Consequences of Contracting Without a Valid Contractor’s License

Construction contractors are both defined by and regulated within nearly every state through laws that regulate contractor licensing. States and some municipalities adopt such licensing regimens to protect the public and to better assure that certain types of structures are properly constructed and free from dangerous defects. Each state has a different statutory and regulatory licensing scheme, but many do have similar characteristics. The definition of “contractor” and the various classifications in which a contractor may apply for a license are set forth in the state laws. Not all contracting or construction work requires a license in every jurisdiction, but contractors must determine if their work falls within the purview of a licensing statute or regulation. It is critically important that contractors understand and fully comply with the laws and regulations governing them in each jurisdiction in which they perform work because the consequences of not fully complying can be devastating.

The penalties for contracting without a license vary from jurisdiction to jurisdiction. California has some of the toughest penalties in the country for unlicensed contractors. An unlicensed contractor is not just a contractor without a license, but also could be a contractor that is incorrectly licensed. As in other jurisdictions, an unlicensed contractor may be subject to both civil and criminal penalties, such as imprisonment and/or a hefty fine for the intentional use of another persons’ license with intent to defraud. The law precludes an unlicensed contractor from maintaining a lawsuit to recover compensation for its work. But the most dreaded penalty of all is that an unlicensed contractor may be required to disgorge any compensation it has previously been paid for performing work that requires a license.

Two recent cases illustrate that failure to be properly licensed can produce negative consequences for a contractor’s bottom line. On February 22, 2018, the Supreme Court of North Dakota issued an opinion in Snider v. Dickinson Elks Building, LLC, in which it held that a contractor was not entitled to recover for labor performed and materials furnished during a time when the contractor was unlicensed. In this case the out-of-state contractor entered into a contract on December 26, 2011; but it did not obtain its contractor’s license until February 6, 2012. The court observed that the relevant North Dakota statute bars claims by a contractor based on work performed or materials furnished during a period of time the contractor was not licensed. The court further noted that this was unlike statutes in other states, such as Arizona and Utah, which require a valid license at the time of contracting and continuously while performing the work.

The Supreme Court of North Dakota held that, although the contractor could not recover for labor performed and materials furnished during the period that it had no license, it could recover for labor and materials provided after it obtained a license.

On March 9, 2018, the Georgia Court of Appeals, in Baja Properties, LLC v. Mattera, applied Georgia’s contractor licensing law to deny an unlicensed contractor its claims. In this case a homebuilder filed a lawsuit against the homeowner for breach of contract. At trial the homebuilder admitted that he did not have a general contractor’s license when the construction contract was executed and when the work under the contract was performed. The court dismissed the builder’s breach of contract claims as void and unenforceable under state law.

The court cited Georgia Code § 43-41-17, which provides that an unlicensed contractor cannot enforce a contract in law or in equity. Further, this statute provides that, “if a contract is rendered unenforceable under this subsection, no lien or bond claim shall exist in favor of the unlicensed contractor for any labor, services, or materials provided . . . .”

These two cases—and many others—serve as object lessons for contractors. Contractors ignore relevant licensing statutes and regulations at their peril! Without a proper license, a contractor’s valid claim for payment can be denied, in whole or in part. In addition, some states require contractors to ensure their subs are properly licensed or face penalties. As requirements vary from state to state, when seeking work in a new jurisdiction, contractors must take care obtain the proper licenses—prior to submitting bids and executing contracts. Some states do not allow a contractor to remedy improper licensure after contract execution, so these matters must be dealt with prior to contract execution.

Surety professionals should consider reminding their contractors to comply with all relevant licensing laws in each jurisdiction in which they perform work, in order to avoid criminal and administrative sanctions or penalties, from fines to imprisonment, and court-ordered restitution.
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The author of this article is Martha Perkins, General Counsel at NASBP. Martha Perkins can be reached at mperkins@nasbp.org or 202.686-3700.

This article is provided to NASBP members, affiliates, and associates solely for educational and informational purposes. It is not to be considered the rendering of legal advice in specific cases or to create a lawyer-client relationship. Readers are responsible for obtaining legal advice from their own counsels, and should not act upon any information contained in this article without such advice.