Elon Musk . . .
And, now, litigation bad ass.
Frequent readers of the California Construction Law Blog know that we’ve talked about the importance of being properly licensed when doing construction work and the risks to you if you don’t.
One California contractor recently found this out the hard way.
In Phoenix Mechanical Pipeline, Inc. v. Space Exploration Technologies Corp., California Court of Appeals for the Second District, Case No. B269186 (June 13, 2017), contractor Phoenix Mechanical Pipeline, Inc. (Phoenix) lost its boosters . . . err britches . . when it sued Elon Musk’s Space Exploration Technologies Corp. (Space X) due to its failure to have a California contractor’s license.
Try and Try Again
In or about 2010, Phoenix entered into a contract with Space X to provide a variety of services including “plumbing, general maintenance and repair, concrete removal and pouring, trash clean-up and disposal, demolition, car washing, electrical, excavation and installation.” According to Phoenix’s complaint against Space X, Space X initially paid for Phoenix’s services but later refused and subsequently informed Phoenix that its services were no longer required and requested that Phoenix leave Space X’s premises. Phoenix’s complaint alleged that Space X owed it more than $1 million.
The really interesting thing about Phoenix’s complaint was not what was alleged, however, but what was not alleged. Phoenix did not allege, as required by Business and Professions Code section 7031, “that he or she [Phoenix] was a duly licensed contractor at all times during the performance of ” its work or under its contract.
As a result, Space X demurred. Rather than opposing the demurrer, however, Phoenix elected to file an amended complaint. In its amended complaint, Phoenix added allegations that Harold Hill, whom Phoenix characterized as its “Responsible Managing Employee,” oversaw all services that [Phoenix] provided to any contractors, companies, or institutions, including [Space X].” Phoenix’s amended complaint further alleged that Hill was the owner of another entity, Phoenix Mechanical Plumbing, Inc. (Phoenix Mechanical), which held a California contractor’s license.
In response, Space X filed another demurrer arguing that Phoenix Mechanical’s contractor’s license was not sufficient to satisfy the requirements of Business and Professions Code section 7031, which requires the “person engaged in the business or acting in the capacity of a contractor” to allege that it was properly licensed, not that a third-party is licensed.
The trial court sustained Space X’s demurrer with leave for Phoenix to file a second amended complaint. In its second amended complaint, Phoenix relabeled Hill as a “responsible managing officer” rather than as a “Responsible Managing Employee.” In addition, Phoenix alleged, tracking the language contained in regulations of the California Contractor’s State License Board, that Hill “supervised construction related services, managed construction activities by making technical and administrative decisions, checked jobs for proper workmanship, and directly supervised construction job sites.” And, finally, Phoenix alleged that it was not required to hold a California contractor’s license for non-construction services.
In response, Space X filed another demurrer. This time, the trial court granted Space X’s demurrer without leave to amend. Phoenix appealed.
On appeal, the Court of Appeals explained that the purpose of Business and Professions Code section 7031 is to “protect the public from incompetence and dishonesty in those who provide building and construction services,” that Section 7031 “advances this purpose by withholding judicial aid from those who seek compensation for unlicensed work,” and that application of Section 7031 “applies despite injustice to the unlicensed contractor.”
Thus, held the Court of Appeals, “[b]ecause Phoenix Pipelines did not allege that it was licensed, section 7031 precludes its claim for work that required a license” and that “[n]one of the arguments that Phoenix Pipelines makes to escape the effect of section 7031 can avoid this result, however harsh.”
Likewise, explained the Court of Appeals, Phoenix’s allegation that Hill was its responsible managing officer, and that Hill was the owner of Phoenix Mechanical a licensed contractor, was “not sufficient to permit Phoenix Pipeline to sue for work that it contracted to perform” (emphasis added) since “Phoenix Pipeline was the contracting entity and the entity that filed suit.”
Finally, explained the Court of Appeals, Phoenix’s contention that Section 7031 shouldn’t be applicable to it because Space X is a sophisticated corporate entity, is “irrelevant to Phoenix Pipeline’s obligation to show that it was licensed.”
Phoenix had one small (and likely very small) win, however. While noting that “several cases have held that specific tasks that do not require a license may not be carved out of a single contract where those tasks are ‘part of an integrated whole,'” the Court of Appeals also noted on review of a demurrer a court accepts as true all facts pled in a complaint. And, here, held the Court, Phoenix alleged that each of its invoices to Space X was a separate contract. Therefore, to the extent an invoice applied to tasks in which no license was required, Phoenix should be permitted to pursue a claim for non-payment of those tasks.
Space X is yet another reminder that if you are performing construction work in California (with a value of $500 or more) you are required to hold valid contractor’s license. If you don’t, there could be dire consequences. Indeed, while the Space X court only addressed the “claim preclusion” provision of Business and Professions Code section 7031, it also includes a “disgorgement” provision as well, requiring an unlicensed contractor to disgorge, or pay back, all compensation paid to it. I have a feeling that Space X didn’t forget about that.