Lesson #1: If You Fire a Licensed Subcontractor, Hire a Licensed Subcontractor. A general contractor is unlikely to recover its costs to replace the work of its subcontractor with an unlicensed takeover subcontractor. The reason stems from the policy behind the licensing laws. Courts understand that licensing laws are intended to protect the public from injury by unqualified persons. The Legislature has made it clear that the licensing requirements provide minimal assurance that all persons offering such services have the requisite skill and character, understand applicable local laws and codes, and know the rudiments of administering a contracting business. See Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 995; Holland v. Morse Intern, Inc., (1st Dist. 2001) 86 Cal. Apll.4th 1443; Domach v. Spencer (3rd Dist., 1980) 101 Cal.App.3d 308, 311. These laws are interpreted and enforced with this public policy objective in mind. Therefore, the Courts won’t reward a general contractor for breaking the laws, including the hiring of an unlicensed subcontractor. Case in point: In January 2011, a national general contractor’s request for a set off of the money paid to an unlicensed takeover subcontractor, against the payments demanded by the licensed subcontractor that it terminated ,was denied by a prominent Los Angeles trial judge in a case involving a payment dispute. The Court in that matter stated the “For the general contractor to assert damages arising out of its hiring of an unlicensed subcontractor in this courtroom would be an end run around California’s strict licensing laws.” So if you fire a licensed subcontractor, make sure the take over subcontractor is properly licensed.
Lesson #2: Keep Your RMO/RME Must be actively involved in your business. California contractors received a firm reminder only a few years ago in White v. Cridlebaugh to keep their RMO or RME involved in their projects. White v. Cridlebaugh, 178 Cal.App.4th 506. In White, JC Master Builders, Inc., built a residence for a Mr. White. White fired JC, and a lawsuit over money ensued. During the course of the lawsuit, it was discovered that the RMO for the A and B licenses held by JC had left the country two years earlier to go on a church mission, and she had no knowledge White construction or their projects since she had turned all control over to others at JC. The end result was that the Court found that JC was effectively unlicensed under 7031(b) and ordered JC to return all of the money paid to it by Mr. White without set off. JC also had to pay Mr. White’s attorney fees and costs.
The morale of the story is that you must be properly licensed at all times during the performance of your work. It is very easy to forget that an employee who left employment who was the RME/RMO for the company, has to be replaced within 90 days from his departure. Contractors need to verify the status of their license with the Contractors License Board every year to ensure compliance. This should become an annual event performed at the beginning of your calendar year or fiscal year. By doing this you will not have any "surprises" on projects which you perform.