Another Case On Substantial Complience

We have written other articles and discussed several cases in our book California Construction Law, regarding California License Law, and more specifically Business and Professions Code section 7031. In the MW Erectors case, which we discussed in our book, we filed an Amicus Brief in opposition citing other options. Unfortunately we did not prevail. We believe the laws in this area are extremely harsh. The case discussed below continues that harshness.

A new case, Great West Contractors, Inc. v. WSS Industrial Construction, Inc., has upheld the decisions in the above referenced cases. In this case, a subcontractor, (WSS Industrial Construction (“WSS”), was barred from bringing a suit against Great West Contractors because WSS was not licensed at all times. WSS is a corporation that had applied for, but not yet obtained, their corporate contractor’s license at the time it submitted its bid. WSS had entered into the contract, ordered parts, and submitted plans before the corporation was actually licensed. However, it had not started actual construction of the site. The RMO of WSS was licensed as an individual and a partnership, but not on behalf of the corporation. The MW Erectors case we have discussed showed that MW Erectors was unlicensed for only a few days, but not “at all times during construction,” and since that case, the law states that “…except as expressly otherwise provided, a contractor may not sue to collect compensation for performance of ‘any act or contract’ requiring a license without alleging that he or she was duly licensed ‘at all times during the performance of that act or contract.’ ”

Business and Professions Code section 7031(e) gives the only exception to the contractor’s licensure requirements. It states that the courts can find there is substantial compliance with the license requirements, “if it is shown at an evidentiary hearing that the person who engaged in the business or acted in the capacity of a contractor (1) had been duly licensed as a contractor in this state prior to the performance of the act or contract, (2) acted reasonably and in good faith to maintain proper licensure, (3) and did not know or reasonably should not have known that he or she was not duly licensed.” This was not the case with WSS, just at it was not with the MW Erectors case, because the corporation was not licensed.

Therefore, the Appellate Court denied WSS’s case, even though the Appellate Court itself agreed that they “are cognizant of the harshness of this result. But the law is clear.”

More On Arbitration

As you all should know, arbitration has become a favorite method of resolving disputes in construction cases. Mediation is another favored method of doing the same. The reason for this favoritism is that you are more likely to get an arbitrator or mediator with construction experience. This is not always true in court where you will have a judge who has no understanding of construction, nor the fact that construction is not a science. I once had a judge who asked me why I subpoenaed the plans since they are so big and dirty!

In this case, Mr. and Mrs. Bruni (“Bruni”) purchased their single family home in a development from James Didion. The contract contained a limited warranty and arbitration provision. Bruni later discovered that their home was defective. Bruni and other homeowners filed suit against the developer alleging construction defects. The homeowners opposed the Motions of the developer stating that the arbitration provisions were unconscionable. The trial court denied the Motions to Compel Arbitration agreeing that the arbitration provisions were unconscionable. The developer appealed. Essentially, the developer was stating that unconscionability must be decided by an arbitrator not the trial court.

The Appellate Court sided with the trial court. The Appellate Court stated that if a party is claiming forgery or fraud, asserting that it never agreed to the arbitration clause, then the court must decide the claim. But if the party is not denying that it agreed to the arbitration clause and instead claims some other defense to the enforcement of the clause, then the court must enforce the arbitration clause and allow an arbitrator to decide the issues.

Here, the Plaintiffs were claiming unconscionability that they never “knowingly agreed” to the arbitration provisions.

Therefore, the trial court and not the arbitrator is required to resolve the unconscionability claim. The reason the court held that the provision was unconscionable was because the provisions were contained in a contract of adhesion (a “take it or leave it” contract), and violated the reasonable expectations of the Plaintiffs (homeowners).

We believe that this is a relatively bad decision. Not because it is unfair, but anyone can say that they did not know what they were signing and therefore the court must decide. Since arbitration is much less expensive than litigation and since many courts are not typically able to resolve complicated construction disputes, this makes it very easy for someone to get out of an arbitration agreement and go to court.

Cash Flow For Contractors

Contractors, subcontractors, and material suppliers should start thinking very hard as to what their cash flow might be after July 1, of this year. If a budget is not approved by the legislature by that time and some emergency measures employed, many of you may not be paid even though you may have completed your work.

There are many legal issues involved in such a matter. However, if emergency measures are not put in place by our government, there could very well be many people or companies who will not get paid timely, only because of our inept Legislature.

Site Inspections

Site inspections are used extensively in construction cases. This is both during construction and sometime thereafter if there is a dispute.

If you have a dispute with your customer, and you have not taken pictures or some other means of verifying that the work you had done was done correctly, then a site inspection is appropriate. We suggest that you photograph your work during construction so that you can verify what you did.

That is to say that the parties and the trier of fact, the one making the decision as to whether the work was done appropriately, visit the site and argue over whether the work was done correctly or not. Unfortunately, quite often, either in arbitration or litigation, you may not have the opportunity to conduct a site inspection and therefore, would have very little proof that the work you did was done correctly.

Therefore, we suggest that any time you get involved in a dispute and are going to someone to determine whether the work that you did was done correctly, you should demand that a site inspection be part of the determination of the dispute. You should do this early on so that you can demand a site inspection early.

Federal Arbitration Act and California Law

What happens when the parties agree to conduct their arbitration in accordance with California law, yet there are triable issues that are not subject to arbitration? This becomes a problem in that you could end up with conflicting decisions. In this case, there was a denial of the request for arbitration and the appellate court said that this was not an abuse of discretion.

In addition, in this case, the general contractor failed to pay the full sum due and building inspectors hindered the subcontractor in its work. The general contractor, subcontractor, and owner, were parties to arbitration agreements, but the building inspectors were not. That created a risk of inconsistent decisions based on conflicting conclusions.