In White v. Cridlebaugh, 175 Cal.App.4th 1535 (2009), the California Court of Appeal’s latest decision interpreting California’s Contractors State License Law (Cal. Bus. & Prof. Code §7000, et seq.; the “License Law”), the court confirmed prior case law holding that an unlicensed contractor has no legal right to recover any money from the project owner for the value of work performed.1 However, the court then went a step further, holding that an unlicensed contractor also has no right to defend an action by the owner by offsetting the value of its work against the owner’s damage claims. This ruling clears up lingering uncertainty regarding the viability of offsets following the 2001 amendments to the License Law, which created a provision expressly stating that claims could be brought against unlicensed contractors to recover all compensation paid to the unlicensed contractor.

In White, the plaintiffs purchased property on which they planned to build their retirement home. They negotiated a time and materials contract with the Cridlebaughs, who signed a construction contract in the name of JC Master Builders, Inc. A dispute arose over cost overruns and the parties sued one another. The plaintiff homeowners sued in relevant part to recover all amounts previously paid to JC Master Builders under §7031 of the License Law; JC Master Builders in turn sued for breach of contract.

At trial, JC Master Builders’ responsible managing officer (RMO) testified that he had not been involved in the management of the company for the past two years, which he had spent overseas as a missionary, and that he had turned over management of the company to the Cridlebaughs. Because JC Master Builders’ RMO was not actively engaged in the management of the business, the court found the corporation’s contractor’s license to be suspended automatically, by operation of law, pursuant to Cal. Bus. & Prof. Code §7068.2. As a consequence, the court further found that JC Master Builders could not be considered a properly licensed contractor during the bulk of its work on the project. As such, JC Master Builders was found to be in violation of Section 7031, which mandated a finding in favor of the plaintiffs on all of their affirmative claims.

In deciding the offset issue, the court examined the legislative history behind the 2001 amendments to Section 7031, and interpreted the legislative history as expressly intended to foreclose the question left open by earlier decisions, of whether an unlicensed contractor could offset for the value of its work, in order to lower the damages awarded against it, in the negative.

White serves as a stark reminder of the care and attention that must be paid to this area of the law at all stages of project development, by all parties involved in the project. Understanding these rules is critically important in the context of evolving project delivery methods, including design-build and public-private partnerships where the lead contracting entity is often viewed more as a “developer” than a contractor subject to the Contractors State License Law.