Key Notes:

  • Recent court decisions have highlighted the importance for contractors to be aware of applicable licensing requirements, as failure to comply can result in severe consequences.
  • Contractor licensing requirements can vary greatly depending on the location of the project.
  • Certain jurisdictions impose extremely harsh penalties on unlicensed contractors, including disgorgement of compensation earned on the project and exposure to criminal penalties.

Licensing requirements for contractors can vary greatly among jurisdictions, but it is imperative that contractors both understand and comply with the applicable license laws and regulations. Failure to do so can result in limitations of rights and remedies and, in some cases, exposure to criminal prosecution.

Michigan Reinforces Homeowners’ Shield, But Denies Them A Sword

The implications of improper licensing were again brought to the forefront in a recent Michigan Supreme Court decision, Epps v. 4 Quarters Restoration LLC, 498 Mich. 518, 872 N.W. 2d 412 (2015), which involved work performed by an unlicensed residential contractor. In Epps, the plaintiff homeowners retained a contractor to perform repair work on their home after it had been damaged in a flood. The contractor represented to the homeowners that it was a licensed contractor although its license had been revoked months earlier. The homeowners were subsequently dissatisfied with the work of the contractor and filed an action to recoup all compensation that had been paid to date. The basis for the homeowners’ claim was that the contractor’s lack of proper licensing violated MCL 339.2412(1) and, accordingly, the parties’ agreement was illegal, void and unenforceable and should be rescinded. The homeowners also asserted claims that the contractor defrauded them, performed the work in an unworkmanlike manner, and converted their insurance proceeds.

The homeowners moved for summary judgment on the claim that the contract was void due to lack of compliance with MCL 339.2412(1) and the trial court granted the motion. Upon appeal, the Michigan Court of Appeals affirmed the summary judgment, but on different grounds. With respect to MCL 339.2412(1), the appellate court agreed with the trial court that violation of MCL 339.2412(1) prevented an unlicensed contractor from bringing or maintaining a claim for compensation, but determined that the lack of a license did not preclude a contractor from defending itself against a claim nor did it make the contract void per se. The Court of Appeals, however, upheld the invalidity of the contract by holding that the contractor defrauded the homeowners by representing that it was licensed and, therefore, the contract was void ab initio (that is, void as of the time it was created).

The contractor then appealed to Michigan’s highest court, where it won a partial victory. The Michigan Supreme Court agreed with the Court of Appeal’s analysis of MCL 339.2412(1), but disagreed as to the status of the contract. In its holding, the Michigan Supreme Court determined that (i) MCL 339.2412(1) prohibits an unlicensed residential contractor from bringing or maintaining an action for the collection of compensation but does not prevent an unlicensed contractor from defending the merits of a claim brought against it; (ii) that MCL 339.2412(1) does not create a private right of action for a homeowner to recover damages based upon a violation of the statute; and (iii) a contract for the services of an unlicensed contractor is voidable at the option of the homeowner, but is not void ab initio.

While the Ebbs decision effectively reduced the penalties for unlicensed contractors, it confirmed the law in Michigan that unlicensed residential contractors cannot institute or maintain actions for compensation. It should be noted that, in Michigan, this limitation on actions extends to lien rights and prevents an unlicensed residential contractor from filing a lien in response to non-payment for its work. Stokes v. Millen Roofing Co, 466 Mich. 660, 662, 649 N.W. 2d 371 (2002).

Michigan Not Alone in Severe Penalties for Unlicensed Contractors

Michigan is not the only jurisdiction with harsh penalties for unlicensed contractors. In both California and Florida there can be severe consequences for performing work without a license. Under California’s Business and Professions Code § 7031, not only is an unlicensed or improperly licensed contractor prohibited from maintaining an action to recover compensation for its work, but the statute also expressly grants a private right of action to recover all compensation paid to the contractor for such work. A recent demonstration of its severe effects can be found in the case of Twenty-Nine Palms Enters. Corp. v. Bardos, 210 Cal.App.4th 1435, 149 Cal.Rptr.3d 52 (2012), rev. denied 2013 Cal. LEXIS 1124 (2013), cert. denied 133 S.Ct. 2884 (2013). In Twenty-Nine Palms, a sole proprietorship construction company submitted a bid and was awarded a project to build an access road and parking lot for a casino on tribal land. The project was successfully completed and the unlicensed contractor was paid in full its $751,995 bid amount. The tribal corporation then discovered that the contractor was unlicensed and brought an action for recovery of its payment. The contractor asserted several unsuccessful defenses, including an argument that it had substantially complied with the licensing statute, but was ordered to pay back the entirety of the $751,995 payment. Efforts to overturn the decision in the appellate courts failed.

In Florida, as a matter of public policy, a contract entered into by an unlicensed contractor after October 1, 1990 is unenforceable by that unlicensed contractor. Fla. Stat. § 489.128(1); see also RTM Gen. Contractors, Inc. v. G/W Riverwalk, LLC, 893 So.2d 583 (Fla.App.2004) (a contract entered into by an unlicensed contractor was “null, void, and unenforceable” and the construction lien filed by that unlicensed contractor was also unenforceable).

Both Florida and California also impose criminal sanctions, which can range from fines to jail time or both, for a contractor’s failure to be properly licensed. See Fla. Stat. § 489.127; Cal. Bus. & Prof. Code § 7000, et seq.

Conclusion

Proper licensing for contractors is not simply an administrative task that can be easily cured if overlooked. While some states, like Ohio, require licenses for only certain classifications of commercial contractors, others require all types of contractors to be licensed. Failure to comply with applicable licensing requirements can result in severe penalties, including disgorgement of all compensation and potential criminal punishment. As these licensing requirements can vary greatly between jurisdictions, it is critical that contractors – particularly those with a regional or national business – be aware of both the applicable laws on this subject and the implications for improper licensing.