In a recent federal court decision, the U.S. Court of Appeals for the Ninth Circuit considered whether unlicensed contractors are prohibited from bringing construction related legal claims against others and whether they are prohibited from asserting certain counterclaims in the event they are sued. The case arose after an Oregon law was passed in 2005 that allowed only contractors with valid licenses from the state’s Construction Contractors Board to commence breach of contract claims with the board, in arbitration or in any court. When the law was amended in 2007, new language was added to make clear that a “claim” meant not just an insurance claim, but any lawsuit, specifically a “court action.” The legislation was heavily backed by the state’s Construction Contractors Board. Coincidentally, by 2013, the law was revised back to the original language that only prohibited the unlicensed contractor from commencing a “claim” (not a “court action”) for construction work.

In April 2009, before the original language in the law was restored, an unlicensed contractor challenged the state law to clarify the legal rights of unlicensed contractors. The unlicensed contractor had entered into a subcontract, under which the unlicensed contractor agreed to fabricate and install certain equipment to build and supply a biological wastewater treatment unit and an aeration diffuser system. At the time of the subcontract agreement, the unlicensed contractor had made the general contractor aware that it did not have an official license from the state’s Construction Contractors Board; however, the subcontract was executed. At some point during the project, the general contractor terminated the subcontract agreement. Shortly thereafter, the general contractor sued the unlicensed contractor, alleging breach of contract, failure to timely and diligently perform the subcontracted services and failure to provide certain equipment and cure certain defaults. The unlicensed contractor counterclaimed for money owed.

To resolve the matter, the federal court relied heavily on both the text and the purpose of the revised unlicensed contractor law. What did “court action” mean? Did replacing the term “claim” with “court action” limit the remedies for unlicensed contractors? Could unlicensed contractors assert a breach of counterclaim if they found themselves in a lawsuit? The federal court found that because the state law’s intent was to deter unlicensed contractors from performing construction work by denying them the ability to pursue all claims for compensation of their work, it would be absurd to allow unlicensed contractors to recover damages when they are sued but not when they file a complaint seeking damages. Because the contractor was not licensed by the board during the time it was sued nor, importantly, at the time it filed its counterclaim, it could not recover for any damages based on its counterclaims. The court’s opinion did not go so far as to specify whether, under the 2013 revisions, unlicensed contractors would now be able to assert counterclaims.

Cases like this evidence why contractors should familiarize themselves with the laws of the state where they are performing construction work and be sure to be in full compliance with licensing requirements. Contractors that fail to have valid licenses may bar their own recovery of potential damages. Meanwhile, owners and general contractors should gain the same familiarity with licensing requirements and, by doing so, may quickly put themselves in a superior legal position in the event they discover that an unlicensed contractor has damaged a project.

Steller J Corp. v. Smith & Loveless, Inc., Case No. 12-35780, 2014 WL 2884556 (9th Cir. June 26, 2014).