The impact of unlicensed contractor activities.

• Jurisdiction: United States
• Date: 01 December 2007
• Author: Dudley, Frederick R.

Almost every construction activity requires licensure of the individual and, if applicable, any business entity contracting to perform that activity, unless exempt. Therefore, it is not surprising that unlicensed activities in the construction industry have been the focus of intense public policy debate for the past 20 years, and the statutory changes and case decisions described herein exemplify that debate. The Florida Department of Business and Professional Regulation (DBPR) is the regulatory body that prosecutes unlicensed activities in this area and, through its various boards, (1) licenses construction activities.

While the details of contractor licensing are beyond the scope of this article, basic licensing information has been included in order to give legal practitioners some means of identifying possible unlicensed activities. This article deals primarily with the Construction Industry Licensing Board (CILB), but there are many parallels with the Electrical Contracting Licensing Board ECLB).

Client Encounters of the (Too) Close Kind

Following are some of the situations a practitioner might routinely encounter that require some understanding of these licensing requirements, which failure to recognize and comply might cause great harm to the client:

* Formation of New Legal Entity--Your client is a sole proprietorship that has been engaged in construction work for many years, but good tax planning and asset protection indicate that the business should now operate as a corporation or limited liability company. You create the new entity and transfer the business assets into the new business, which then begins contracting under its new name. However, until an application for the new entity has been approved by DBPR, any contract, lien, or bond rights may be unenforceable by the contractor (in law or equity).

* Merger of Legal Entities--Your client engages in construction activities and has met all licensure requirements. You are retained to represent the client in the acquisition and merger of another entity, which will become the surviving entity following the merger. The activities of the acquired entity may be unrelated to construction. However, until an application for the new merged entity has been approved by DBPR, any contract, lien, or bond rights may be unenforceable by the contractor (in law or equity).

* Contract Preparation--A corporate client retains you to prepare or review its contract forms. You check the DBPR records and determine that all licensing requirements have been met. However, if the Florida Department of State records indicate that the business name in which your client contracts for construction work is "inactive," any such contract may be unenforceable.

* Lien Preparation--Your firm has been engaged to prepare and record a construction lien pursuant to Ch. 713, Part I, for the unpaid balance due on a contract. However, unless you can determine that the lienor has met the state or local licensure requirements, that lien may be unenforceable (and the owner entitled to "prevailing party" attorneys' fees).

* Contract, Lien, or Bond Litigation--You have been retained to file or defend an action for breach of construction contract, with or without a lien foreclosure or cause of action against a surety bond. Unless the contractor is properly licensed as required by F.S. Ch. 489, you may need to raise (or encounter) a defense that might result in a summary judgment for (or against) your client, together with an award for "prevailing party" attorneys' fees. Did you advise your client of such possible consequences upon engaging in the litigation?

Unlicensed Contracting Activities

There are at least eight possible legal consequences that can result from construction activities by an unlicensed contracting entity, (2) each of which is described herein.

* Loss of contractor's contract rights (F.S. [subsection] 489.128 and 489.532). (3)

* Loss of lien and bond rights (F.S. [section] 713.02(7)).

* Treble damages (F.S. [section] 768.0425).

* Damages for violation of building code (F.S. [section] 553.84).

* Administrative sanctions (F.S. [subsection] 455.228 and 489.13).

* Criminal penalties (F.S. [section] 489.127(2)).

* Possible action for "disgorgement" (per case law).

* Cause of action for "unfair trade practice" (F.S. [section] 501.204).

Definitions

Several statutory definitions are important to an understanding of "unlicensed activities," beginning with the definition of "contractor" in F.S. [section] 489.105(3).

(3) "Contractor" means the person who is qualified for, and shall only be responsible for, the project contracted for and means, except as exempted in this part, the person who, for compensation, undertakes to, submits a bid to, or does himself or herself or by others construct, repair, alter, remodel, add to, demolish, subtract from, or improve any building or structure, including related improvements to real estate, for others or for resale to others; and whose job scope is substantially similar to the job scope described in one of the subsequent paragraphs of this subsection. For the purposes of regulation under this part, "demolish" applies only to demolition of steel tanks over 50 feet in height; towers over 50 feet in height; other structures over 50 feet in height, other than buildings or residences over three stories tall; and buildings or residences over three stories tall. Contractors are subdivided into two divisions, Division I, consisting of those contractors defined in paragraphs (a)-(c), and Division II, consisting of those contractors defined in paragraphs (d)-(q).

Note that "compensation" is required, so working for free does not require a license. On the other hand, merely "offering" to perform contracting services is an act of "contracting" for which a license is required, unless one of the statutory exemptions applies.

F.S. [section] 489.105(6) defines "contracting" as follows:

(6) "Contracting" means, except as exempted in this part, engaging in business as a contractor and includes, but is not limited to, performance of any of the acts as set forth in subsection (3) which define types of contractors. The attempted sale of contracting services and the negotiation or bid for a contract on these services also constitutes contracting. If the services offered require licensure or agent qualification, the offering, negotiation for a bid, or attempted sale of these services requires the corresponding licensure. However, the term "contracting" shall not extend to an individual, partnership, corporation, trust, or other legal entity that offers to sell or sells completed residences on property on which the individual or business entity has any legal or equitable interest, if the services of a qualified contractor certified or registered pursuant to the requirements of this chapter have been or will be retained for the purpose of constructing such residences.

The last sentence of this section constitutes the so-called "developer's" exemption, which is only a partial exemption in that it only allows the offering and contracting of "completed residences" if a licensed contractor is used for the actual construction.

Next, [section] 489.105(13) defines a "business organization" as follows: "'Business organization' means any partnership, corporation, business trust, joint venture, or other legal entity which engages or offers to engage in the business of contracting or acts as a contractor as defined in this section."

This definition is used in [section] 489.119(2) as follows:

(2) If the applicant proposes to engage in contracting as a business organization, including any partnership, corporation, business trust, or other legal entity, or in any name other than the applicant's legal name or a fictitious name where the applicant is doing business as a sole proprietorship, the business organization must apply for a certificate of authority through a qualifying agent and under the fictitious name, if any.

Types and Scopes of Licenses

There are three types of contractors: certified, who can perform in every city and county in the state; registered, who can only perform in the local governments (cities and counties) where they are licensed and their local licensure is then "registered" with the state; and specialty. Both certified and registered contractors are grouped into two divisions and each type is limited to the "scope" of work described in F.S. [section] 489.105(3)(a)-(q), as follows:

Division I includes the following contractors: (a) General (any structure); (b) Building (commercial and residential structures not exceeding three stories, and accessory structures), and (c) Residential (one-family, two-family or three-family structures not exceeding two habitable stories over not more than one uninhabitable story, and accessory structures).

Division II includes the following contractors: (d) Sheet metal; (e) Roofing; (f), (g) and (h) Air-conditioning categories; (i) Mechanical (which includes air-conditioning); (j), (k) and (l) Pool/spa categories; (m) Plumbing; (n) Underground utility and excavation; (o) Solar; and, (p) Pollutant storage systems;

"Specialty" contractor is defined in [section] 489.105(q) as a contractor whose scope of work is limited to a particular phase of construction. Pursuant to [section] 489.113(6), the CILB may, by rule, create a number of "voluntary" specialty contractors. To...