June 8, 2017
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Jayme Idle | June 22, 2016
During my first year of practice, a seasoned construction litigation attorney told me: “Every time you receive a new construction case, check everyone’s licensing, first thing.” As it turns out, following this simple advice can save a client significant time, and in many cases, a small fortune, usually in the form of unspent attorneys’ fees. This article explains how Florida’s unlicensed contractor statute can affect a construction claim for better or worse.
Currently, Florida has a robust construction industry due to its continually growing population and great weather that allows year-round construction activities. To ensure the welfare and safety of the public and that quality construction services are provided, Florida requires many different types of contractors to be properly licensed.
Florida Statute Chapter 489 provides the statutory authority for the state to enforce its rigid contractor licensing requirements. The Florida Construction Industry Licensing Board which is part of the Florida Department of Business and Professional Regulation (DBPR), is responsible for licensing and regulating the construction industry. Anyone has the ability to check the licensing status of any contractor in Florida, through the DBPR’s website (www.myfloridalicense.com/dbpr/). The website also provides information related to any complaints or disciplinary proceedings brought against a contractor.
Over the years, the Florida legislature has revised and amended Chapter 489 to comport with constantly evolving issues related to the construction industry. Several key changes and additions to the statute have arisen from the detrimental affects of unlicensed contracting throughout the state. In 1992, after Hurricane Andrew ravaged Southern Florida, there was an instant need for contracting services to repair and rebuild the damaged areas. Unfortunately, many unscrupulous individuals and companies preyed upon the hurricane victims by offering unlicensed construction services that ultimately resulted in unregulated and shoddy work.
The first version of Chapter 489.128 enacted by the legislature in 1991, provided contracts “performed in full or in part” by an unlicensed contractor “shall be unenforceable in law” and that courts had the discretion to extend the rule to equitable remedies. The original version included a “cure provision” that provided if the unlicensed contractor “obtains or reinstates” the license, the statute no longer applies.
Over the years, the legislature has fine-tuned the statute which is now more rigid and unforgiving than its original version. Some of the notable changes are as follows. The 2000 amendment changed the language so that contracts were unenforceable at law or equity, as opposed to the court having discretion. The 2003 amendment eliminated the “cure provision,” meaning that it was irrelevant whether the contractor obtained or reinstated their license after-the-fact. Additionally, the 2003 amendment eliminated the requirement that the contract be “performed in full or in part” by the unlicensed contractor. This change broadened the statute’s scope in that the subject contract only needed to be “entered into” as opposed to it also being performed by the unlicensed contractor. The 2005 amendment provided the only party to lose their contract enforcement rights was the unlicensed contractor. The other involved parties’ enforcement rights were unaffected, provided the other parties were also properly licensed, if required.
The more rigid and current version of Chapter 489.128 states: “As a matter of public policy, contracts entered into on or after October 1, 1990, by an unlicensed contractor shall be unenforceable in law or in equity by the unlicensed contractor.”
For the purpose of applying Chapter 489.128, the statute defines an individual as “unlicensed” if the individual does not have a license required by Chapter 489, concerning the scope of work to be performed under the contract. The statute defines a business organization as “unlicensed” if it does not have a primary or secondary qualifying agent in accordance with Chapter 489 concerning the scope of work to be performed.
The current statute further provides that a contractor will be considered “unlicensed” only if the contractor was unlicensed on the “effective date” of the original contract for the work. If no effective date is stated in the contract, then the date the last party executed the contract will be used. Should the contract not establish a date, then the date of first furnishing of labor, services, or materials will be used.
In addition to the unenforceable contract penalty, an unlicensed contractor also faces other severe sanctions and punishments for engaging in unlicensed contracting: 1) First offense is a criminal misdemeanor and second offense is a third degree felony, punishable by up to a $5,000 fine and 5 years in prison; 2) Forfeiture of the unlicensed contractor’s lien and bond claim rights; and 3) In cases involving injury to consumers, treble damages (or triple actual damages) may be sought against the unlicensed contractor. These severe penalties illustrate the legislature’s intent in protecting the state’s citizens and businesses from the perils of unlicensed contracting.
In Florida, it is not uncommon for developers and general contractors to create a single-purpose entity (SPE) for the construction of large projects. The SPE can provide potential limits on liability and other advantages with administering the project. Most times, these developers and general contractors are sophisticated, experienced, and careful to ensure that the SPE is properly licensed. However, sometimes they are not, as evidenced by my own experience and through factual scenarios in case law. Whether it is a timing issue, clerical issue, or pure ineptitude, the risks of failing to properly license the SPE through a qualifying agent prior to entering into a construction contract can spell disaster for a general contractor, or conversely, could spell good fortune for a subcontractor.
Prior to the elimination of the Chapter 489.128 “cure provision,” a contractor had the time and ability to correct a licensing violation should it have been discovered after entering into the contract. However, with the elimination of the “cure provision,” the current statute is unforgiving. Should the opposing party establish that the SPE was not properly licensed through a qualifying agent at the time the contract was entered into, then the offending unlicensed contractor will have no ability to enforce the terms of the contract and will have additionally forfeited its rights to any lien or bond claims related to the work stemming from the contract.
As a practical example, imagine an SPE entering into multiple subcontracts with subcontractors for a large construction project. Typically within those subcontracts are contractual indemnity provisions in favor of the SPE. Should the SPE be deemed unlicensed pursuant to Chapter 489.128, then any potential future contractual indemnity claims by the SPE against the subcontractors would be unenforceable, assuming the involved subcontractors were properly licensed themselves or performed work not requiring licensure.
Another likely scenario could involve a project owner’s failure to pay the SPE. Should the SPE be deemed unlicensed pursuant to Chapter 489.128, it would be precluded from foreclosing a construction lien on the project. Depending on the solvency of the project owner, the lack of lien rights could cause the SPE, and its affiliate entity and individuals, to suffer a devastating financial blow.
Situations like the ones above is why a construction litigation practitioner should verify the contractor licensing status for all parties involved in the dispute at the outset. I have witnessed a construction related dispute that had the potential of lasting months, or even years in litigation, be resolved in a few days because a contractor was not properly licensed. Conversely, I have witnessed a protracted construction related dispute proceed in litigation for years prior to the subcontractors discovering the general contractor was unlicensed at the time the subcontracts were entered into and were therefore unenforceable.
Despite the rigidness of the unlicensed contractor statute, other sections of Chapter 489 include exemptions that may exempt an otherwise unlicensed contractor from some of the penalties set forth in the statute. Two notable exemptions are known as the “Big Boy” Exemption and Developer Exemption.
The Big Boy Exemption is found in Chapter 489.119(7) and states that a contracting entity with a net worth of at least $20 million that employs a licensed contractor responsible for obtaining permits and supervising the entity’s contracting activities on property owned by the entity or its parent, subsidiary, or affiliate, is exempt from licensure, and thus its construction contracts would be enforceable. For instance, this exemption could arguably apply to a subcontract entered into between a large unlicensed developer and subcontractor, so long as the above conditions are satisfied. As a practical matter, should it be discovered that a party to a construction contract is lacking the requisite licensure status, an inquiry into the offending entity’s business background and operations as set forth above is necessary to determine whether the exemption applies.
The Developer Exemption is found in Chapter 489.105(6) and applies to either an individual or entity that offers to sell or sells completed residences on property on which the individual or entity has any legal or equitable interest if the services of a licensed contractor have been or will be retained for the purpose of constructing or completing such residences. Although this exemption seemingly applies only when an otherwise unlicensed individual or entity is entering into contracts to sell completed residences on their own property, unlicensed developers have argued its application to enforce subcontract agreements related to the actual construction of the residences and not just the sale of them. Unfortunately, the case law regarding the interpretation and application of this exemption is lacking, so it is unclear whether the argument would succeed.
One of the main differences between the Developers Exemption and the Big Boy Exemption is that the former only requires the licensed contractor to be “retained” by the entity claiming the exemption, whereas Big Boy actually requires the entity to “employ” the licensed contractor. This difference could become important when an entity claiming an exemption has difficulty establishing whether a licensed contractor was actually “employed” by the entity. Arguably, it would require less to prove through evidence, that a licensed contractor was merely “retained” as opposed to being “employed.” Although no Florida case law exists on the interpretation of this fine point, I have recently witnessed this exact argument put forth by a seemingly unlicensed contracting entity.
Based on the foregoing, it is apparent no one should assume someone or some entity is a properly licensed contractor. The range of offenders is wide – from the sole individual who intentionally poses as a licensed contractor, knowing full-well they are not, to the large general contractor company that did not properly have a qualifying agent for its SPE at the time it entered into a $20 million construction contract. As a practical matter for litigating construction related claims, it is necessary to evaluate and verify the contractor licensing status for all relevant parties at the outset of the claim. The information that may be discovered could have the potential to resolve the claim at a very early stage.
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