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Unlicensed Contractor Could Lose $23 Million

Again, a contractor has been caught performing work without a valid California contractor's license, and could lose $4,669,376 in unpaid charges and be required to pay back $18,331,911. This time it's Jacobs Engineering, one of the largest and most sophisticated contractors, and presumably with plenty of lawyers advising it.

Jacobs Facilities was licensed when it won the contract with the Judicial Council of California, the state agency which administers all of the state's courts, and when it started work, in 2006. During the course of the work, Jacobs Engineering went through what it called a "branding initiative," which included reducing the number of subsidiaries it maintained and paid for. One of those was Jacobs Facilities. The RMO for Jacobs Facilities withdrew in August 2008, Facilities' license was suspended, and it expired in November. In October 2009, the JCC leaned that the license had expired, and filed suit in December to recover what it had paid since the license had lapsed.

At trial, Jacobs persuaded a jury to accept its defense that there had been an "internal reassignment of the duties to" another subsidiary which had a valid license. The problem was that no one had told JCC, and the contract required JCC's prior written consent before any such assignment could become effective. The Court of Appeal did not buy the argument. The now unlicensed company remained the contracting party.

Civil Code §1031(a) and (b) are strict and intended to be punitive. In 1989, the legislature amended the statute to make it punitive, as a deterrent against construction by unlicensed persons. The California Supreme Court has upheld that interpretation, even in situations more onerous than this. In one such case, a licensed California general contractor told a subcontractor licensed in another state that he did not need a California license to work on the general contractor's job. It then refused to pay the sub and successfully defended the sub's lawsuit to collect for the materials and labor the sub had expended, because the sub was unlicensed in California. The fact that Jacobs Engineering and many of its other subsidiaries were licensed was no defense. This subsidiary was not licensed.

The Court of Appeal remanded to the trial court for the judge, without a jury, to determine whether or not Jacobs Facilities was in "substantial compliance" with the licensing requirements, as defined by the four part test of Civil Code §1031(e). Jacobs Facilities will have to prove: (1) that it was duly licensed prior to performing the work, (2) that it acted reasonably and in good faith to maintain its license, (3) that it did not know that it was no longer licensed when the work was performed, and (4) that it acted promptly and in good faith to reinstate its license.

I don't see how the defendant can survive that test. It had its RMO withdraw and let the license lapse, because it was closing down Jacobs Facilities, intentionally. It can't pass the second and third tests. I don't know whether assigning the contract to another subsidiary which was licensed would satisfy the fourth test. Jacobs Facilities' license was never reinstated.

$23 million. And, oh yeah, the plaintiff is the agency that runs the courts. Maybe they'll settle.

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