The Fifth Day, LLC v. James P. Bolotin, et al., ___ Cal.App.4th ___(March 27, 2009, No KC047712)
By Jon E. Maki & Bram Hanono
The California Court of Appeal for the Second Appellate District determined that an entity which provided construction management services to a private owner developing commercial real property was not required to be licensed as a contractor pursuant to the Contractors’ State License Law ("CSLL") (opinion by Acting Presiding Justice Armstrong, concurrence by Justice Krieger). In a lengthy dissent, Justice Mosk disagreed, highlighting that the intent of the CSLL is to protect consumers from unqualified and unlicensed contractors and predicted that the decision on a case of first impression creates a loophole in the license requirements by allowing unlicensed contractors to call themselves "construction managers."
The plaintiff entered into a Development Management Agreement ("DMA") with defendant to provide certain "industrial real estate development and construction project management" services. Plaintiff sued defendant for compensation alleged to be due for services rendered by plaintiff. The trial court granted summary judgment in favor of defendant on the grounds that plaintiff was acting as a contractor required to be licensed pursuant to Business and Professions Code section 7026, which barred plaintiff’s claim for compensation under section 7031(a) since plaintiff was not licensed. On appeal, plaintiff contended that it was not a "contractor" within the meaning of section 7026. The Court of Appeal agreed with plaintiff and reversed the trial court’s judgment.
The case turned on whether plaintiff performed services which required it to be licensed as a contractor. The services at issue were summarized by the Court as follows:
to assist, on behalf of the Owner, in coordinating the activities of the various workers to enable them to complete their assigned tasks in an organized and efficient manner, on time and on budget; to maintain records such as insurance certificates, as well as the financial books and records for the project; to keep the Owner apprised of the status of the project; to be the on-site "point person" to respond to issues as they arose; and generally to act as the Owner’s agent with respect to the various parties connected with the development of the project.
In a fairly brief opinion, the majority concluded that plaintiff had no responsibility to perform any construction on the project or enter into any contract for such performance. In a rather literal and narrow reading of section 7026, the Court found that plaintiff did not contract with the owner to "perform any of the activities listed in the section 7026’s definition of a contractor."
Additionally, the Court was persuaded by the fact that defendant had hired a general contractor to oversee the construction of the project, which indicated that the DMA did not contemplate that plaintiff would perform construction services. The Court also noted that the Legislature specifically provided that construction managers on public works projects are required to the licensed architects, engineers or general contractors. Therefore, the Court concluded that the absence of a similar statute regarding privately owned development projects "strongly suggests that the Legislature determined that licensure of construction managers was not necessary in that arena."
Justice Mosk, in his dissent, interpreted the definition of a "contractor" under section 7026 more broadly and argued that the plaintiff was a contractor under the CSLL, whether or not its primary duty was to act as a "construction manager." He analyzed plaintiff’s services in the DMA and concluded that "plaintiff acted in the capacity of a contractor by undertaking to perform such services as the coordination of work and supervision of other licensed construction professionals." Justice Mosk also concluded that section 7026.1 does not designate the only circumstances in which a consultant to an owner-builder must hold a contractor’s license and that the use of the term "includes" indicates a non-exclusive list of such circumstances.
Additionally, Justice Mosk focused on the intent of the CSLL in general, which he summarized as providing strict licensing rules to protect people from "unqualified, unscrupulous and unlicensed contractors." Requiring the licensing of construction managers who undertake to supervise the work of other licensed contract professionals is consistent with the CSLL according to the Justice Mosk. Justice Mosk predicts that this decision has created a loophole for unlicensed contractors who merely call themselves "construction managers."
Jon Maki is a senior associate in the Intellectual Property Litigation and Technology Transactions Practice Group in the firm’s Del Mar office. Bram Hanono is an associate in the Business Trial Practice Group in the firm’s Del Mar and San Diego offices.