BPC §7031 — The Unlicensed Contractor Disgorgement Statute
Cal. Bus. & Prof. Code §7031 · Last legislative update: Jan. 1, 2021 · Verified April 2026
California Business and Professions Code §7031 is the harshest contractor licensing statute in any U.S. state. It operates as both a shield — barring unlicensed contractors from suing for compensation — and a sword — letting owners recover every dollar already paid to an unlicensed contractor, no matter how well the work was done. The California Supreme Court has emphasized the legislature's intent to make the penalty deliberately severe in order to deter unlicensed contracting. Most §7031 disputes turn on three questions: was the work the kind that required a license, was the contractor actually licensed during the relevant period, and does the narrow "substantial compliance" doctrine in subdivision (e) save an otherwise unlicensed claimant?
Full Statutory Text
The text below is reproduced verbatim from California Legislative Information. Subdivision labels are bolded for navigation; emphasis (italics) is not in the original statute.
(1) Any legal action or arbitration commenced prior to January 1, 1995, regardless of the date on which the parties entered into the contract.
(2) Any legal action or arbitration commenced on or after January 1, 1995, if the legal action or arbitration was commenced prior to January 1, 1995, and was subsequently dismissed.
Source: California Legislative Information, leginfo.legislature.ca.gov. Updated Jan. 1, 2021.
Plain-Language Annotation
Subdivision (a): The "Shield" — No License, No Lawsuit
An unlicensed contractor cannot bring or maintain any lawsuit or arbitration to collect payment for work that required a contractor's license. This applies regardless of the merits — meaning even if the work was excellent, the contract was clear, the owner agreed to pay, and the only defense the owner raises is "you weren't licensed," the contractor loses. The plaintiff must plead and prove licensure at all relevant times. A defendant doesn't have to do anything affirmative to raise this defense; the burden is on the contractor to establish licensure from the outset of the case.
One narrow exception: the prohibition doesn't apply to contractors who are each individually licensed but who failed to comply with §7029 (joint venture licensing). That exception exists because §7029 violations don't involve actual unlicensed practice — they involve licensed contractors who didn't file the right paperwork for a joint venture.
Subdivision (b): The "Sword" — Disgorgement of Everything Paid
An owner (or anyone who hired an unlicensed contractor) can sue to recover all compensation paid to that contractor. The statute uses the phrase "all compensation paid" — California courts have read this strictly: no setoff for the value of materials supplied, no offset for the labor actually performed, no equitable adjustment for quantum meruit. If the project required a license and the contractor didn't have one, every dollar paid is recoverable. The only exception is the narrow §7031(e) substantial compliance safe harbor.
This is the "sword" because it doesn't just defeat the contractor's claim — it lets the owner go on offense and recover what was already paid. Practically, this means an owner who suspects unlicensed work can stop paying, get sued by the contractor, win on the §7031(a) defense, and then countersue for disgorgement under §7031(b). California is the only U.S. state with this combination.
Subdivision (c): Mechanic's Liens and Security Interests Are Void
A security interest — including a mechanic's lien under Civil Code §8400 et seq. — recorded by someone who wasn't a duly licensed contractor during the relevant work is unenforceable. This means an unlicensed contractor cannot use the lien process to attach the property and cannot foreclose under Civ. Code §8460. An owner faced with a lien recorded by an unlicensed contractor can petition under Civ. Code §8480 to release or expunge the lien, using CSLB certification under §7031(d) to establish that the lien claimant was not duly licensed and therefore holds an unenforceable security interest.
Subdivision (d): Burden of Proof on the Contractor
When licensure is in dispute, the contractor must produce a verified certificate from CSLB establishing licensure in the proper classification at all relevant times. The opposing party (typically the owner) does not have to produce anything affirmative to put licensure at issue — they only need to controvert it. This burden-of-proof rule routinely defeats §7031(a) claims at summary judgment when a contractor produces a license that was issued under a different name, in a different classification, or with a gap during performance.
Subdivisions (e) & (f): The Substantial Compliance Safe Harbor
This is the only escape route from §7031. Even where it applies, it's narrow: the contractor must show at an evidentiary hearing that (1) they had been duly licensed in California before performance, (2) they acted reasonably and in good faith to maintain licensure, and (3) they acted promptly and in good faith to remedy the licensure failure once they learned of it.
What §7031(e) does not cover: a contractor who never held a California license; a contractor who knew their license had lapsed and continued to work without taking prompt steps; or a contractor licensed in the wrong classification for the work. Courts have read the three-prong test strictly, and the burden of proof at the evidentiary hearing is on the contractor.
Leading Case Examples
Hydrotech Systems, Ltd. v. Oasis Waterpark
(1991) 52 Cal.3d 988
The California Supreme Court held that §7031 bars even claims for fraud and misrepresentation arising out of an unlicensed contractor's work — not just contract claims. The court reasoned that allowing fraud workarounds would defeat the legislature's clear policy of categorically denying unlicensed contractors any forum to recover. After Hydrotech, an unlicensed contractor cannot recast a payment claim as a fraud claim or an unjust enrichment claim to escape §7031.
MW Erectors, Inc. v. Niederhauser Ornamental and Metal Works Co.
(2005) 36 Cal.4th 412
The Supreme Court interpreted what it means to be "duly licensed at all times during performance." Even a brief lapse — here, a period during which the contractor's license was technically suspended for an unrelated administrative deficiency — was enough to trigger §7031(a) and bar recovery for work performed during the lapse. The court rejected arguments that the lapse was technical or that no public harm resulted: the statute means what it says about "at all times."
Loranger v. Jones
(2010) 184 Cal.App.4th 847
The Court of Appeal applied §7031(b) disgorgement to require an unlicensed contractor to return the full amount paid, even though the work was complete and the owner had occupied and used the improvement for years. The opinion is the most-cited modern authority for the proposition that there is no offset under §7031(b) — not for materials, not for the value of work performed, not for the time the owner enjoyed the improvement. "All compensation paid" means all compensation paid.
Panterra GP, Inc. v. Superior Court
(2022) 74 Cal.App.5th 697
A 2022 decision narrowing §7031 in a specific factual setting. The Court of Appeal allowed a properly-licensed contractor that had been omitted from a written contract to seek reformation under Civil Code §3399 to be made a party. Panterra was actually licensed and the parties intended for it to be the contractor; §7031 was not designed to penalize a licensed contractor for a clerical drafting error. The case demonstrates that §7031 has limits — but those limits are narrow and case-specific. Most §7031 defenses still succeed.
Practical Impact
For an owner, §7031 is the most powerful single tool in California construction law against a non-performing or fraudulent contractor. The first step in any contractor dispute should be to verify licensure on the CSLB license-check tool — not just whether a license currently exists, but whether it was active during the entire performance period and in the correct classification.
For a contractor, §7031 is the strongest argument for relentlessly maintaining licensure compliance: keep the license current, file timely renewals, keep the bond on file, verify classification matches the actual scope of work being bid, and never let a Responsible Managing Officer or Responsible Managing Employee resign without immediate replacement. A single payment to a license that has lapsed can be the difference between getting paid and disgorging the entire job.
For a subcontractor or supplier, §7031 cuts in both directions: it can bar a subcontractor's payment claim if the sub's own license was deficient, and it can be raised affirmatively if the prime contractor was unlicensed. Subcontractors should verify the prime's license before agreeing to work — both for §7031 reasons and because Civil Code §8400 et seq. lien rights generally depend on the prime contractor being licensed.
Related California Statutes
- Cal. Bus. & Prof. Code §7028 — criminal misdemeanor penalties for unlicensed contracting
- Cal. Bus. & Prof. Code §7026 — statutory definition of "contractor"
- Cal. Bus. & Prof. Code §7159 — Home Improvement Contract requirements (see deep-dive)
- Cal. Bus. & Prof. Code §7160 — civil action for fraudulent misrepresentation
- Cal. Civ. Code §8400 — mechanic's lien rights of contractors
Frequently Asked Questions
Does §7031 apply if the work was performed perfectly?
Yes. The statute applies "regardless of the merits of the cause of action." Quality of workmanship is not a defense to a §7031(a) bar or to §7031(b) disgorgement. Hydrotech v. Oasis Waterpark is the leading authority — an unlicensed contractor cannot recover even on theories of fraud, quasi-contract, or quantum meruit.
What's the statute of limitations on a §7031(b) disgorgement claim?
The leading published Court of Appeal decision so far is Eisenberg Village of the Jewish Homes for the Aging v. Suffolk Construction Co., Inc. (2020) 53 Cal.App.5th 1201, which held that a one-year limitations period under Code of Civil Procedure §340 applies to §7031(b) disgorgement as a liability created by statute. An owner has one year from accrual to file the disgorgement claim. Some plaintiff-side counsel argue for the three-year statute under CCP §338, but after Eisenberg Village most courts have treated one year as the controlling limitations period unless and until the California Supreme Court says otherwise.
If a contractor is licensed in Class B but does work that needed a C-class specialty license, does §7031 apply?
It can. The statute requires licensure "in the proper classification." A Class B general building contractor performing electrical work that required a C-10 specialty license may be treated as unlicensed for that work. The classification rules are in 16 CCR §§832.01–832.62. Misclassification cases are highly fact-specific; CSLB classification opinions can be persuasive but are not binding on a court.
Does §7031 apply to design professionals like architects and engineers?
No, not when they are acting solely as design professionals; §7031 is in the Contractors State License Law (BPC Chapter 9). Architects are licensed under BPC §5500 et seq., and engineers under BPC §6700 et seq. Those statutes have their own enforcement mechanisms but not a §7031-equivalent disgorgement remedy. Civil Code §8302 also gives design professionals lien rights independent of contractor status.
Can a §7031(a) defense be waived?
No. The California Supreme Court has held that §7031 advances a strong public policy that cannot be waived by contract or by the parties' conduct. Under Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, courts may vacate an arbitration award that contravenes explicit legislative public policy; because §7031 embodies a strong, non-waivable policy, an award requiring payment to an unlicensed contractor is vulnerable to challenge on that ground.
What should I do first if I think my contractor was unlicensed?
Three steps, in order: (1) Pull a verified license history from CSLB for the contractor and confirm dates of licensure, any suspensions, and the classifications held. (2) Pull your contract, change orders, and payment records. (3) Talk to a California construction-law attorney before contacting the contractor. A §7031(b) disgorgement claim is best preserved by careful timing — and by not making admissions or settlements that could later be argued to estop the claim. Bay Legal PC handles these matters; the consultation form below is one way to start.
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This page is legal information, not legal advice. Contractor Law is published by Bay Legal PC (Jayson Elliott, CA Bar No. 332479) as a California construction-law reference. Statutory text is reproduced verbatim from California Legislative Information (leginfo.legislature.ca.gov); annotations and case discussions are original commentary, not summaries of any third-party publication. Reading this page does not create an attorney-client relationship. Verify current statutory text and procedural deadlines with a California-licensed attorney before relying on them. More about Bay Legal PC's California construction practice at baylegal.com.
Last reviewed: April 2026 · Jurisdiction: California · Responsible attorney: Jayson Elliott, CA Bar No. 332479, Palo Alto, Santa Clara County
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