Licensing statutes and regulations are among the more non-uniform laws in this country, besides lien laws. The primary focus of licensing is supposed to be for public health and safety. That is, the license, while not a guarantee of the quality of the contractor, indicates the contractor’s compliance with some minimum standards and requirements. In other instances, the license law is simply a revenue measure, a tax on the contractor’s right to perform work. Whether the law addresses public safety, or is predominantly a tax, the results of non-compliance can be the same and can be harsh.

In some states (Louisiana and Mississippi, for example) a contractor is not allowed even to bid a project unless it has a state license. The submission of a bid in those jurisdictions is not only a violation of the law, but the award of a contract to an unlicensed contractor subjects both the contractor and the owner to penalties. In addition, the contract is void and unenforceable.

Unlicensed contractors have tried to avoid this problem by using another company’s license, such as by entering into a joint venture with a licensed company and then using that license to get a job. This motivation for a joint venture is particularly attractive for an unlicensed, out-of-state contractor. But severe problems can arise with such a scheme.

A recent case from the Idaho Supreme Court emphasizes the dangers of joint venturing with an unlicensed entity.

United Structures did not have an Idaho license for public works projects. However, Best Contracting did. The two companies entered into an oral joint venture agreement through which Best would bid jobs and, when awarded, the jobs would be performed by United. Best took care of bonding, insurances and payroll, and profits were to be split 50/50.

Under this arrangement, United and Best performed more than 35 projects together in Idaho, both private and public. After about eight years, the two companies got into a dispute over accounting for profits. A lawsuit followed. Neither party argued that the joint venture was improper. The Idaho Supreme Court came up with that concept on its own.

Idaho’s “Public Works Contractors License Act” makes it unlawful for a company or a joint venture to perform public works contracts without a public works license. In addition, with a joint venture, state law requires that all of the parties be licensed.

The court went even further. It held that a contract is void if it is made for the purpose of furthering anything prohibited by statute, such as obtaining a public contract without a license. So, because only Best was licensed, the joint venture agreement was found to be illegal and could not be enforced by either party. The nullity of the agreement applied even though some of the Best/United contracts were not with an Idaho public entity, but were with private owners.

Under basic contract law, five elements are necessary for a contract to be formed: (1) offer; (2) acceptance; (3) consideration; (4) legal capacity; and (5) legal purpose. It was argued that only the contracts between the joint venture and the Idaho public owner were void and unenforceable. But the taint of the illegal act of practicing without a license fully infected the joint venture.

The federal government tends to challenge any state law which might interfere with federal authority. Licensing laws fall within this purview. For example, take the case of an unlicensed contractor that was awarded a construction contract for an Air Force base in Arkansas. The contractor was fined by the state.

The United States Supreme Court reversed:

Subjecting a federal contractor to the Arkansas contractor license requirements would give the State’s licensing board a virtual power of review over the federal determination of ‘responsibility’ ....

The same is true for subcontractors. In a case involving an unlicensed subcontractor doing work for the Corps of Engineers in Arizona, a federal board of contract appeals held that “a locally issued license was not required in order to perform a subcontract on a federal construction project.”

The variations from state to state are remarkable. The laws and judicial decisions referenced here underscore the need to review those laws, particularly if you are an out-of-state contractor.

Make certain that you have the most recent version of the law. State and federal contracting statutes are often revised in ways that could affect your legal rights. EC

ITTIG, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, e-mail: [email protected], or his Web site, www.ittig-ittig.com.