GENERAL INSURANCE COMPANY OF AMERICA v. ST PAUL FIRE AND MARINE INSURANCE COMPANY (1969)

Plaintiff General Insurance Company of America (General) appeals from a judgment entered in favor of defendant St. Paul Fire and Marine Insurance Company (St. Paul) following granting of St.Paul's motion for summary judgment on plaintiff's second amended complaint.   The facts as set forth in the pleadings, declarations and exhibits attached thereto are summarized.

A contract was executed February 19, 1963 between Shoreham Towers, as owner, and Diverco Constructors, a limited partnership, by Diverco Constructors, Inc., a California corporation, general partner, as contractor, for the construction of a multi-store apartment.   General executed a surety bond on February 29, 1963 to guarantee the faithful performance of the construction contract.   The bond named Shoreham Towers as obligee and Diverco Constructors, a limited partnership, as principal.

Diverco Constructors, Inc., a corporation, was the sole general partner of Diverco Constructors, a limited partnership.

Diverco Constructors, Inc. entered into a subcontract with V.C. Walters Electric, Inc., also known as Mt. Vernon Electric, Inc., for electrical work to be performed by the latter.   On March 19, 1963 St.Paul wrote a subcontract surety bond to guarantee the faithful performance of the electrical subcontract.   The bond named Walters Electric, Inc., as principal and Diverco Constructors, Inc. as obligee.

The declaration of R.M. Clayton, General's surety claim supervisor for the job, recited that between February 19, 1963 and June 1, 1963 the construction work was performed by Diverco Constructors, Inc.;   that the limited partnership did not participate in the work;  that about June 1, 1963 Diverco Constructors, Inc. had financial difficulties and defaulted on the construction contract;  that the owners demanded that General, as surety, perform the contract;  that on July 1, 1963 General employed A.L. Travers, construction superintendent for Diverco on the Shoreham Towers job, to supervise the project until General could obtain a qualified contractor to complete it;  that Travers served in this capacity until October 9, 1963, when he was replaced by L.E. Douglas, a licensed building contractor, who completed the job;  that Walters Electric, Inc., performed its contract under the direction of Travers and Douglas between July 1, 1963 and December 17, 1963;  that on December 17, 1963 Walters Electric, Inc., defaulted on its subcontract and a substitute electrical contractor was obtained to complete the electrical work;  that during the fall of 1963, Clayton learned that the contractor's license of Diverco Constructors, Inc., had expired June 30, 1963 and immediately took steps to have the license reinstated.

A certificate of the Contractors' State License Board states that Diverco Constructors, Inc. was licensed as a general engineering contractor July 16, 1957, that its license expired June 30, 1963, and that it was reissued December 19, 1963.   The certificate also states that Divercoi Constructors, a copartnership, of which Diverco Constructors, Inc. was the general partner, was licensed as a general building contractor on July 27, 1961 and that is license expired June 30, 1963.

By this action General, as subrogee for its principal, Diverco Constructors, a limited partnership, seeks to recover from St. Paul, surety for the electrical subcontractor, additional expenses of $77,215.25 incurred by General in performing the electrical subcontract in behalf of the defaulting electrical subcontractor, and in addition $29,250.00 in penalties assessed against plaintiff for construction delays.

Defendant's motion for summary judgment was presented to and considered by the trial court on the sole question of whether plaintiff's right of recovery is barred by section 7028, Business and Professions Code, which makes it “unlawful for any person to engage in the business or act in the capacity of a contractor within this State without having a license therefor,” and by section 7031, Business and Professions Code, which provides in part:

“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 action or contract, * * *.”  (Italics added.)

 Defendant St. Paul also points out that the prime contractor, plaintiff General's principal, was Diverco Constructors, a limited partnership, of which partnership Diverco Constructors, Inc., a corporation, was the sole general partner.   The electrical subcontractor was executed by Diverco Constructors, Inc., a corporation, and it was the sole named obligee of the electrical subcontractor's bond written by defendant St. Paul.   St. Paul argues in support of the summary judgment that under its bond only the obligee thereof, Diverco Constructors, Inc., a corporation, has a right of action thereon;  that plaintiff's principal was not an obligee thereof, Diverco Constructors, Inc., a corporation, has a right of action thereon;  that plaintiff's principal was not an obligee thereof.   This question was neither submitted to nor considered by the trial court in connection with the motion for summary judgment.   If defendant desired the trial court to consider this defense, the point should have been raised and should have been supported by affidavits, thereby giving plaintiff notice and the opportunity to file affidavits in opposition.   (code Civ.Proc. § 437c.)   In our discussion of the effect of the contractor's licensing laws on plaintiff's right of action, we therefore disregard the legal questions that might exist in connection with this defense and consider the two entities as plaintiff's principal and as defendant's obligee, and limit our discussion to the effect noncompliance with the Contractors License Law has on plaintiff's action.

Plaintiff General first contends that a licensed surety company, performing a construction contract in behalf of its principal, is not subject to the provisions of the Contractors License Law.   Plaintiff argues that the work of completing the construction contract after the default of the prime contractor was the exact undertaking permitted by law and intended to be performed as a part of the business of writing surety bonds.   The argument is novel.   It is not supported by direct authority and we have found note.

 The general purpose of the Contractors License Law is to protect public health and safety by prohibiting incompetent or inexperienced persons from acting as building contractors.  (Gatti v. Highland Park Builders, Inc., 27 Cal.2d 687, 690, 166 P.2d 265.)   Plaintiff's contention is directly contrary to the legislative intent.   Surety companies are not among those made expressly exempt from the law.  (See bus. & Prof.Code, § 7040 et seq.)   We hold that a surety company acting in the capacity of a building contractor is subject to the provisions of section 7031, Business and Professions Code.

Plaintiff has sought to avoid the effect of section 7031, Business and Professions Code, by alleging in its second amended complaint that “at the time of entering into said prime contract, DIVERCO CONSTRUCTORS was a duly licensed contractor.   Thereafter said license expired during the period of time said prime contract was being performed but was readily renewed prior to the completion of the prime contract, and at all times mentioned herein DIVERCO CONSTRUCTORS has substantially complied with the requirements of Business and Professions Code § 7031.”

Substantial Compliance with Contractors License Law

Admittedly plaintiff's principal failed literally to conform to the commands of section 7031, Business and Professions Code.   As noted in Latipac, Inc. v. Superior Court, 64 Cal.2d 278, 281, 49 Cal.Rptr. 676, 679, 411 P.2d 564, 567, the courts “have not insisted upon such strict observance if it would transform the statute into an ‘unwarranted shield for the avoidance of a just obligation.’  (Gatti v. Highland Park Builders, Inc. (1946) 27 Cal.2d 687, 690 [166 P.2d 265].)  If the facts clearly indicate that the contractor has ‘substantially’ complied with the statute and that such compliance has afforded to the obligor the protection contemplated by the statute, we have rejected the obligor's attempt to escape liability.  [Citations.]”  In reviewing the cases the Supreme Court listed the elements upon which the courts have relied for the application of the doctrine of substantial compliance, stating on pages 281–282, 49 Cal.Rptr. 679, 411 P.2d 567, “(1) the fact that plaintiff held a valid license at the time of contracting, (2) that plaintiff readily secured a renewal of that license and (3) that the responsibility and competence of plaintiff's managing officer were officially confirmed throughout the period of performance of the contract.”   The first condition was met in this case.   Serious questions are presented under the facts as to the second and third conditions.

Renewal of license.   The court in Latipac,supra, 64 Cal.2d 278, 49 Cal.Rptr. 676, 411 P.2d 564, stressed that the purpose of the legislation was protection of the public, to insure the competence and responsibility of building contractors, stating on page 283, 49 Cal.Rptr. 681, 411 P.2d 569:  “Just as plaintiff's possession of a valid contractor's license at the time of contracting attests to its competence and responsibility at the inception of the contract, so the renewal of its license after completion of performance lends confirmation to plaintiff's continuing competence responsibility during the period of performance.”

In Latipac, plaintiff contractor held a license for 17 months after the date of execution of the contract, allowed the license to expire for non-payment of fees, completed the job approximately eight months thereafter, and renewed its license approximately 12 months after its former license had expired.   The plaintiff explained the delay was due to sickness of its office manager.   Even though the court noted the license was not promptly renewed, it stated that there was nothing in the record that suggested that plaintiff's fitness to enjoy a license was subject to variation in the interval between its expiration and renewal, that in the absence thereof the court could accord weight to the renewal as satisfying the policy of the statute, and concluded that the second condition had been met.

The same conclusion was reached in Gatti v. Highland Park Builders, Inc., supra, 27 Cal.2d 687, 166 P.2d 265, where Gatti, holder of a valid contractor's license, entered into a construction contract with defendant.   During the period of construction, Gatti and his foreman, who also held a contractor's license, entered into a partnership.   The parties agreed to completion of the contract by the partnership.   In a suit by the partnership on the contract, defendant sought to escape liability by reason of the failure of plaintiffs to have a partnership license at the time the two contractors began to perform on a partnership basis, although a partnership license was secured three months thereafter.   The court held there was substantial compliance by plaintiffs.

Similarly, in Weiman v. Superior Court, 51 Cal.2d 710, at page 713, 336 P.2d 489, 491, the court stated:  “John A. Nelson, individually, was at all times a licensed contractor;  that he made the construction contract with the Weimans in his individual capacity;  that thereafter he incorporated as John A. Nelson, Incorporated, and assigned the contract to the corporation;  that the corporation was thereafter duly licensed during the course of the construction and has since remained duly licensed at all times, but that there was an interval between the time when the assignment was made by John A. Nelson, individually, to John A. Nelson, Incorporated, and the time when the corporation became duly licensed.”   The court found substantial compliance in the fact that there was at all times a duly licensed contractor on the job, either the individual who first obtained the contract or his corporate alter ego to which he assigned the contract.

In each of the foregoing cases and in similar cases where the court found substantial compliance with the statute, in spite of evidence of a later renewal of a license that expired during the period of performance, the court stressed the fact that the late renewal of the license confirmed the contractor's continuing competence and responsibility during the period of performance, and that such compliance, though late, afforded the obligor the protection contemplated by the statute.   In each the contractor fully performed his contract, giving his obligor the agreed professional services.

 The facts in the instant case are distinguishable.   Plaintiff's principal defaulted in its performance of the contract, performed no further work thereunder, allowed its license to expire, and approximately six months later, at plaintiff's request and apparently to meet the second condition of Latipac, renewed its license.   Because of the default and failure to perform, the later renewal of the license did not give the obligor or any person the protection contemplated by the statute.   Insofar as this lawsuit is concerned, it was meaningless.

 Confirmation of responsibility and competence of managing employee.   The third condition of Latipac, supra, 64 Cal.2d 278, 49 Cal.Rptr. 676, 411 P.2d 564 is “The responsibility and competence of plaintiff's managing officer were officially confirmed throughout the period of performance of the contract.”  (P. 282, 49 Cal.Rptr. 682, 411 P.2d 570.)   The pattern of the statute evinces a legislative determination that the fitness of a corporation or limited partnership to enjoy a contractor's license lies in the competence and experience of the individual who qualifies on its behalf.   A corporate or a limited partnership applicant qualifies for a license by demonstrating that one of its employees possesses the requisite knowledge and experience.   (Bus. & Prof.Code, § 7068, subds. (b), (c).  Section 7068.1, Business and Professions Code, requires that the individual who qualifies “shall be responsible for exercising such direct supervision and control of his employer's or principal's construction operations as is necessary to secure full compliance with the provisions of this chapter and the rules and regulations of the board relating to such construction operations * * *.

The certificate of the Contractors' State License Board, attached as Exhibit A to a declaration of plaintiff's attorney, states with respect to Diverco Constructors, Inc.:  “Clarence E. Crandall, formerly Vice President, qualified as Responsible Managing Officer for the B–1 classification but disassociated January 15, 1963.   Perry Becker Shirley qualified for said B–1 classification on April 8, 1963, and disassociated on April 30, 1963.   The primary classification was changed from B–1 to A, and SB–1 became the supplemental classification upon the qualification of L.E. Douglas as Responsible Managing Employee for both said classifications on December 19, 1963.   L.E. Douglas disassociated on September 18, 1964.”

With respect to Diverco Constructors, a copartnership, the certificate states that is license “was issued July 27, 1961, and was continuously in effect thereafter until June 30, 1963, when it expired.   Clarence Edward Crandall qualified as Responsible Managing Employee for the license.”

The parties have not supplied us with any relevant rules and regulations of the Contractors' State License Board defining the various classifications of responsible managing employees, mentioned above.   In the absence thereof we feel justified in concluding that Diverco Constructors, Inc., had no responsible managing employee after June 30, 1963.

Mr. Clayton, plaintiff's claim supervisor for the job, stated in his declaration that Diverco Constructors, Inc., had no responsible managing employee between the period of April 30, 1963 and December 19, 1963, and that Diverco Constructors, a copartnership, had noresponsible managing employee after June 30. 1963.

Mr. Clayton, plaintiff's claim supervisor for the job, stated in his declaration that Diverco Constructors defaulted on June 1, 1963, that on July 1, 1963 plaintiff employed one Travers, Diverco's construction superintendent, to supervise the work until plaintiff could obtain a qualified contractor, and that on October 9, 1963, plaintiff obtained L.E. Douglas, a licensed building contractor, who thereafter completed the job.   He did not indicate that Travers had a valid contractor's licensee or obtained one thereafter.   We conclude there was no duly licensed general contractor on the job from June 1, 1963 to October 9, 1973.

 We find no case supporting plaintiff's contention of substantial compliance with the Contractors License Law where during a lengthy period of performance a corporate or partnership contractor had no qualified responsible managing employee, or where in the absence of a duly licensed contractor, an unlicensed construction superintendent was in charge.   As repeatedly stated in the cited cases and in other cases on the subject, the statutory requirement that the contractor be licensed at all times during the performance of the contract demonstrates the Legislature's determination that it is mandatory for the health and safety of the public that a competent andexperienced contractor be on the job at all times while the work is in progress.   This mandate was not met in this case and plaintiff's action is barred by section 7031, Business and Professions Code.

Judgment affirmed.

SCHWEITZER, Associate Justice.

COBEY and ALLPORT, JJ., concur.