Masonry Magazine June 2006 Page. 48
Legal Issues
Subcontracting
Without a License Can
Be Risky Business
Bradley J. Hansen, Esq.
Hughes & Associates PLLC
It is not unusual in today's competitive construction market to find subcontractors who are willing to bid on and accept projects across state lines. While there always exist profitability risks in taking on work in distant locales, many subcontractors are unaware of the risks associated with failing to comply with a state's licensing requirements. Subcontractors who fail to comply with a jurisdiction's licensing requirements can face dire consequences and subject themselves to penalties far beyond those that may be imposed by a state's licensing authority.
State Licensing Requirements
and Penalties
Each state imposes its own licensing laws and regulations on subcontractors to help protect the public from substandard work caused by unlicensed and incompetent contractors. While each state may employ very different licensing standards, the penalties and consequences associated with performing unlicensed subcontracting work can also vary greatly from state to state.
A subcontractor's oversight on licensing requirements can lead to fines, civil penalties and criminal charges. Moreover, unlicensed subcontractors may find that, after performing substantial work on a project, they may not be able enforce their own contracts to recover payment. Similarly, unlicensed subcontractors may lose all lien rights typically afforded to then under state law.
Divergence of State Laws
Some jurisdictions, like the District of Columbia and Maryland, have very clear licensing laws with harsh results for subcontractors who fail to follow the rules. In Maryland, unlicensed subcontractors are not permitted to sue for breach of their subcontracts. In the District of Columbia, unlicensed subcontractors are not only prohibited from recovering payment under their subcontracts, but may also be forced to surrender money they have already received.
Other states, like Virginia, also apply standards similar to those in Maryland and the District of Columbia, negating contracts entered into by unlicensed subcontractors as illegal and therefore unenforceable. Some jurisdictions have very clear licensing laws with harsh results for subcontractors who fail to follow the rules.
Virginia law, however, provides a "safe harbor" for unlicensed subcontractors. In essence, unlicensed subcontractors are permitted to recover payment for work performed, so long as the subcontractor can demonstrate a good faith belief that a license was not required. A good rule of thumb for subcontractors, however, is not to rely on a state's "safe harbor" laws, if any exist. After all, demonstrating your "good faith beliefs" can prove to be as costly as not getting paid in the first place.
In yet other states, unlicensed subcontractors may still recover payment despite failing to comply with licensing laws. For instance, in the recent Idaho Supreme Court case of Barry v. Pacific West Construction Inc., a subcontractor was not licensed in accordance with Idaho's public works law. As a result, the general contractor requested that the subcontractor perform extra work at no additional cost and it would make the problem "go away." When the subcontractor refused to perform the work, the general contractor barred the subcontractor from the construction site. The subcontractor sued for money it was owed.
The court held that the unlicensed subcontractor could not recover damages for breach of contract because its