Effective January 1, 2017, the Legislature has enacted a significant change to California's strict contractor's licensing law, providing some relief to contractors who have allowed their license to lapse through oversight or inadvertence – provided they can show that they acted "promptly and in good faith" in fixing the mistake. If so, the contractor can avoid the severe penalties which are otherwise imposed upon unlicensed contractors.

Previously, California's treatment of unlicensed contractors was as straightforward as it was harsh. Under the former version of California Business & Professions Code §7031(e), an unlicensed contractor could be forced to "disgorge" (i.e. refund) any amounts it received for work performed during the unlicensed period. This was true regardless of how well the work was performed, and regardless of the reason for the gap in licensure. A sole exception was provided in §7031(e) for instances where the contractor could show it was in "substantial compliance" with the licensing law. This, in turn, could only be established by a showing that the contractor:

  1. Had been previously licensed in California for the type of work performed;
  2. Acted reasonably and in good faith to maintain proper licensure;
  3. Did not know or reasonably should not have known that he or she was not duly licensed when performance of the act or contract commenced; and
  4. Acted promptly and in good faith to reinstate his or her license upon learning it was invalid.

The third requirement above was the most vague and difficult to establish, since it was often hard for the contractor to prove a negative - that he or she did not know the license had expired. Rather, the contractor was left trying to show that his or her failure to realize that the license had expired was "reasonable" – a challenging task on its face.

The good news for such contractors is that the recent amendment to §7031(e) has completely removed the third requirement referenced above. Now, a contractor who finds that its license had inadvertently expired or lapsed during the performance of its work can take advantage of the exception by showing that it had previously been licensed, had acted reasonably in maintaining its license, and acted "promptly and in good faith" to reinstate the license upon learning that it had expired.

While this change will provide relief to some contractors who find themselves in the unenviable position of having performed work while unlicensed, California's licensing laws remain undeniably stringent and harsh. The goal of the state's statutory licensing rules was succinctly stated by the California Supreme Court in Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 995 as follows:

"Section 7031 advances this purpose by withholding judicial aid from those who seek compensation for unlicensed contract work. The obvious statutory intent is to discourage persons who have failed to comply with the licensing law from offering or providing their unlicensed services for pay."

To this end, the change to §7031(e) does not alter the fact that a contractor seeking payment for his or her work still carries the burden of proving that the contractor was properly licensed at all times the work was being performed. Rather, the changes to §7031(e) merely expand the "substantial compliance" exception discussed above.

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