Lewis & Queen v. N. M. Ball Sons

• Decision Date: 19 March 1957
• Court: California Supreme Court
• Parties: LEWIS & QUEEN, a Partnership, George W. Lewis and Paul C. Queen, Plaintiffs and Appellants, v. N. M. BALL SONS, a Partnership, et al., Defendants and Respondents. S. F. 19563.

Page 713

308 P.2d 713

48 Cal.2d 141

LEWIS & QUEEN, a Partnership, George W. Lewis and Paul C. Queen, Plaintiffs and Appellants, v. N. M. BALL SONS, a Partnership, et al., Defendants and Respondents.

S. F. 19563.

Supreme Court of California, In Bank.

March 19, 1957.

Rehearing Denied April 17, 1957.

Howard B. Crittenden, Jr., San Francisco, for appellants.

Thelen, Marrin, Johnson & Bridges, Gordon Johnson and Dario De Benedictis, San Francisco, for respondents.

TRAYNOR, Justice.

Plaintiffs George W. Lewis and Paul C. Queen are engaged in the contracting business as the partnership of Lewis and Queen, hereinafter referred to as plaintiff. Defendant Ball Sons, hereinafter referred to as defendant, is also in the contracting business.

In June, 1949, defendant was awarded two contracts by the state, each contract for the construction of a separate section of the Hollywood Parkway. Defendant then entered into four contracts with plaintiff. With respect to the work to be done on each section of the parkway, there were two contracts between plaintiff and defendant. The first was entitled a 'subcontract,' and under it plaintiff agreed to remove concrete encountered during excavation of the roadway and apply water needed in the process of compacting the ground. The second was entitled an 'equipment rental agreement,' and under it plaintiff agreed to provide defendant with construction equipment for road excavation, 'overhaul,' and compacting.

Plaintiff brought this action for damages for breach of the equipment rental agreements and for the reasonable rental value of equipment alleged to have been held beyond the agreed rental term. Plaintiff also sought to recover against sureties on labor and material bonds posted by defendant in compliance with Government Code section 4200 before commencing work on the parkway, and stop notice bonds posted by defendant pursuant to Code of Civil Procedure section 1184e (now section 1192.1) after the present dispute arose. Defendant answered denying that it had breached the rental agreements, and filed a cross-complaint in which it alleged a breach of the agreements by plaintiff and sought to recover overpayments made to plaintiff.

The trial court found that before the execution of the rental agreements plaintiff and defendant had entered into an oral agreement that plaintiff would undertake as a single subcontract the removal of concrete, application of water, excavation, overhaul, and compacting of original ground. Defendant then discovered that if it subcontracted all of this work, it would violate provisions in its contracts with the state that required it to perform with its own organization work of a value of not less than fifty per cent of the value of all the work embraced in the state contracts. The parties agreed therefore, with the intention of circumventing the provisions in the state contracts, to divide the five items of work under each state contract between two writings, a subcontract and an equipment rental agreement. Notwithstanding the form of these writings, it remained the agreement of the parties that plaintiff would perform all five items of work as an integrated subcontract operation.

There was substantial evidence to support these findings. The rental agreements themselves provided for compensation based on the number of cubic yards of earth moved or square yeards compacted rather than on the period of time during which defendant had use of the equipment, and the rental term was the time required to do the work called for by the state contracts. Testimony indicated that plaintiff furnished and retained control over both operating and supervisory employees, that it moved equipment to and from other jobs without defendant's consent, and that it carried on the work under both subcontracts and rental agreements with the same personnel, equipment, and accounting. Defendant paid wages, payroll taxes, and compensation insurance for employees operating the machines, but these costs were charged against amuonts owing plaintiff under the rental agreements and so ultimately were borne it. Monthly progress reports from defendant to plaintiff were on a single form and made no segregation between charges attributable to work under the rental agreements and charges attributable to work under the subcontracts. The evidence, especially the testimony of Stanley Ball, tended to show that for all practical purposes the work was conducted by plaintiff, and that defendant exercised only such control as was necessary to coordinate the various subcontractors working on the parkway.

The trial court concluded that plaintiff had agreed to act and had in fact acted as a contractor within the meaning of section 7026 of the Business and Professions Code, and that because it had done so without the license required by section 7028, it was barred by section 7031 from maintaining any action for compensation. Lewis had an individual license, but neither Queen nor the partnership of Lewis and Queen had licenses. The court held, in the alternative, that the rental agreements were unenforceable because they violated the provisions in the state contracts against subcontracting more than a certain amount of the total work. Since we have concluded that plaintiff's failure to obtain a license prevented it from maintaining any action for compensation, we have no cause to consider this alternative ground. The court entered judgment for defendant on the complaint and for plaintiff on the cross-complaint. Plaintiff appeals from the judgment against it. ¹

Section 7028 of the Business and Professions Code 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 * * *.' Section 7026 defines a contractor as 'any person, who * * * does himself or by or through others construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building, highway, road * * * or improvement * * *.' 'The term contractor includes subcontractor * * *.' Section 7030 makes it a misdemeanor for any person to act in the capacity of a contractor without a license. Section 7031 provides that, '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 contrator at all times during the performance of such act or contract.'

Furthermore, section 7025 states that the 'person' required to have a license by section 7028 includes a partnership, and section 7029 makes it unlawful for two individuals, 'each of whom has been issued a license to engage separately in the business * * * of a contractor * * * to jointly * * * act in the capacity of a contractor * * * without first having secured an additional license for acting in the capacity of such a joint venture or combination * * *.'

The evidence shows that in spite of the form of the rental agreements plaintiff actually undertook to and did in fact 'construct a highway' for defendant, and thereby acted as a contractor within the meaning of section 7026. See Albaugh v. Moss Const. Co., 125 Cal.App.2d 126, 132-133, 269 P.2d 936; Phillips v. McIntosh, 51 Cal.App.2d 340, 343, 124 P.2d 835; cf. Harrison v. Shamalian, 110 Cal.App.2d 500, 243 P.2d 82; Andrew v. Conner, 101 Cal.App.2d 621, 225 P.2d 943.

Plaintiff contends, however, that because defendant admitted in its answer that equipment had been furnished under the written rental agreements, the trial court was precluded from finding that the actual agreements were subcontracts because it should have restricted its findings to the issues made by the pleadings. There is no merit in this contention. Whatever the state of the pleadings, when the evidence shows that the plaintiff in substance seeks to enforce an illegal contract or recover compensation for an illegal act, the court has both the power and duty to ascertain the true facts in order that it may not unwittingly lend its assistance to the consummation or encouragement of what public policy forbids. Wells v. Comstock, 46 Cal.2d 528, 532, 297 P.2d 961; Franklin v. Nat C. Goldstone Agency, 33 Cal.2d 628, 629, 204 P.2d 37; Fewel & Dawes, Inc., v. Pratt, 17 Cal.2d 85, 92, 109 P.2d 650; Endicott v. Rosenthal, 216 Cal. 721, 728, 16 P.2d 673; Tevis v. Blanchard, 122 Cal.App.2d 731, 732-734, 266 P.2d 85; see Ownes v. Haslett, 98 Cal.App.2d 829, 835-836, 221 P.2d 252. It is immaterial that the parties, whether by inadvertence or consent, even at the trial do not raise the issue. The court may do so of its own motion when the testimony produces evidence of illegality. Norwood v. Judd, 93 Cal.App.2d 276, 277-278, 282, 209 P.2d 24. It is not too late to raise the issue on motion for new trial, Pacific Wharf & Storage Co. v. Standard American Dredging Co., 184 Cal. 21, 23-24, 192 P. 847, in a proceeding to enforce an arbitration award, Franklin v. Nat C. Goldstone Agency, 33 Cal.2d 628, 629, 204 P.2d 37, or even on appeal. Morey v. Paladini, 187 Cal. 727, 733-734, 203 P. 760. In the present case the issue was in fact raised during the trial.

Equally without merit is plaintiff's contention that because the rental agreements stated that they contained all provisions agreed to by the parties, the parol evidence rule precluded the admission of other evidence showing the true nature of the agreement between the parties and that plaintiff had in fact acted as a contractor. The parol evidence rule does not exclude evidence showing that a contract lawful on its face is in fact part of an illegal transaction. Code Civ.Proc. § 1856; Endicott v. Rosenthal, 216 Cal. 721, 728, 16 P.2d 673; May v. Herron, 127 Cal.App.2d 707, 710-711, 274 P.2d 484; Kennerson v. Salih Brothers, 123 Cal.App.2d 371, 374, 266 P.2d 871; De...