Most construction projects of any size have target start and stop dates.  Material delays, change orders, schedules, and weather can always alter the final finished product.  Unlike construction projects, disgorgement claims against unlicensed contractors have a critical path which cannot be altered.  A claim is ripe when the work is finished or the contractor leaves the job, and the disgorgement claim must be filed within one year.

Eisenberg Village v. Suffolk Construction[i] established two main conclusions regarding a disgorgement claim against a general contractor:

  1. the applicable limitations period starts to run for such a claim when an unlicensed contractor completes or ceases performance of the act or contract at issue; and
  2. the consumer protection-based provision which allows for recovery of all compensation paid to an unlicensed contractor is a penalty, and therefore must be filed within one year from the completion or cessation of the contractor’s performance.

Until the Eisenberg Village opinion of August 2020, start and stop dates were not clearly defined.   In March 2021, a court in another appellate decision, San Francisco CDC LLC v. Webcor Construction L.P.[ii], concurred with the Eisenberg Village opinion establishing a trend to evenly apply the one-year limitation on such claims across other California jurisdictions.  The Webcor decision further confirms the start date for such an action is not subject to equitable tolling or delayed discovery.

Penalty, Not Restitution

The Eisenberg Village opinion concluded a disgorgement claim is a penalty assessed against a contractor because it “deprives the contractor of any compensation for labor and materials used in the contraction while allowing the plaintiff to retain the benefits of that construction.”[iii] Simply put, because the project owner does not have to suffer injury to seek the remedy, it is a penalty against the contractor, and not restitution to the owner.  The public policy of deterring contractors from operating without a valid license is the basis for the penalty.  The state purposely provides a windfall to project owners at the expense of the unlicensed contractor, and yet, the owner retains the work completed by the contractor and can be awarded monies for building the project.  Given this is a penalty, an action to recover the penalty must be brought within one year.[iv]

The Webcor decision agreed with this assessment and noted the appropriateness of calling a disgorgement claim a penalty since courts have similarly characterized the disgorgement provision of Business and Professions Code section 7031(b) as a harsh or punitive statutory remedy meant to dissuade unlicensed work.[v] Webcor also recognized a disgorgement operates as a “forfeiture” because it deprives an unlicensed contractor of all compensation, and the quality of the work is not the reason for the disgorgement or the reasons for the failure of licensure.[vi]

No Delayed Discovery or Equitable Tolling Applies

The Webcor decision echoed the Eisenberg Village decision regarding delayed discovery.  Any allowance for the disgorgement claims to accrue only after discovery of injury would result in absurd outcomes.  Since no injury is required to bring a Business and Professions Code section 7031(b) claim, a plaintiff could discover a licensing violation ten years later and file suit. If the plaintiff has no duty to investigate whether the contractor was properly licensed absent some sort of facts that would put him or her on notice, there would be, in effect, no time limitation at all in most cases.”[vii]

In instances when it is difficult for a party to observe or understand the breach of a duty or determine when the injury itself occurred, the discovery rule based on equity and the concepts of fairness allow for an accrual of a claim to be a movable target.  Business and Professions Code section 7031(b) is the statute designed to punish the unlicensed contractor.  The intent of the statute is not to compensate plaintiff, but instead to apply drastic measures upon those contractors not in compliance with licensure.  Therefore, discovery of licensure issues is not the trigger, instead, completion of work creates the start date.

As stated in Eisenberg Village, “if we were to hold that the discovery rule applied, it would be nearly impossible to formulate rules for its application that could be consistently applied” because the underlying concern is to stay true to protecting all parties from the defense of a stale claim.  Since Business and Professions Code section 7031(b) does not require any injury to the project owner, the Eisenberg Village court indicated if a plaintiff wants to pursue a disgorgement claim, the party has a duty to investigate whether the contractor was properly licensed.

The Webcor opinion reiterates this point by agreeing with Eisenberg’s analysis:  applying a discovery rule allows for the absurd predicament in which plaintiff could discover a licensing violation ten years after construction and file a lawsuit.  “The one-year statute of limitations applies to disgorgement claims brought under Business and Professions Code section 7031, and the discovery rule and other equitable doctrines do not.”  Both courts reasoned that when it comes to making a claim as to the licensing status of a contractor, the public is put on notice and the public has the obligation and the means to determine such stature.

Takeaway

There seems to be a trend overall in construction related matters.  The policies in play protecting the public are also in play protecting the contractors.  Much like the statutes of repose, which prevent construction defect claims after ten years, [viii] disgorgement claims are necessary to protect the public, but, they are finite in availability to protect contractors.  

Any claim seeking the return of construction costs accrues when a project is completed and the final payment is made.  In addition, the existence of a contractor’s license is a matter of public record, therefore, consumers have access to the information they need in order to bring a disgorgement action within the applicable one-year period.


[i] Eisenberg Village v. Suffolk Construction, 53 Cal.App.5th 1201 (August 2020).

[ii] San Francisco CDC LLC v. Webcor Construction L.P, 62 Cal.App.5th 266 (March 2021).

[iii] Id. At 1201. 

[iv] Code of Civil Procedure section 340(a).

[v] Judicial Council of California v. Jacobs Facilities, Inc. (2015) 239 Cal.App.4th 882, at 895.

[vi] MW Erectors v. Niederhauser (2005) supra, 36 Cal.4th 412, at 426.

[vii] Webcor, 62 Cal.App.5th 266, citing Eisenberg Village, 53 Cal.App.5th at 1214.

[viii] Code of Civil Procedure section 337.15 and Civil Code section 941(a).

 

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