Beware of the Dangers of Hiring Unlicensed Subcontractors

By: Joseph M. Sweeney, Esq., Christopher J. Olson, Esq., Scott A. Mangum, Esq.,
William M. Kaufman, Esq. and M. Jonathan Robb, Jr., Esq.

A recent California appellate court opinion provides insight to a long-standing dispute regarding Section 7031 of the Business and Professions Code. It is well-established that under Section 7031, an unlicensed contractor is barred from seeking compensation for work requiring a contractor’s license. But does Section 7031 bar a licensed contractor from seeking compensation for work performed by an unlicensed subcontractor? The Court in Kim v. TWA Construction, Inc. (2022) 78 Cal.App.5th 808 said yes in certain circumstances—contractors might be barred from collecting compensation for work performed by an­ unlicensed subcontractor.

In 2015, homeowners Sally Kim and Dai Truong hired general contractor TWA Construction Inc. (“TWA”) to build their home in Los Gatos, California. TWA’s work included several projects for the homeowners. The contract between the parties specified that all the projects would be completed by a licensed individual in addition to an agreement that TWA would indemnify the homeowners from any claims arising from TWA’s negligence.

One of the projects included the removal of a eucalyptus tree that straddled the neighboring property of Joan Todd and the homeowners’ property. The homeowners did not know such work infringed on their neighbor’s property at the time of the project. The homeowners had received a permit from the City and assumed that the tree could be removed without getting approval from Todd. As the tree was being removed, Todd told the workers to stop and called the police. The project was ultimately terminated by the homeowners without any further work being performed.

A year later, Todd filed suit against Kim-Truong, who ultimately settled. The homeowners pursued TWA for indemnity in the amount of $50,000, plus attorney’s fees and costs. In the course of litigation, it was discovered that TWA never checked the license of Martin Hoffman, the independent contractor hired to remove the tree. Before trial, Kim-Truong (who had filed a cross-complaint against TWA for several claims including negligence and express contractual indemnity) filed a motion in limine requesting that Hoffman prove that he had the required license for tree removal work. He was unable to produce a license. As a result, the trial court ruled that TWA was barred under Section 7031 from retaining $10,000 of $16,000 paid for the services performed by the unlicensed subcontractor.

TWA appealed, arguing that the trial court had erred in its application of Section 7031. The appellate court affirmed the trial court’s ruling citing public policy. The appellate court reasoned in part that the lower court’s decision provided protection to homeowners against potentially shoddy and unlicensed work and gave an incentive for contractors to check their worker’s licenses before hiring them. The court did not consider as waived whether Hoffman was an employee for TWA.

The Kim v. TWA Construction, Inc. opinion leaves several issues to be resolved. Notwithstanding, now is a good time to review both your form contracts and liability insurance coverages:

• Are your contracts up to date and do they contain terms and conditions (including indemnity, scope of work and payment provisions) that adequately protect your business and serve your needs?
• Moreover, do you have adequate insurance to protect your company when something inevitably goes wrong—including coverage for your subcontractors’ work (if applicable)?
• What exclusions and exemptions does your insurance policy contain?
• Have appropriate additional-insured endorsements been issued for particular projects and, if so, does that coverage continue or terminate when the subcontractor (or contractor) completes its work?
• All of these important questions must be addressed in advance of contracting to mitigate against potential catastrophic results. Contractors are encouraged to have their contracts reviewed by counsel. And above all, make sure to keep your contractor license in force and ensure that your subcontractors are properly licensed!

For more information, or if you you have specific questions, please contact Joseph M. Sweeney, Esq., Christopher J. Olson, Esq., Scott A. Mangum, Esq., William M. Kaufman, Esq. and M. Jonathan Robb, Jr., Esq.