An Alabama appellate court decision held that an unlicensed contractor may not recover any damages from another party regardless of its conduct on the project. This begs the question: When can an unlicensed contractor recover damages stemming from the wrongful actions of another party? The answer depends on the state where your project is located.
Alabama
In Construction Services Group, LLC v. MS Electric, LLC, 292 So.3d 643 (Ala. Civ. App. 2019), MS Electric, LLC (“MS Electric”), an electrical subcontractor, executed a contract to perform electrical work totaling $198,831.10 for Construction Services Group, the prime contractor. The project at issue was the renovation of an Alabama middle school. After completing a portion of its work, MS Electric halted work on the project and subsequently sued Construction Services for hundreds of hours of unpaid labor costs totaling $23,650.00. Construction Services submitted a counter-claim for negligent misrepresentation damages stemming from the subcontractor’s false representation during the bidding process that it was properly licensed for the work on the project.
The crux of the dispute was MS Electric’s lack of proper licensing for the project. MS Electric possessed a valid electrical license from the Alabama Board of Electrical Contractors at the time of bidding and while conducting work. What MS Electric apparently failed to realize before bidding on the project, however, was that an additional subcontractor’s license was required from the State Licensing Board for jobs in excess of $50,000.00. MS Electric failed to obtain this additional license, and as a result, Construction Services refused to render payment for work completed on the project.
Initially, MS Electric asserted its claims under a breach of contract theory. This claim was later dismissed on summary judgment due to the Alabama statute barring recovery under the contract due to the lack of proper licensing. In an attempt to circumvent the statute, MS Electric amended its complaint to assert unjust enrichment—a quasi-contractual claim—and succeeded at trial. Construction Services then appealed the judgment in favor of MS Electric. The primary issue on appeal: Whether an unlicensed contractor could circumvent Alabama law barring recovery of damages by asserting an unjust enrichment claim.
On appeal, the court determined that, regardless of what “theory” of recovery is asserted by an unlicensed contractor, it may not recover any damages under Alabama law. The court’s reasoning was applied similarly to a claim for breach of contract; a contract or “transaction” executed by an unlicensed contractor is “illegal” and thus deemed unenforceable. The court determined that the accepted bid pursuant to which MS Electric performed was an illegal contract and that the work itself was also illegal. Therefore, Alabama law prohibited MS Electric from recovering damages incurred from the illegal work regardless of the cause of action asserted. The court concluded by addressing the wrongful actions of the other party, stating that “current Alabama law does not recognize any exceptions to the rule that public policy will not permit recovery by an unlicensed contractor regardless of the conduct of the other party.” The court reversed the judgment in favor of MS Electric and granted judgment for misrepresentation to Construction Services.
Other States
Different states’ licensing laws widely vary on the measure of recovery of damages by an unlicensed contractor. Obviously, recovery depends on whether licensing is even required for a particular project. The type of work and the location of the project often determine the required licensing. On one hand, not all states require general contractors to be licensed, including Texas and Vermont. On the other hand, most, if not all, states require specialty subcontractors—including plumbers and electricians—to be licensed. For example, Florida and Tennessee require prime contractors and other specialty subcontractors to be licensed. Contractors must also consider whether they need to be licensed in every state they operate in or if reciprocity exists. Some states require non-resident contractors to be licensed in that state even if they are licensed in their own state, including Maryland and Georgia. All of the above are important points to consider when ensuring you are properly licensed for a project to avoid the potential result of forfeiture of any right of recovery as a result of performing illegal work. Each state is different, and its licensing laws must be examined as a part of due diligence before bidding on a project.
In litigation, an unlicensed contractor’s potential recovery depends on that state’s licensing scheme. For example, in Tennessee, an unlicensed contractor may never recover lost profits but may recover other damages incurred on a project. Unlicensed contractors, however, face a higher burden to recover actual and documented expenses because they must make a proper showing upon clear and convincing evidence. This requires proper documentation of costs, and excludes all undocumented costs incurred on a project. Also in Tennessee, licensing must be maintained from the submission of the bid or offer to contract until that contractor’s work on a project is complete.
Georgia’s treatment of unlicensed contractors is similar to Alabama’s. Any contract with an unlicensed contractor for performance of work within the scope of residential or general contracting is unenforceable or illegal. In addition, under the Nonresident Contractor Act, a non-resident contractor failing to comply with statutory bonding and registration requirements may be denied access to Georgia state courts until compliance has been achieved. While this does not result in forfeiture, it may limit the potential forums for pursuing recovery of damages.
California has some of the most draconian penalties for unlicensed contractors. Similar to other states, an unlicensed or improperly licensed contractor is prohibited from suing to recover compensation under a construction contract. More concerning is that an owner may actually sue the unlicensed contractor to recover all of the compensation paid to the contractor for any work illegally performed. This substantially increases the risk of potential loss should a contractor fail to comply with licensing requirements in the state. Unlike Alabama, however, California does not invalidate a contract for lack of proper licensing at the bidding stage, if compliance is achieved before performance commences.
Takeaways
While it is easy to be sympathetic to the plight of the electrical subcontractor in Alabama, do not expect ignorance or creative pleading to save you from contractor licensing requirements. Forfeiture of rights (in addition to potential criminal sanctions) is an extreme outcome usually avoided by the courts, but cannot be avoided if mandated by a state’s licensing statute. Contractors should familiarize themselves with a state’s licensing laws and ensure compliance before bidding on a project. Licensing laws can be complex and, at times, nonsensical and each state has its own licensing scheme. Licensing laws are often unforgiving to parties who fail to comply, regardless of good faith or ignorance. When conducting work in a new state, always ensure that you have complied with the proper licensing requirements and consult with competent counsel, with knowledge of a state’s licensing scheme, if necessary. A final piece of practical advice: when in doubt, get licensed.
Alex S. Hoppestad is an associate with Smith Currie Oles LLP in the firm’s Nashville, Tennessee office.
Any copies of cases, statutes, and regulations referenced in the article are available upon request to the author.
Smith Currie Oles provides comprehensive legal services to all parts of the construction industry across the nation. Smith Currie lawyers have decades of demonstrated success representing construction and federal government contracting clients “From the Ground Up,” including procurement matters, contract formation and negotiation, project administration, claims prosecution and, when necessary, in litigation and other forms of dispute resolution.
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