Thursday, September 17, 2009

No license, No Rights!

Georgia and other states require that certain contractors have a license to file liens, recover damages, and to enforce contracts

Several states, including Georgia, require those desiring to engage in construction-related activities to obtain a license or to associate with a licensed individual. Failing to comply with the state’s licensing requirements can negatively affect your ability to enforce a contract or recover costs for any work performed. For example, in JR Construction/Electric, LLC v. Ordner Construction Co., 294 Ga. App. 453, 669 S.E.2d 224 (Ga. App. 2008), the court held that the subcontract between a contractor and a subcontractor was void as against public policy and unenforceable because the subcontractor was unable to show that it had conformed to the state’s licensing requirements.

Georgia’s Licensing Requirement

JR Construction/Electric, LLC (“JR”), a Wisconsin company, entered into an agreement with Ordner Construction Company (“Ordner”) to install electrical systems. At the time of contracting, JR was not directly associated with a Georgia licensed electrician. Georgia statute O.C.G.A. § 43-14-8(a), states that “[n]o person shall engage in the electrical contracting business as an electrical contractor unless such person has a valid license from the Division of Electrical Contractors.” Under section 43-14-8(f), the statute further provides that “[n]o partnership, limited liability company, or corporation shall have the right to engage in the business of electrical contracting unless there is regularly connected with such partnership, limited liability company, or corporation a person or persons actually engaged in the performance of such business on a full-time basis who have valid licenses issued to them” from the Division of Electrical Contractors.

In an effort to comply with the statute’s licensing requirement, JR entered into a joint venture agreement with Moore Electric Company (“Moore”). Moore had one licensed electrician, whose role, as project manager, was to supervise and monitor each Moore project and insure that all work was in accordance with the plans, codes and specifications. After performing the work outlined in the Ordner subcontract, JR filed a claim against Ordner for breach of contract, unjust enrichment and expenses of litigation. Ordner moved for summary judgment asserting that JR was not licensed to perform work in Georgia. The trial court granted Ordner’s motion for summary judgment. On appeal, JR asserted that it complied with the state’s licensing statute through the creation of a joint venture with Moore. JR claimed that Moore’s project manager supervised and monitored the work performed under the Ordner subcontract. However, no evidence was produced to show that Moore’s project manager did more than present his electrical license to obtain permits for the work.

The court determined that Moore’s project manager’s involvement with the project was too remote to comply with the Georgia licensing statute. JR failed to produce any additional evidence that it complied with the “being regularly connected to a Georgia-licensed electrician” requirement of the statute. Because JR failed to show compliance with the statute, the court held that it was unable to enforce the subcontract agreement against Ordner.

Additionally, JR was prohibited from recovering the value of its services under the theories of unjust enrichment or quantum meruit. In the decision, the court stated that where “an express agreement is unenforceable because it violates public policy, the agreement cannot be made legal and binding as an implied contract, by merely praying for a recovery on quantum meruit of a portion of the amount expressly agreed upon.” In other words, JR’s failure to produce evidence that it complied with Georgia’s licensing requirements voided the Ordner subcontract as against public policy and any implied promises to pay for services were also void when made.

New York’s Licensing Requirement

Similarly, licensing requirements in other states have prevented unlicensed contractors from enforcing mechanic’s liens or recovering payments under contract or in quantum meruit. In Vanguard Construction & Development Co., Inc., 879 N.Y.2d 300 (N.Y. 2009), the New York court held that although the homeowner was aware that the contractor was unlicensed and planned to take advantage of such fact, the contractor could not recover any further payments under the contract or in quantum meruit. New York’s public policy prohibits an unlicensed contractor from recovering for breach of contract or in quantum meruit and renders the underlying contract unenforceable by the contractor. However, the statute does not prevent the homeowner from recovering damages for breach of contract from the unlicensed contractor. Thus, while a contractor was unable to pursue damages arising from an express or implied contract, nor could it foreclose on a mechanic’s lien, the homeowner was entitled to enforce the contract and recover damages for breach of contract.

New Mexico’s Licensing Requirement

Likewise, in Romero v. Parker, 207 P.3d 350 (N.M. Ct. App. 2009), the New Mexico court held that public policy prevented an unlicensed subcontractor from bringing suit to recover payment for work performed on five different projects. Further, an unlicensed contractor risks having to repay payments already made to him. The court stated that “an unlicensed contractor may not retain payments made pursuant to a contract which requires him to perform in violation of the statute” and entitles a “landowner a full refund.” The general contractor that hired the unlicensed subcontractor filed a counterclaim seeking recovery of payments made to the subcontractor. However, the court denied the general contractor’s counterclaim because the general contractor failed “to furnish and maintain evidence of responsibility.” New Mexico statute § 60-13-1.1(c) requires that “contractors be required to furnish and maintain evidence of responsibility.” There was no indication that the subcontractor withheld information from the general contractor or that the general contractor made any attempt to obtain information concerning the subcontractor's licensure. Therefore, the court concluded that New Mexico’s statute barred “both an unlicensed subcontractor from recovering compensation from a general contractor and a general contractor who did not act responsibly in hiring an unlicensed subcontractor from recovering compensation already paid to the unlicensed subcontractor.”

Practical Note

Each state has its own contractor licensing requirements. Before performing work in a particular state, ensure that you have complied with and understand that state’s licensing requirements. A failure to fully comply may leave you with an unenforceable contract and no rights to file a lien, enforce a lien, make a claim on a bond, or to receive any payments.

Unenforceable contracts are contracts that have no remedy in damages or specific performance because they arise out of illegal bargains, which are void at their inception. If you take the risk and perform work without a license, in violation of a state statute, not only is the contract unenforceable as to you, you open yourself up to a plethora of other claims. Some states require that you reimburse the property owner any amounts they have paid for work you performed without a license. Additionally, you may be held liable to the property owners, general contractors, subcontractors, insurance companies, and bonding companies for damages for breach of contract, fraud, and indemnification.

Don't get caught doing business without a license.

This blog is intended to be solely a source of general information on topics related to construction, contract and commercial law. It is not intended to render legal advice on specific problems. If advice is required to address specific matters please feel free to contact me or another qualified attorney.

Ian C. Clarke