Business Law and the Regulation of Business 11th Edition by Richard Mann, Barry Roberts

Exercise 8

FACTS General contractor Stalker Brothers, Inc. (Stalker) hired a subcontractor Alcoa Concrete and Masonry, Inc. (Alcoa) from 2004 through 2007. Alcoa was unlicensed until March 26, 2008. In 2004, all of Alcoa's invoices were fully and timely paid. When payments in 2005 became less regular, Stalker promised to pay Alcoa when a building owned by Stalker was sold, but full payment was not made. Alcoa continued to perform subcontract work for Stalker based on an agreement that Stalker would pay Alcoa $1,500 per week against invoices for past work and new work. In November 2006, Alcoa performed the cement and masonry work for Stalker on the ''Cahill'' job, in which Stalker represented that there was sufficient profit to pay Alcoa for that subcontract and for the entire past due balance. In the summer of 2007, Stalker ceased paying Alcoa entirely.
Alcoa sued Stalker for $53,000 plus interest and attorneys' [leave as is] fees. Stalker was granted a summary judgment on the ground that because Alcoa was not licensed, the series of subcontracts were illegal and could not be enforced. The circuit court's decision was based on a line of Maryland cases dealing with licensing, which is illustrated in the home improvement field principally by Harry Berenter, Inc. v. Berman, [citation.] If the purpose of a business licensing statute is to raise revenue, courts will enforce a contract for compensation for business activity that requires a license, even if made by an unlicensed person. But, if the purpose of the licensing requirement is to protect the public, then the Maryland cases relied upon by the court do not enforce contracts made by unlicensed persons who seek compensation for business activity for which a license is required. Alcoa argues that the rule distinguishing between revenue and regulation does not apply to the facts here, in which the agreement was between two businesses engaged in contracting. The contracts sought to be enforced were not between Alcoa and the various homeowners with whom Stalker had contracted.
DECISION The judgment of the Circuit Court is reversed, and the case remanded.
OPINION Rodowsky, J. At issue is whether a home improvement general contractor is contractually obligated to pay a subcontractor who was not licensed under the Act, either at the time of entering into the subcontract or when the subcontract was properly performed, but who was licensed when this suit was brought.
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Maryland appellate decisions have applied the revenue/ regulation rule in a number of contexts. All of the cases under the Act have dealt with the contractor-owner relationship. The members of the public who were protected by the regulatory licensing requirement were the owners of the home. This Court recently again has held, applying Harry Berenter, that a contract between the owner of the improved premises and an unlicensed contractor would not be enforced. [Citation.] ***
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Our review fails to disclose any Maryland appellate decision directly answering whether the regulatory license rule applied in Harry Berenter, declaring unenforceable a home improvement contract between an owner and an unlicensed contractor, applies to a subcontract between a licensed contractor and an unlicensed subcontractor. Harry Berenter does recognize that, pursuant to provisions of the Act ***, the failure to comply with certain formal contractual requirements in a home improvement contract does not invalidate the contract. [Citation.]
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The authors of Corbin on Contracts, after reviewing the revenue/regulatory rule, state:
Even when the purpose of a licensing statute is regulatory, courts do not always deny enforcement to the unlicensed party. The statute clearly may protect against fraud and incompetence. Yet, in very many cases the situation involves neither fraud nor incompetence. The unlicensed party may have rendered excellent service or delivered goods of the highest quality. The noncompliance with the statute may be nearly harmless. The real defrauder may be the defendant who will be enriched at the unlicensed party's expense by a court's refusal to enforce the contract. Although courts have yearned for a mechanically applicable rule, most have not made one in the present instance. Justice requires that the penalty should fit the crime. Justice and sound policy do not always require the enforcement of licensing statutes by large forfeitures going not to the state but to repudiating defendants.
In most cases, the statute itself does not require such forfeitures. The statute fixes its own penalties, usually a fine or imprisonment of a minor character with a degree of discretion in the court. The added penalty of unenforceability of bargains is a judicial creation. In many cases, the court may be wise to apply this additional penalty. When nonenforcement causes great and disproportionate hardship, a court must avoid nonenforcement.
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After the decision in Harry Berenter, in which the Court relied in part on the Restatement of Contracts, the American Law Institute adopted Restatement (Second) of Contracts (1981). Section 178 states a more flexible approach to enforceability than the rigid revenue/regulatory dichotomy. Section 178 reads:
When a Term Is Unenforceable on Grounds of Public Policy
(1) A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms.
(2) In weighing the interest in the enforcement of a term, account is taken of
(a) the parties' justified expectations,
(b) any forfeiture that would result if enforcement were denied, and
(c) any special public interest in the enforcement of the particular term.
(3) In weighing a public policy against enforcement of a term, account is taken of
(a) the strength of that policy as manifested by legislation or judicial decisions,
(b) the likelihood that a refusal to enforce the term will further that policy.
(c) the seriousness of any misconduct involved and the extent to which it was deliberate, and
(d) the directness of the connection between that misconduct and the term.
We find no indication in the Act or in the Maryland cases that a policy of the Act is to protect general contractors from unlicensed subcontractors. Consequently, the fact that the Act is a regulatory measure does not bar Alcoa from recovering on its subcontracts with Stalker.
INTERPRETATION A regulatory license is a measure to protect the public from unqualified practitioners; the failure to comply with such a regulation prevents the noncomplying party from recovering for services rendered if (1) the statute provides that a noncomplying agreement is unenforceable or (2) the public policy behind the regulatory purpose clearly outweighs the noncomplying party's interest in being paid for services rendered.
CRITICAL THINKING QUESTION When should the failure to obtain a license to operate a business prevent the owner or operator from receiving compensation for services?