Most Common Errors by California Contractors

1. VIOLATION OF HOME IMPROVEMENT LAWS

"Home improvement" means the repairing, remodeling, altering, converting, or modernizing of, or adding to, residential property and shall include, but not be limited to, the construction, erection, replacement, or improvement of driveways, swimming pools, including spas and hot tubs, terraces, patios, awnings, storm windows, landscaping, fences, porches, garages, fallout shelters, basements, and other improvements of the structures or land which is adjacent to a dwelling house. Under Business and Professions Code Section 7159, all contracts must state the "approximate completion date" as opposed to the date of substantial completion. There are many required bold notices. All clauses must be at least 10-point. The contract must advise the homeowner that the contractor does or does not have commercial general insurance and workers’ compensation insurance. If the contractor has such coverage, he or she must list the name and telephone number of the insurance company. All change orders must be in writing, unless required by the building department at the job site, and must state the effect that the change order will have on progress payments and on the completion date. On a home improvement contract, accepting an excessive down payment, requiring payment before completion of the work, and requesting or accepting payment that exceeds the value of the work performed or material delivered is cause for discipline.

2. ORAL CHANGE ORDER

Under the Home Improvement Laws summarized above, all change orders must be in writing and a blank sample change order must be attached to the contract.

3. ABANDONMENT WITHOUT LEGAL EXCUSE

Abandonment of a project without legal excuse is cause for discipline under Business and Professions Code Section 7107. It is often a bone of contention whether the contractor was terminated or whether the contractor abandoned a project, so a complete paper trail is critical.

4. UNTIMELY OR NO PRELIMINARY NOTICE

Any contractor who does not have a direct relationship with the property owner must serve a preliminary notice unless the owner has expressed knowledge of the existence of the contractor. Even if there is a direct relationship, if there is a construction lender, a preliminary notice is required. If preliminary notice is not sent out at the beginning of the project, it only relates back to services provided within the last 20 days.

5. HIRING UNLICENSED SUBCONTRACTORS

Entering into a contract with a contractor while such contractor is not licensed constitutes a cause for disciplinary action under Business and Professions Code Section 7118. Similarly, aiding and abetting an unlicensed person constitutes a cause for disciplinary action under Business and Professions Code Section 7114.

6. USING BOGUS RMO

A contracting corporation qualifies by the appearance of a responsible managing officer ("RMO") or a responsible managing employee ("RME"). Business & Professions Code Section 7068(B)(3). The RMO must own at least 20 percent of the equity of the firm and must engage in the contracting business the lesser of at least 32 hours or 80 percent of the total business hours. Contractor’s License Board, Board Rule 823.

Buzgheia v. Leasco Sierra Grove (1997) 60 Cal. App.4th 374 holds that where the licensee has qualified through the use of an RME (responsible managing employee), the contractor has the burden of proving not only that the firm is properly licensed but also that the RME requirements have been met.

A corporate contractor which has no bona fide RMO is unlicensed and must disgorge any fees paid. White v. Cridlebaugh (2009) 178 Cal. App.4th 507

7. MAKING FALSE WORKERS COMPENSATION EXEMPTION

Business and Professions Code Section 7125.2 provides that the failure of a contractor to obtain or maintain workers' compensation insurance coverage if required under this chapter, shall result in the automatic suspension of the license by operation of law. The license suspension imposed by this section is effective upon the earlier of either of the following: (1) On the date that the relevant workers' compensation insurance coverage lapses. (2) On the date that workers' compensation coverage is required to be obtained.

Wright v. Issak (2007) 149 Cal.App.4th 1116, the court held contractor who fails to maintain workers' compensation insurance (or who underpays his payroll) and whose license is automatically suspended by operation of law cannot maintain an action in a dispute over a home remodeling job. In that case, the contractor's license was suspended by operation of law even though the contractor might not have been aware of the suspension. As a result, the project owner recovered substantial damages, plus the disgorgement of $27,000.00 that had been paid to the contractor. In addition, the court awarded $10,000.00 in punitive damages for the contractor's fraud in reporting that it had paid its workers ‘compensation premium.

Thus, if a contractor falsely claims to be exempt from the requirement of maintaining worker's compensation insurance to the Contractors State License Board, then hires employees who are not licensed subcontractors, the contractor runs the risk of these draconian penalties.

8. USE OF CORPORATION NOT YET LICENSED

In the case of Opp v. State Farm Fire & Marine Insurance Co. (2007) 154 Cal.App.4th 71, a licensed contractor whose unlicensed corporation entered into a subcontract with a general contractor could not sue to recover compensation even though the contractor's license number appeared on all documents relating to the contract. The corporation was the contracting party and since it was unlicensed, recovery was barred by Business & Professions Code Section 7031.

In a similar situation in Asdourian v. Araj (1984) 38 Cal. 3d 276, the California Supreme Court has held that the contractor is unlicensed for purposes of proceeding under the contract. The substantial performance exception used as a saving clause, in this case, has since been repealed by the Legislature.

9. USE OF INCOMPLETE OR WRONG NAME

In Ballo v. Steadfast-BLK (2011) 196 Cal. App.4th 694, the court held that a sole proprietor contractor can sue under a filed fictitious name if the contractor is licensed even if the fictitious name is not listed with the CSLB (licensed as David Clark dba "Clark Heating and Air Conditioning" while the fictitious name was filed as "Clark Air Conditioning and Heating." The failure to update was at most cause for disciplinary action. Thus, even if the contractor has the right to sue, the failure to use the correct name when contracting can get the contractor disciplined by the Contractors State License Board.

10. FAILURE TO OBTAIN PERMITS

Willfully and deliberately violating any state or local law relating to the issuance of building permits where the services are for $500 or more is cause for disciplinary action.

11. CONTRACTING TO PERFORM LESS THAN TWO TRADES

Business and Professions Code Section 7057 provides that a general building contractor must contract for the use of at least two unrelated building trades or crafts, or to do or superintend the whole or any part thereof unless the contractor also maintains a specialty license.