by Garrett E. Dillon, Associate

A recent California decision, The Fifth Day, LLC v. James P. Bolotin, et al., 09 C.D.O.S. 4019 (March 27, 2009) stands for the proposition that a person acting as a “construction manager” does not need to comply with the licensing requirements of the California Business and Professions Code despite performing many of the same services as a general contractor.  This decision creates a loophole in the California Contractors’ State License Law, specifically sections 7028 and 7031 of the California Business and Professions Code, due to the Court majority’s reliance on the strict definitions of the terms “contractor” and “construction manager.” Fortunately, a lengthy and well-reasoned dissent exposes this loophole, outlines the public policy rationale behind the California Contractors’ State License Law, and illustrates how simple semantics can impact even seemingly straightforward cases.

Background and Relevant Business and Professions Code Sections

In The Fifth Day, the Plaintiff, The Fifth Day, LLC, entered into a contract with Industrial Real Estate Development Company, the owner, to provide certain “industrial real estate development and construction project management” services with respect to real property located in Chino, California.  The Plaintiff sued the owner and its principal, James P. Bolotin, for compensation allegedly due to Plaintiff.  The trial court granted summary judgment in favor of defendants on the ground that Plaintiff was acting as a general building contractor and was required to hold a license pursuant to Business and Professions Code section 7026.  Because it had no license, the Plaintiff was barred by section 7031(a) from maintaining its action against defendants.

Section 7026 of the California Business and Professions Code defines “contractor” as “any person who undertakes to or offers to undertake to, or purports to have the capacity to undertake to, or submits a bid to, or does himself or herself or by or through others, construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building, highway, road, parking facility, railroad, excavation or other structure, project, development or improvement, or to do any part thereof, . . . whether or not the performance of work herein described involves the addition to, or fabrication into, any structure, project, development or improvement herein described of any material or article of merchandise.”

Section 7028 sets forth the licensing requirements and makes it unlawful for any entity to engage in the business of or to act in the capacity of a contractor without a license.  Section 7031 codifies the strong public policy favoring the protection of the public from unscrupulous and incompetent contractors and bars a person from suing to recover compensation for any work performed under an agreement for services requiring a contractor’s license unless the proper licensure was in place at all times during the contractual performance.

The Majority Opinion

On appeal, Plaintiff contended that it was not a contractor within the meaning on section 7026, that it was exempt from the license requirement because it was an owner of the property or a partner of the owner and, that even if some of the services it rendered did require a contractor’s license it could still be paid for other services that did not require a license.  The appellate court found that Plaintiff was not a contractor within the meaning of the licensing statute and its claims, therefore, were not barred by section 7031(a).

The appellate court framed the central question as whether “an entity which provides construction management services to a private owner developing commercial real property is required to be licensed pursuant to the Contractors’ State Licensing Law.” The appellate court determined that Plaintiff’s duties under its contract were: (i) to assist, on behalf of the owner, in coordinating the activities of the various workers to enable them to complete their assigned tasks in an organized and efficient manner, on time and on budget; (ii) to maintain records such as insurance certificates, as well as the financial books and records for the project; (iii) to keep the owner apprised of the status of the project; (iv) to be the on-site “point person” to respond to issues as they arose; and (v) generally to act as the owner’s agent with respect to various parties connected with the development of the project.  Further, the majority found that Plaintiff had no responsibility or authority to perform any construction work on the project, or to enter into any contract or subcontract for the performance of such work.

Defendants argued that, pursuant to section 7057 of the Business and Professions Code, which defines a general contractor to include a contractor who “superintends the construction of any structure built, being built, or to be built, for the support, shelter and enclosure of persons,” construction management services, such as those performed by Plaintiff, may not be performed without a general contractor’s license.  The majority disagreed, finding that section 7057 provides that any contractor who engages in the listed activities is a general building contractor, not that any “person” or “entity” that does so comes within the definition.  Thus, on the basis of a strict reading of the statutory definition of “contractor,” the majority determined that no California cases held that a “construction manager” must be licensed under the Contractors’ State License Law.

The Dissenting Opinion

Justice Mosk, author of the dissent, exposed the loophole created by the majority opinion which, in his view, now permits “unqualified, unscrupulous and unlicensed” contractors to call themselves “construction managers” rather than “contractors” and avoid the licensing requirements of the Contractors’ State License Law.  The dissent held that when “a construction manager, as plaintiff, undertakes various contractor services, he or she must have a valid contractor’s license.”

Justice Mosk first found that Plaintiff, pursuant to his duties as outlined by the majority, undertook to act as a construction manager and simply as an advisor.  Recognizing that pursuant to the agreement, Plaintiff undertook to perform specific construction management services, it was clear that Plaintiff was no mere advisor.

Instead, the dissent determined that Plaintiff was a construction manager who provided contractor services and therefore needed to be licensed.  Justice Mosk reasoned that, pursuant to both the definition of a contractor under sections 7026 and 7057, a construction manager who undertakes on behalf of an owner to perform work within in the purview of these provisions is a contractor within the meaning of section 7026.

This interpretation is consistent with the purposes of the Contractors’ State License Law’s requirements, which provide minimal assurance that all persons offering such services in California have the requisite skill and character for performance, understand applicable local laws and codes, and know the rudiments of administering a contracting business.  The dissent further reasoned that the fact that the Legislature explicitly required that such construction management services provided on public projects must be by licensed contractors did not imply that construction managers on private projects need not be licensed, stating that “otherwise, a person simply designated as a construction manager on a private project could perform the duties of a contractor defined in section 7026 and avoid the licensing requirement.”

Conclusion

The decision in The Fifth Day clearly shows that some courts look to the strict language in a statute, while others, including Justice Mosk here, look more toward the legislative intent and public policy when interpreting statutory definitions.  As noted by both the majority and dissent, this case involved a decision rendered on summary judgment, and therefore, the defendant would still have the opportunity to establish at trial that the Plaintiff actually performed services in such a manner that a license was required.  Regardless, the decision creates a loophole in the licensing law that turns on a simple difference of statutory interpretation.  For both the contractor operating as an unlicensed “construction manager” and the owner seeking to invalidate a claim by that contractor, this decision clarifies some of the hurdles the each must overcome.  Contractors attempting to operate as unlicensed “construction managers” should tread carefully because the future decision may not be so lenient.


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Watt, Tieder, Hoffar & Fitzgerald is one of the largest construction law firms in the world, with a practice that encompasses all aspects of construction contracting, claims and disputes resolution, and transactional legal services. WTHF principally represents large general contractors, design firms, and sureties throughout the country and internationally.