No License; No Claim; No Recovery: Oregon Contractors Beware!

Stellar J Corp. v. Smith & Loveless, Inc., 2010 WL 3118360 (D. Or. Aug. 5, 2010)

By:  Tom Wolfendale, K&L Gates, Seattle

Overview:

A general contractor ("general") brought a claim, originally in state court, against one of its first tier subcontractors ("sub") for breach of contract; in turn, the first tier subcontractor removed the action to federal court and brought claims against the general and its surety for breach and quantum meruit.

On a public works project, the sub was to supply and install equipment for a city wastewater treatment project.  At the time of contracting with the general, the sub did not have an Oregon Contractor’s license.  During the work, the general terminated the sub for failure to perform.  The sub counterclaimed alleging the general breached and also sued the general’s surety for recovery.  The general asserted an affirmative defense that the sub did not have an Oregon license and could not prosecute its counterclaims.

The general contractor sought summary judgment against the sub claims based on the sub’s failure to obtain an Oregon license.  The federal contract dismissed the sub’s claims.

Facts and Law:

Over a year after the subcontract was signed and after it had filed its original counterclaim, the sub applied for an Oregon license. The sub filed amended claims after it obtained the license.

The general relied on Or. Rev. Stat. Section 701.131 that provides that a contractor cannot sue on a construction claim unless it has a valid license at the time of bid or at the time of entering into the contract.  However, this requirement is not enforced if a court or adjudicatory body determines (a) that the contractor didn’t have a license as required and the contractor was not aware of the requirement and submits an application within 90 days of becoming aware of the requirement AND at the time of perfecting the lien or commencing the legal action the contractor was licensed AND enforcement would result in "substantial injustice to the contractor"; OR (b) the contractor’s license lapsed and was renewed within certain time limits; OR (c) a contractor/developer is entitled to the same exceptions; OR (d) where the action is directed against a contractor which supplies labor, material, design and/or manufacture of equipment and arises out of claimed defects from such activities.  Or. Rev. Stat. Section 701.005(5)(a) and OAR Section 812-002-0760(1) were also applicable to define "contractor" and "construction work" for purposes of 701.131.

The sub contended that the exceptions (a) and (d) above applied to its counterclaims, relating to awareness, obtaining the license and substantial injustice and that it was a supplier and the claim arose out of defects.  However, the federal court sustained the general’s summary judgment because (1) the contractor was unlicensed at the time it filed the original counterclaim and the subsequent amendments (after it had a license) did not constitute substantial compliance with the statute and (2) as for exception (d), the court found that the exception is meant to protect consumers who are damaged by unlicensed contractors and defective goods and services are provided by vendors and subcontractors (moreover, the exception fails because if it applied it would apply to the general not the sub, whose claims are based on breach and quantum meruit and not construction defect and the exception does not apply because to accept the sub’s argument the exceptions would "swallow the rule.").  The court rejected other sub arguments that the sub was not a "contractor" for purposes of the statute; that the general was estopped because it "knew" the sub was unlicensed; and that the subcontract’s severability clause saved some of its claims.  The court finally denied the sub’s motion to dismiss and refile in an effort to cure the problem.

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