees and penalties related to becoming licensed. The owner should not be entitled to free work unless they have damages. For instance, the lack of licensing causes issues with inspections, certificate of occupancy, and a delay in moving in, then the owner would be able to reduce payment by the amount of damage the subsequent issues caused as determined by negotiations, the contract, arbitration, or, if necessary, a court of law.
Posted by: Jim W - Friday, June 27, 2014 5:31 PM

This is an ongoing problem. There will always be unscrupulus participants on both sides of a construction project, ethics be damned. You play the game, take your chances and at all times be aware or be prepared to suffer losses. I learned my lesson early back in the 70's but he who has the gold still controls the game. My attorney costs more that your attorney and my pockets are deeper.
Posted by: ADAguy - Monday, June 30, 2014 11:07 AM


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