In Maryland, contractors who perform home improvements are required to be licensed with the Maryland Home Improvement Commission. In addition to facing civil and criminal fines and penalties, unlicensed contractors risk losing the ability to enforce their contracts, meaning that they may lose their right to effectively demand payment for services performed. Furthermore, with limited exceptions, contractors are prohibited from making payments to unlicensed subcontractors under the Maryland Home Improvement Law. The policy behind the Maryland licensing requirement is to protect the public from unscrupulous home improvement contractors.
Alcoa Concrete & Masonry, Inc. v. Stalker Brothers, Inc.
Earlier this year, in interpreting the Maryland Home Improvement Law (Licensing Law) the Maryland Court of Special Appeals ruled that a subcontractor that is unlicensed both at the time it contracted to perform home improvements and when it performed the work, can file suit to demand payment so long as it is licensed at the time of filing.
Alcoa Concrete & Masonry, Inc. (Alcoa), a subcontractor, brought suit against the general contractor, Stalker Brothers, Inc. (Stalker), for non-payment for work performed. The trial court determined that the subcontracts between Alcoa and Stalker were illegal and could not be enforced because Alcoa was not licensed when it contracted with Stalker, or when it performed the work. The decision of the trial court relied upon a well-established principle of Maryland law that if the purpose of a licensing statute is to protect the public, then courts will not enforce contracts made by unlicensed parties seeking compensation for business activities that require a license. Since the purpose of the Licensing Law is to protect the public, the trial court would not enforce Alcoa’s subcontract.
On appeal, the Court of Special Appeals reversed the decision of the trial court and granted Alcoa the right to enforce its subcontract with Stalker, reasoning that the policy of protecting the public is not implicated in the arms-length transaction between a general contractor and a subcontractor.
The appellate court also noted that Maryland law allows exceptions for payment to unlicensed contractors where the contractor loses its license through expiration, suspension or revocation. The appellate court further stated that the prohibition in the Licensing Law against paying an unlicensed contractor is limited to the time when payment under the subcontract is to be made. Accordingly, the appellate court concluded that allowing Stalker to withhold payment to Alcoa as a licensed subcontractor, when it had already made payments to Alcoa when it was unlicensed, would not be a reasonable interpretation of the Licensing Law.
Lessons of the Alcoa Case
There are lessons in the Alcoa case for both contractors and subcontractors.
- Subcontractors that perform home improvements are required to be licensed and should get licensed with the Maryland Home Improvement Commission.
- If a subcontractor that performs home improvements is not licensed at the time of contracting, all is not lost. However, unlicensed contractors should immediately begin the application process so that they can obtain a license in the event that it becomes necessary to file suit to recover payments.
- General contractors should obtain evidence that their subcontractors are licensed with the Maryland Home Improvement Commission. In Alcoa, the appellate court emphasized that general contractors are part of the enforcement process, placing the burden on general contractors to withhold payment until a subcontractor is licensed. This will effectively ferret out unlicensed subcontractors and motivate other subcontractors to get licensed, furthering the policy of homeowner protection.
Finally, it is important to note that in Alcoa, there were no allegations of defective work by the subcontractor, and the general contractor had induced the subcontractor to continue working based on assurances of future payment. Accordingly, be aware that different facts may yield a different outcome in another case.