Engineering firms face a number of regulatory hurdles in all phases of their practices. Managing and maintaining firm licensure includes license registration, testing, renewals, tracking continuing education credits, coordinating qualifier licenses, and maintaining accurate records with state authorities. As such, it is a tremendous administrative challenge to ensure proper licensing in all jurisdictions, mainly because the requirements vary greatly from state to state. Additionally, companies need to maintain and ensure compliance with corporate filings in each state in which they are doing business.
As many readers know, what is allowed in one jurisdiction may not be permissible in another. Any disconnect between the disparate aspects of compliance can jeopardize a company’s licensing or corporate status and ability to perform. As a result, licensing and corporate missteps are breeding grounds for litigation because of the many ramifications that result from failing to stay on top of the paperwork. This applies to contractors as well. Let’s take a look at three different angles — all recent cases involving missed corporate formalities involving construction industry participants.
Expired business license voids contractor’s entire claim
First, the recent case of Hudson General Contractor Inc. v. Department of the Interior. In 2019, Hudson entered into a fixed-price contract with the National Park Service (an agency of the Department of the Interior) to do construction work at a national park in Ohio. The National Park Service terminated Hudson’s contract for default, and Hudson appealed the termination to the Civilian Board of Contract Appeals. Before trial, the department asked the board to dismiss Hudson’s appeal due to the fact its corporate status had long lapsed with the state of Virginia.
Although Hudson was at one time incorporated in Virginia, the Virginia State Corporation Commission administratively terminated the corporation for failure to file an annual report and pay the annual registration fee in 2013. Five years later, in 2018, Hudson was permanently dissolved with no right of reinstatement. So at the time Hudson entered into the contract with the National Park Service, it was not licensed to operate in any state as a corporation.
The board found that a necessary element to contracting is that the parties entering into it both possessed the capacity to do so. Virginia law states that “non-entities” lack the capacity to bring suits or prosecute claims after the termination of a corporate existence, and the board dismissed Hudson’s appeal. The lesson here: Don’t be sloppy. The failure to comply with something as simple as an annual report or annual registration fee can be hazardous.
Unlicensed joint venture contractor avoids indemnity obligations
A far different result occurred in the recent case of Maroulis v. Entergy Louisiana LLC. In that case, the project owner entered into a construction contract with a joint venture of Castleman Donlea and Associates LLC and Sigur Construction LLC. The project involved the renovation of a motel in Metairie, Louisiana, and the parties used a standard American Institute of Architects contract form. The JV agreement between Sigur and Castleman Donlea called for Sigur to act as the general contractor on the project. Sigur was a licensed commercial contractor in the state, whereas Castleman Donlea was an out-of-state company with no contractor’s license in Louisiana. Despite this, Castleman Donlea was the JV partner that entered into a subcontract with Sunbelt Rentals Scaffold Services LLC.
When an employee of Sunbelt was seriously injured at the job site, the injured worker sued the project owner. Predictably, the project owner sued Castleman Donlea, alleging it had a duty to indemnify the owner for claims arising from bodily injury. Castleman Donlea argued that the prime contract was null and void due to its lack of licensure with the state — and that the owner could not enforce any indemnity obligations against it. The trial court did not buy that argument, so Castleman Donlea appealed.
The Court of Appeal of Louisiana agreed with the unlicensed JV member, stating that when a JV enters into a contract, each member must hold a state license. The court acknowledged the owner’s argument that Castleman Donlea had “unclean hands” and should not be allowed to benefit (and duck legal responsibility) based on its own licensing failures. However, the court noted evidence in the record suggesting that the owner knew, or should have known, that Castleman Donlea was unlicensed at the time of contracting. The lesson here is that state licensing laws applicable to JVs are very jurisdiction-specific and even trickier. Failure to comply with all licensing laws and regulations can present unintended consequences if not adhered to by a contractor or design firm.
Contractor allowed to pursue design professional despite lack of license
While the Louisiana case above held that a contract with an unlicensed entity renders the contract null and void, a recent case in North Carolina came to a different conclusion altogether. In Wright Construction Services Inc. v. Hard Art Studio, a contractor was allowed to sue a design professional despite its lack of a contractor’s license at the time it entered into the contract with the owner.
In this case, a developer sought to build a mixed-use retail and student housing complex in North Carolina. The project was beset by delays stemming from the design drawings, discovery of an underground storage tank in the building footprint, and issues arising from obtaining constructible designs for shaft walls and shear walls. The contractor brought a negligence suit against the design professionals engaged by the owner, alleging they breached the duty of care they owed to the contractor.
The design professionals asserted the “licensure defense,” alleging the suit could not be maintained because the contractor was not properly licensed at the time of contracting — even though it later obtained a valid license during the early months of the project. The trial court agreed and dismissed the suit. The contractor appealed and the Court of Appeals of North Carolina reversed the decision, finding that the licensure defense does not apply to bar negligence claims. The appeals court largely relied on public policy grounds, noting that the public interest would not be served if architects and engineers were shielded from their legal responsibility to exercise due care in the critical aspects of the construction process. Moreover, the court noted that architects and engineers were not the class of persons intended to be protected by general contractor licensing laws — those were for the benefit of the public at large.
The lesson from all these cases should be clear. This is a complicated area of the law, and every state and situation may look at the public policies differently. Don’t tempt fate — make sure that you have whatever licenses you need to do business in the jurisdictions where you practice.