HYDROTECH SYSTEMS LTD v. OASIS WATERPARK

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Court of Appeal, Fourth District, Division 2, California.

HYDROTECH SYSTEMS, LTD., Plaintiff and Appellant, v. OASIS WATERPARK, etc., et al. Defendants and Respondents.

No. E006508.

Decided: March 22, 1990

Sanger & Stein, Rick M. Stein, Palm Springs, for plaintiff and appellant. Schlecht, Shevlin & Shoenberger, Joel S. Miliband, Palm Springs, for defendants and respondents Oasis Water Park, Thomas Hazelrigg, Shamania Inv. Co., Inc. and Michael Mastro.

MODIFIED OPINION

Plaintiff Hydrotech Systems, Ltd., a New York corporation (plaintiff), has appealed from the order of dismissal (which order constitutes a final judgment for purposes of appeal pursuant to Code of Civil Procedure section 581d) entered, after the demurrer of defendants Oasis Water Park (erroneously sued as Oasis Waterpark), Thomas Hazelrigg, Michael Mastro and Shamania Investment Company, Inc. (defendants) to Hydrotech's second amended complaint for damages was sustained without leave to amend.

FACTS

Because this appeal comes to us following the sustaining of a demurrer to plaintiff's second amended complaint, the following facts are taken from the allegations of that complaint, and, for purposes of the demurrer, are deemed to be true.

In July 1985, plaintiff, a New York corporation, was the owner and developer of unique, patented wave generating equipment and process (the AquaWave wave generating equipment) which was designed to generate simulated surfing waves in a large “surfing pool.”   At that time, no other vendor in the United States was able to simulate comparable waves.   Plaintiff also had unique expertise in installing and maintaining the AquaWave equipment.

On July 18, 1985, plaintiff and Wessman Construction Company Inc. (Wessman) entered into a written agreement whereby plaintiff, as subcontractor to Wessman, the general contractor, was “to furnish all necessary materials and/or to furnish all labor, tools, equipment and [indecipherable] necessary to perform, and to perform all work and [indecipherable] in ‘Section J’ [indecipherable] in the construction of [a] 29,000 sq. ft. Wave Pool—Oasis Water Park․  Contract includes complete design and construction of a 29,000 sq. ft. Wave Pool.   If design drawings do not meet with Owner's and Contractor's approval, Owner and Contractor have the option to terminate this contract with no further payment.   Wave Pool is to be capable of a 4 ft. high curling, surfing wave․  ¶ Contract includes a complete set of working drawings for hot pools, Lazy River, clubhouse pool, cold pool in clubhouse, landing pools, runouts, complete filtration system for all of the above․”  In return, plaintiff was to be paid $850,000.

Addendum No. 1 to this contract provided, in relevant part:

“It is understood that the owner will obtain and pay for all necessary building permits ”  The stricken sections of the addendum appear to have been initialed by a representative of Wessman and by plaintiff's president.

According to plaintiff, it had been reluctant to become involved in the actual construction of the water park, and originally intended simply to deliver the wave-making equipment and to provide consultation regarding the equipment.   However, the defendants, Oasis Water Park (apparently the owner of the project), Thomas Hazelrigg, Oasis' sole shareholder, Michael Mastro, Hazelrigg's silent partner and financial backer, and Shamania Investment Company, Inc., a Washington corporation allegedly used by Hazelrigg and Mastro as their alter ego, insisted on plaintiff's full involvement in the project, because of plaintiff's unique skills and expertise, and assured plaintiff, “in response to repeated queries by [plaintiff], that Wessman would arrange for a California contractor to work with [plaintiff] to the extent [the contract] required [plaintiff] to perform construction services in California, for which a California contractor's license was required.”

In reliance on such promises, plaintiff entered into the contract, and then delivered and installed its wave-generating equipment and other ancillary materials and services.   Despite plaintiff's full performance under the contract, defendants withheld from plaintiff a retainage of $75,000, part of another 10 percent retainage referred to in the contract, and $4,575 for tile markers which plaintiff delivered and installed on the project.

Plaintiff then sued Wessman and the defendants for fraud;  sued Wessman for breach of the written contract, sued Wessman and defendants for breach of a contract implied in fact, and sued Wessman and defendants for money owed and unpaid for equipment and materials delivered.

Defendants demurred to plaintiff's second amended complaint on two grounds:  (1) that it failed to state facts sufficient to constitute a cause of action, because it failed to allege that plaintiff was a licensed contractor in the State of California;  and (2) that plaintiff, as a New York corporation, lacked legal capacity to institute the action, having failed to comply with Corporations Code section 2105.

Defendants' demurrer was sustained without leave to amend, and an order of dismissal was entered.   Plaintiff filed a timely notice of appeal, and contends that:  (1) Business and Professions Code section 7031 does not apply to it in this particular case, because it was an out-of-state contractor dealing in California in an isolated transaction in which it was a subcontractor, not the general contractor;  (2) it was not required to comply with Corporations Code section 2105 because its work on the Oasis Water Park project was an isolated transaction;  and (3) in any event, its cause of action for fraud should not have been barred even if it should be found to be subject to the licensing requirements of Business and Professions Code section 7031.

DISCUSSION

I.Does Business and Professions Code Section 7031 Apply To Plaintiff Under the Circumstances of This Case?

 According to plaintiff, the fact that plaintiff was the only vendor in the United States capable of supplying defendants with the Aquawave wave generating equipment “render[s] it exceedingly unjust to bar [plaintiff's] claim under Business and Professions Code Section 7031.   Moreover, the legislative basis which underlies the California Contractors License Law has nothing to do with claims by legitimate out of state contractors dealing with California on a[n] ‘isolated transaction.’ ”

Plaintiff then relies on Asdourian v. Araj (1985) 38 Cal.3d 276, 211 Cal.Rptr. 703, 696 P.2d 95 for the proposition that the purpose of section 7031 is to protect the public from marginal, incompetent and fraudulent contractors, and that the legislature never intended to bar a just claim by a competent company dealing in California in an isolated transaction.

However, Asdourian actually held that a contractor who has substantially complied with section 7031 should not be deprived of compensation for his or her work, because the fact of substantial compliance demonstrated that those for whom the work was done had not been deprived of the full protection contemplated by the licensing requirement of the Contractors' State License Law.  (Bus. & Prof.Code, § 7000 et seq.)

Specifically, in Asdourian, the contractor had obtained a valid license in the fictitious name of his sole proprietorship, and then had entered into contracts using his own name rather than the fictitious name which appeared on the license.   Because the contractor's own qualifications had been examined and approved as the basis for issuance of the license to his sole proprietorship, the fact that the license was in the proprietorship's name rather than in the contractor's name did not deprive the people for whom he performed the work of the full protection contemplated by the licensing requirement, and the purpose of the licensing law (the protection of the public from perils incident to contracting with incompetent or untrustworthy contractors) was effectively realized.

Here, unlike as in Asdourian, plaintiff has not alleged any facts showing that it substantially complied with the licensing requirements of the Contractors' License Law.   Instead, it simply argues that it (1) provided a unique service and (2) engaged in this unlicensed activity as an “isolated transaction” in California.   It does not cite any authority in support of its argument that either of these circumstances is enough to exempt it from the operation of section 7031.   Regrettably, our reading of the applicable sections does not excuse it from the requirements of the licensing laws under either circumstance.

Business and Professions Code section 7031 provides:

“No person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action in any court of this state for the collection of compensation for the performance of any act or contract for which a license is required by this chapter without alleging and proving that he was a duly licensed contractor at all times during the performance of such act or contract, except that such prohibition shall not apply to contractors who are each individually licensed under this chapter but who fail to comply with Section 7029.”

Business and Professions Code section 7026 defines “contractor” as follows:

“The term contractor for the purposes of this chapter is synonymous with the term ‘builder’ and, within the meaning of this chapter, a contractor is any person, who undertakes to or offers to undertake to or purports to have the capacity to undertake to or submits a bid to, or does himself or by or through others, construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building, highway, road, parking facility, railroad, excavation or other structure, project, development or improvement, or to do any part thereof, including the erection of scaffolding or other structures or works in connection therewith, or the cleaning of grounds or structures in connection therewith, and whether or not the performance of work herein described involves the addition to or fabrication into any structure, project, development or improvement herein described of any material or article of merchandise.   The term contractor includes subcontractor and specialty contractor.”  (Emphasis added.)

It is apparent from the above language that section 7031 was intended to apply to the “addition to or fabrication into any structure, project, development or improvement ․ of any material or article of merchandise,” unique or not, and whether done by a contractor, subcontractor, or even a specialty contractor.

It is also apparent that the section was intended to apply so that “[n]o person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action in any court of this state for the collection of compensation for the performance of any act or contract for which a license is required by this chapter without alleging and proving that he was a duly licensed contractor at all times during the performance of such act or contract, ․” regardless of whether such person engaged in the performance of such act or contract as an “isolated transaction” in California.  “[T]he concern for the public inherent in the [Contractors' License Law] centers upon the building done in California and the practices of the building trades in this state [citation]․  Thus, ․ the law requires that an applicant for a contractor's license ‘show such degree of knowledge and experience in the classification applied for, and such general knowledge of the building, safety, health and lien laws of the State and of the administrative principles of the contracting business as the board deems necessary for the safety and protection of the public ’․”  (Conderback, Inc. v. Standard Oil Co. (1966) 239 Cal.App.2d 664, 679, 48 Cal.Rptr. 901.)   It is manifest that the concern for the public inherent in section 7031 is just as applicable to a project done by an out-of-state contractor with few jobs in California as to a project done by a California contractor who performs only one job in California before going out of business.

Plaintiff also argues that section 7031 should not apply to it because it did not contract directly with the public, and because it is really trying to recover for the purchase price of the wave generating equipment, rather than for any contracting work.   Unfortunately for plaintiff, it is clear that section 7031 applies to subcontractors (who contract with the general contractor, rather than with the general public).   It is also clear that section 7031 bars an unlicensed contractor from maintaining an action to collect “compensation for the performance of any act or contract for which a license is required by this chapter without alleging and proving that he was a duly licensed contractor at all times during the performance of such act or contract,”  (section 7031) and that the contract here, on which plaintiff cannot maintain an action, included the wave-generating equipment as part of the entire contract.

II.

Does Corporations Code Section 2105 Apply To Plaintiff Under the Circumstances of This Case?

Having determined that plaintiff's action is barred by Business and Professions Code section 7031, we need not address the issue of whether plaintiff is also barred by Corporations Code section 2105.

III.

Is Plaintiff's Cause of Action for Fraud Against Defendants Also Barred Because of Section 7031?

 Although section 7031 bars recovery on construction contracts by unlicensed contractors, it does not bar recovery in tort.  (See, e.g., Proffitt & Durnell Plumbing, Inc. v. David H. Baer Co. (1966) 247 Cal.App.2d 518, 522, 55 Cal.Rptr. 764.)

 According to the allegations of plaintiff's cause of action for fraud, defendants induced plaintiff to enter into the contract with Wessman Construction by promising, with no intent of keeping their promises, that they too would be responsible for making sure that plaintiff would be paid for its services.   Although these allegations might be more clearly worded, it is apparent that plaintiff at least can state a cause for fraud against defendants, and that therefore the demurrer to plaintiff's fraud cause of action against defendants should not have been sustained without leave to amend.

In a petition for rehearing filed with this court on February 7, 1990, defendants contend that allowing plaintiff to pursue its fraud cause of action circumvents the strong public policy of the Contractors' License Law to protect the public from unlicensed contractors.

In our opinion, however, that policy is endangered if professional contractors believe they can knowingly induce unlicensed subcontractors to perform work with the intent not to pay for it, secure in the knowledge that there can be no legal intervention, even on the ground of fraud.   The financial incentives created by such a situation would lead to the very result the law was intended to prevent—the increased exposure of the general public to construction projects built by unlicensed workers.

If, however, the financial incentive to enter into such contracts is countervailed by the fear of being sued for fraud, the risk of such increased exposure, in our opinion, will be minimized.

DISPOSITION

The judgment is reversed as to the first cause of action, and affirmed in all other respects.   Each party shall bear its own costs on appeal.

McDANIEL, Associate Justice.

HOLLENHORST, Acting P.J., and DABNEY, J., concur.