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
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
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").
During the pendency of the litigation, CH2Mfiled a Motion for Summary Judgment
against UDC on the bases that the lawsuit was time barred and because UDC had acted as
unlicensed contractor. The Motion for Summary Judgment was denied.
The matter then proceeded toward trial. One week before the trial started, the
California Supreme Court handed down its ruling in Crawford v. Weather Shield
Manufacturing Inc. (2008) 44Cal.4th 541 ("Crawford Case") whereby it held that a clause in
an indemnity contract which provided for a duty to defend triggered an immediate duty to
defend (upon tender) and the duty to defend would remain in effect irrespective of a
finding of no negligence on the part of the indemnitor at trial. The parties stipulated that
the matter would proceed to a jury trial and that the Trial Court would later determine
whether there was a duty to defend UDC under the indemnity contract.
The jury then returned a verdict finding that CH2M was not negligent and had not
breached its contract with UDC. However, based on the Crawford Case, the Trial Court
ruled that UDC was still entitled to its defense costs in defending the homeowners )
association's construction defect case and denied CH2M's demand for attorney's fees as a
prevailing party. CH2M appealed. On appeal, the Court of Appeal ruled that the
Crawford Case applied (it rejected a retroactivity argument proffered by CH2M) and
further ruled that the Business and Professions Code section 7031 bar did not apply
because the defense costs sought by UDC did not constitute a claim for compensation for
UDC's services. The Court of Appeal acknowledged that its decision was in tension with
the Ranchwood Case.
The UDCcase is an important decision as it is the first major holding to interpret the
Crawford Case. However, beyond its treatment of the Crawford Case (which is broad), the
Court in the UDC Case explains that an unlicensed entity will not be subject to the
statutory bar under Business and Professions Code section 7031 where its claim is for
reimbursement of defense fees arising from a construction defect case. While the UDC
Case is in tension with the Ranchwood Case, the authors anticipate that the Trial Courts
will give significant weight to the reasoning in the UDC Case.
About the Authors: Edward F. Morrison, Jr. is the founding partner and Brett C.
Drouet is a partner of The Morrison Law Group, a professional corporation. Their
biographies can be viewed at www.morrisonlawgroup.com.
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