Hydrotech Systems, Ltd. v. Oasis Waterpark

• Decision Date: 24 January 1991
• Docket Number: No. S015248,S015248
• Citation: 277 Cal.Rptr. 517,803 P.2d 370,52 Cal.3d 988
• Court: California Supreme Court
• Parties: , 803 P.2d 370 HYDROTECH SYSTEMS, LTD., Plaintiff and Appellant, v. OASIS WATERPARK, et al., Defendants and Respondents.

Page 517

277 Cal.Rptr. 517

52 Cal.3d 988, 803 P.2d 370

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

No. S015248.

Supreme Court of California,

In Bank.

Jan. 24, 1991.

[52 Cal.3d 991] [803 P.2d 372] Sanger & Stein, and Rick M. Stein, Palm Springs, for plaintiff and appellant.

Schlecht, Shevlin & Shoenberger, John C. Shevlin, Palm Springs, Alvarado, Rus & McClellan and Joel S. Miliband, Orange, for defendants and respondents.

EAGLESON, Justice. ^*

Section 7031 of the Business and Professions Code ¹ states that one may not sue in a California court to recover "compensation" for "any act or contract" that requires a California contractor's license, unless he "alleges and proves" he was duly licensed at all times during his [52 Cal.3d 992] performance. We granted review to decide two questions. The first is whether section 7031 permits an unlicensed nonresident to sue upon an "isolated transaction" in California where "exceptional circumstances" exist, even though there was no substantial compliance with California's licensing law. The second--an issue of potentially broad importance--is whether section 7031 bars an unlicensed contractor's fraud action against the person for whom the work was done.

We conclude, as did the Court of Appeal, that section 7031 contains no implied exception for foreign entities, isolated transactions, or other "exceptional" circumstances. We also hold, contrary to the Court of Appeal, that the statute bars an unlicensed contractor's claim for fraud when the primary deceit alleged is a false promise to pay, and the damages primarily consist of, or are measured by, the price or value of the work and materials furnished. Any other result would circumvent the clear statutory policy of deterring unlicensed contract work. We therefore affirm in part and reverse in part the decision of the Court of Appeal.

FACTS

Plaintiff Hydrotech Systems, Inc. (Hydrotech), a New York corporation, manufactures and installs patented equipment designed to simulate ocean waves. Hydrotech claims that its product, and its skills at installing and maintaining the equipment, are unique. Defendant Oasis Waterpark (Oasis), a California corporation, owns and operates a water-oriented amusement park in Palm Springs. Defendant Wessman Construction Company, Inc. (Wessman) was Oasis Waterpark's general contractor for construction of the park.

In July 1985, Hydrotech contracted with Wessman to design and construct in the park a 29,000-square-foot "surfing pool" using Hydrotech wave equipment. The total contract price was $850,000. Wessman was entitled to hold back specified portions of this amount pending satisfactory completion and operation of the pool.

Hydrotech later sued Wessman, and Oasis Waterpark and its principals (collectively Oasis). Hydrotech's suit claimed that more than $110,000 in "retainage" amounts were still being withheld although the pool had long since been completed and was performing as specified. The second amended complaint, filed November 29, 1988, asserted claims against all defendants for fraud, breach of implied contract, and money due and owing, and against Wessman for breach of written contract. The complaint also asserted that full payment had been made for Hydrotech's construction services, and that the unpaid balance was only for equipment and materials.

[52 Cal.3d 993] In its fraud count, Hydrotech alleged as follows: Because it was concerned about licensing problems, Hydrotech wished only to sell and deliver its equipment and to avoid involvement in design or construction of the pool. However, Oasis insisted that Hydrotech's unique expertise in design and construction was essential. To induce Hydrotech to contract for these services, and "in response to repeated queries by Hydrotech," defendants promised that Wessman would arrange for a California contractor to "work with" Hydrotech on any construction

[803 P.2d 373] activities which required a California license. Defendants also promised to pay in full for Hydrotech's wave equipment and for "associated equipment and services." In reasonable reliance on these promises, which defendants never intended to honor, Hydrotech furnished equipment and services in full compliance with its contract. Had Hydrotech known defendants' promises were false when made, it would not have performed under the contract, and therefore suffered damage according to proof

Defendants demurred on grounds, inter alia, that the complaint failed to allege Hydrotech possessed a California contractor's license. Hydrotech conceded it had no California license. However, Hydrotech asserted that it sought only unpaid amounts for sale of equipment, for which a license was not required. ² In the alternative, Hydrotech claimed that application of section 7031 was unnecessary and unjust because Hydrotech possesses unique expertise in its field and provided construction services only at its customer's insistence. Hydrotech also argued that section 7031 does not bar tort actions for fraud.

The trial court sustained Wessman's demurrer to the written-contract count but granted Hydrotech leave to amend. The demurrers to all other causes of action in Hydrotech's complaint were sustained without leave to amend. The trial court entered an order dismissing all defendants save Wessman from the action.

Hydrotech appealed the dismissal order. ³ It argued first that the protective purposes of the licensing law are not served by applying section 7031 to a nonresident who subcontracted at its customer's specific request to provide unique construction skills in an "isolated" California transaction. Hydrotech also repeated its contention that section 7031 does not bar claims of fraudulent inducement to enter a construction contract.

[52 Cal.3d 994] The Court of Appeal rejected the former argument but accepted the latter. It reversed that portion of the trial court's judgment which dismissed Hydrotech's fraud count, but affirmed the dismissal of Hydrotech's complaint in all other respects.

Hydrotech sought review on the "isolated transaction" issue, and defendants sought review on the fraud question. We granted both petitions. As we explain, defendants' contentions have merit, but Hydrotech's do not. ⁴

DISCUSSION

1. Section 7031 applies despite the "exceptional circumstances" of this transaction.

Hydrotech renews its contention that the "exceptional circumstances" of its

[803 P.2d 374] dealings with Oasis make application of section 7031 unnecessary and unjust. Hydrotech points to its allegations that it reluctantly provided construction services on a one-time basis only because Oasis solicited its specialized wave-generation expertise, which was available nowhere else. Hydrotech argues that the "isolated" provision of such specialized services by a mere subcontractor should be deemed exempt from section 7031. The law, however, is otherwise

Section 7031 states clearly that, with exceptions not relevant here, "[n]o person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action " in a California court to recover "compensation for the performance of any act or contract for which a [contractor's] license is required ... without alleging and proving" that he or she "was a duly licensed contractor at all times during the performance of [the] act or contract...." (Italics added.)

[52 Cal.3d 995] Section 7026 provides that, for purposes of the license requirements, "a contractor is any person, who undertakes to or offers to undertake to ..., or does himself or by or through others, construct ... any ... structure, project, development or improvement, or to do any part thereof, ... whether or not the performance of [such] work ... involves the addition to or fabrication into any [such] structure, project, development or improvement ... of any material or article of merchandise. The term contractor includes subcontractor and specialty contractor." (Italics added.) The numerous express exemptions from the licensing law ( § 7040 et seq.) do not include foreign contractors, isolated transactions, or "unique" building services and capabilities.

The purpose of the licensing law is to protect the public from incompetence and dishonesty in those who provide building and construction services. (Lewis & Queen v. N.M. Ball Sons (1957) 48 Cal.2d 141, 149-150, 308 P.2d 713.) The licensing requirements provide minimal assurance that all persons offering such services in California have the requisite skill and character, understand applicable local laws and codes, and know the rudiments of administering a contracting business. (Ibid.; Conderback, Inc. v. Standard Oil Co. (1966) 239 Cal.App.2d 664, 678-679, 48 Cal.Rptr. 901.)

Section 7031 advances this purpose by withholding judicial aid from those who seek compensation for unlicensed contract work. The obvious statutory intent is to discourage persons who have failed to comply with the licensing law from offering or providing their unlicensed services for pay.

Because of the strength and clarity of this policy, it is well settled that section 7031 applies despite injustice to the unlicensed contractor. "Section 7031 represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties, and that ... such deterrance can best be realized by denying violators the right to maintain any action for compensation in the courts of this state. [Citation.] ..." (Lewis & Queen, supra, 48 Cal.2d at p. 151, 308 P.2d 713, italics added; see also Brown v. Solano County Business Development, Inc. (1979) 92 Cal.App.3d 192, 198, 154 Cal.Rptr. 700; Rushing v. Powell (1976) 61 Cal.App.3d 597, 605, 130 Cal.Rptr. 110.)

Hydrotech concedes that it had no California license, yet seeks contract compensation for activities which required such a license. It...