As many are aware, California Business and Professions Code section 7031 bars a
contractor from recove:ring compensation for work it performs in its capacity as an
unlicensed contractor (and provides that the person who utilizes the unlicensed
contractor's services may recover all compensation paid to the unlicensed contractor, i.e.
"disgorgement"). The Courts, consistent with the California Supreme Court decision in
HydrotechSystems, Ltd. v. Oasis Waterpark (1991)52Cal. 3d 988,have broadly construed
Business and Professions Code section 7031 to apply to all types of actions seeking to
enforce a mechanics' lien, to recover for breach of a construction contract, or to obtain the
reasonable value of labor and materials furnished, regardless of the equities (or inequities).
See, Lewis & Queen v. N. M. BallSons (1957)8 Ca1.2d141; Vallejo Development Co. v. Beck
Development Co. (1994)24 Cal.App.4th 929 and Wright v. Issak (2007)149 Cal.App.4th
1116.
A question which has arisen however, is whether a person or entity who does not
hire the unlicensed contractor may still raise the Business and Professions Code section
7031bar to defeat a claim against it by an unlicensed entity. That question had apparently
been answered in part in Ranchwood Communities Limited Partnership v. Tim Beat
Construction Co. (1996) 49 Cal.App.4th 1397 ("Ranchwood Case") where the Court of
Appeal, Fourth District, held (in a split decision) that an unlicensed developer could not
recover against a subcontractor on an express indemnity contract (the Court did hold that
claims for equitable indemnity were permitted, however).
In a departure from the Ranchwood Case, the California Court of Appeal, Sixth
District, has changed course and held that a developer defendant could recover defense
costs from a subcontractor based on an express indemnity contract irrespective of its
licensure status.
That decision was reached in UDC-Universal Development v. CH2M Hill (2010)181
Cal.App.4th 10 ("UDC Case"). In the UDC Case, a homeowners association brought an
action against the developer and an engineering subcontractor for property damage
resulting from defective conditions at the development. The developer (UDC-Universal
Development ("UDC')) later filed an indemnity cross-complaint against, among others,
engineering contractor CH2M Hill ("CH2M").