An avoidable disaster: A well-respected, hard-working engineer designs and installs a system that meets and exceeds an owner’s contractual requirements. The project was located out-of-state for the engineer, but the promised fee justified the effort. In a rush to meet the project requirements, the engineer failed to confirm and follow the state registration and licensing requirements. After completion, the owner refuses to pay, arguing that the contract is illegal and void due to the engineer’s failure to obtain and maintain a license in this foreign state. The engineer is baffled and asserts that the system is better than the owner asked for – no harm, no foul, right? Unfortunately for the engineer, the owner has a viable argument. Penalties for noncompliance with a state’s registration and licensing requirements can be harsh and must be considered prior to performing work in a foreign state.
The Purposes of Government Regulation Shape the Penalties for Noncompliance
To understand the penalties, it helps to understand the different purposes of registration and licensing requirements. Government regulation of construction serves two purposes. One is to protect the general public from the potential hazards related to construction such as personal injury and property damage. Another is to produce revenue to the government from construction activity. While regulation exists in many forms and varies by state, every state requires construction contractors and professionals to register and obtain pertinent licensure. The purposes served by the registration and licensing requirements largely dictate the different penalties for noncompliance.
For example, every state requires foreign entities that transact business in the state to obtain some type of certificate of authority. This ensures that the state maintains a record of contractors performing work in the state while also producing revenue to the state from registration fees and taxes. Failure to comply at the time of contract execution typically does not result in the unenforceability of a contract for services. See Custom Track, Inc. v. Vulcan Mining, Inc., 62 Wash. App. 208, 813 P.2d 626 (1991).
In Vulcan Mining, a rock-crushing contractor that failed to register under Washington’s contractor registration act could still recover in a suit to collect payment from a mining company. The court looked to the purpose of the registration act and observed that the act was intended to prevent the “victimizing of a defenseless public by unreliable, fraudulent and incompetent contractors.” The court found the act’s purpose did not apply to the relationship between the contractor and mining company, which was essentially a joint venture.
Further, the failure to comply with registration requirements will likely only preclude recovery until compliance is satisfied. The court in Charles W. Smith & Sons Excavating, Inc. v. Lichtefeld-Massaro, Inc., 477 N.E.2d 308 (Ind. Ct. App. 1985) followed the majority rule that the failure of a foreign entity to obtain a certificate of authority by the date it filed its complaint merely suspended, rather than barred, legal proceedings until such time as a certificate is obtained. Nonetheless, noncompliance with registration acts may carry serious ramifications if lien statutes are relied upon for recovery. In one case, the failure to obtain a certificate of authority led the court to find that a party “simply has no lien to claim” because such claims only exist for those who comply with the registration act. Space Planners Architects, Inc. v. Frontier Town-Missouri, Inc., 107 S.W.3d 398, 403 (Mo. Ct. App. 2003).
As licensing carries obligations to the public that typically exceed registration requirements, licensing requirements are generally enforced more strictly than registration requirements with harsher penalties. For example, the court in Dist. Bd. of Trustees v. Morgan, 890 So. 2d 1155 (Fla. Dist. Ct. App. 2004) observed that when an out-of-state architect fails to comply with Florida’s licensing act, the architect can neither recover under Florida’s lien statute nor recover for breach of contract. In that circumstance, the unlicensed person has no right to enforce a contract for services that required a license. However, the court refused to find that a licensed architect’s mere failure to obtain a certificate of authorization invalidated the contract or otherwise precluded recovery. The court emphasized that the lack of a certificate of authorization does not create a risk to the general public similar to that of an unlicensed architect.
All states require engineers and architects to be licensed, but not all states require contractors to be licensed. Thus, contractors must understand licensing requirements prior to pursuing out-of-state work. In some jurisdictions, the failure to have a required license when a bid is submitted – as opposed to when work is performed – is a violation of the licensing requirements and could jeopardize the contract award. The court in AED, Inc. v. KDC Investments, LLC, 155 Idaho 159, 307 P.3d 176 (2013) found that a demolition contractor’s failure to be properly licensed at the time it submitted a bid resulted in the blasting contract being illegal and unenforceable. Further, the fact that the contractor obtained a license after contract execution did not change this result.
Some jurisdictions, however, temper the harshness of noncompliance penalties by recognizing the doctrine of substantial compliance with licensing requirements. Application of the substantial compliance doctrine is also predicated on the purpose served by licensing requirements. For example, inDeReggi Const. Co. v. Mate, 130 Md. App. 648, 747 A.2d 743 (2000), the court recognized that substantial compliance of licensing requirements is sufficient for a contractor to maintain a cause of action for nonpayment. The court found that although the contractor did not obtain a license prior to contract execution, the contractor did obtain a license prior to commencement of work and completed the work in a professional manner. Accordingly, the court found that the purposes of the licensing act were served in this case. Substantial compliance with licensing requirements, if recognized in a jurisdiction, is fact dependent and should not be relied upon unless necessary.
Essentials for Compliance
It is essential that registration and licensing requirements be understood at the earliest point possible. Although out-of-state work can be profitable, failing to comply with a state’s requirements may leave an out-of-state contractor without any recourse for payment after work is completed. Thus, it is vital to determine the precise requirements of the foreign state including: obtaining a certificate of authority prior to pursuing out-of-state work and bidding on a project; understanding whether and when an out-of-state license is required; understanding whether your firm and an employee or principal of your firm must have a license; understanding whether a city, county or other local registration or license may also be required; understanding the costs and time associated with obtaining the registrations or licenses, including any bonding or insurance requirements; understanding whether joint venturing or partnering with an in-state registered or licensed entity may be beneficial; understanding the obligations imposed by the required registration and licensing; understanding the requirements to keep required registration and licensing in effect; and understanding the consequences of a violation of the registration or licensing requirements with respect to recovery for nonpayment.
If an out-of-state construction contractor or professional performs all contractual requirements but does not obtain required state registration and licensing requirements, there is significant risk that the penalties for noncompliance may preclude recovery for such work. Stated differently, the no harm, no foul rule is too risky to rely upon. State licensing and registration requirements differ and must be understood prior to pursuing work out-of-state. The requirements differ largely because the purposes that states place on licensing and registration differ. Similarly, a court’s strict enforcement of licensing and registration requirements may exist in one factual scenario, but substantial compliance with such requirements may be found adequate in another factual scenario. While the benefits of out-of-state work may be merit the pursuit of such projects, complete understanding of the state registration and licensing requirements prior to pursuit of such projects is essential for success.