Performing work as an unlicensed contractor in Tennessee is risky, since most nonpayment claims by unlicensed contractors are barred under state law. However, a Court of Appeals recently declared that claims for quantum meruit are allowed in Tennessee when the payment dispute occurs between contractors.
The problem with unlicensed contract work
Performing construction work without a proper license is a dangerous proposition. And each state handles unlicensed work differently.
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In some states, unlicensed contractors can’t file a mechanics lien. In other states, such as Florida, unlicensed work can lead to fines and potential criminal penalties. And to take it to the most extreme extent, Georgia courts have stated that unlicensed contractors have no legal right to payment.
In Tennessee, unlicensed contractors can still file liens on most projects, with the exception of single-family, residential projects. But how does the state of TN feel about other actions for recovery?
According to Tennessee statutes,
“Any contractor required to be licensed under this part who is in violation of this part or the rules and regulations promulgated by the board shall not be permitted to recover any damages in any court other than actual documented expenses that can be shown by clear and convincing proof.”Tenn. Code Ann. §62-6-103(b)
So what are the limits of this statute? Does this apply to claims between contractors? These questions were answered in a recent Court of Appeals case in Nashville.
Unlicensed sub files multiple claims for nonpayment against GC
The case in question is Sifuentes v. D.E.C., LLC.
- General contractors*:
- D.E.C., LLC (DEC)
- National Resources Company, LLC (NRC)
- Subcontractor: Jose Sifuentes, d/b/a Jose’s Electric (Sifuentes)
*It’s unclear from the facts of the case the relationship between these two parties, as the opinion reads, “Tenant hired DEC and/or NRC to construct a bowling alley.”
A tenant in a commercial building hired DEC for the construction of a bowling alley on the premises. In turn, DEC had subcontracted the electrical wiring, lighting, and other equipment and machinery for the bowling alley. Around the same time, NRC was working as a general contractor on a different project in the same building.
As work began, a representative from DEC informed Sifuentes that the project completion date was pushed up. Sifuentes responded that he would need to hire additional employees at a higher hourly rate to meet the new deadline. DEC agreed, so Sifuentes upped his labor force.
Payment problems begin to arise
Invoices were being paid weekly, including one week with the increased hourly rate. However, the September invoice went unpaid. When Sifuentes confronted DEC about the nonpayment, they responded that “he needed to complete the work in order for DEC to receive payment from NRC.”
Sifuentes was also hired by NRC to perform electrical work on a different project, under a separate contract, in the same building. Sifuentes informed NRC that his employees couldn’t continue to work on the bowling alley project because DEC hadn’t paid their invoice. NRC paid $33K directly to Sifuentes to keep his employees on the job. But NRC warned that if they stopped work on the bowling alley, Sifuentes would be terminated.
The $33K was enough to cover labor costs for the completion of the bowling alley. To cover the rest of the costs, Sifuentes liquidated his savings and retirement funds to pay the remaining costs. The bowling alley was completed on time, but DEC never paid any invoices after August.
Trial court dismisses unlicensed subcontractor’s claims
Sifuentes then filed a lawsuit against DEC under claims of breach of contract, promissory estoppel, promissory fraud, and quantum meruit for a total of $101K. He also sought consequential and punitive damages.
DEC filed a motion to dismiss the claims based on the fact that Sifuentes was an unlicensed contractor, citing the §62-6-103. And furthermore, failed to seek recovery under said statute. Sifuentes plead with the court by stating that DEC had assured them that they would be “operating under a licensed contractor and did not have to worry about securing a permit.”
The trial court wasn’t swayed. They granted the motion, and all claims were dismissed. Sifuentes appealed.
Appelate Court: Unlicensed contractors claim quantum meruit against another contractor
The appeals court began by stating that under common law, contracts between an unlicensed contractor and a property owner were considered illegal. So as a general rule, unlicensed contractors can’t recover damages from an owner under breach of contract or quantum meruit claims.
However, there was a case from the 80’s where the court declared that disputes between contractors require different considerations.
“In such disputes, the court held that an unlicensed contractor still had a viable quantum meruit claim against another professional in the construction business. But the measure of recoverable damages was limited to ‘actual expenses in the form of labor and materials expended on the project as shown by clear and convincing proof.'”
Subsequently, the court looked to the language of the statute, and took these considerations into account. Quantum meruit is a theory of recovery available when a benefit is conferred on another party when there is no enforceable express contract between the parties. This seems to be directly applicable to these types of scenarios.
The court concluded that the legislative intent of the statute was to limit the measure of damages for contractors in violation of the licensing requirements — not to completely eliminate them.
The court reversed the dismissal of the quantum meruit claim.
All other claims were dismissed
The court remanded the case to trial for the quantum meruit claim. However, as far as the other claims were concerned, the court made short work of those.
Punitive and consequential damages
Unlicensed contractors can only recover damages for actual documented expenses established by clear and convincing evidence. Since claims for punitive and consequential damages aren’t actual or “real” damages, these claims were properly dismissed.
Breach of contract and promissory estoppel
Breach of contract and promissory estoppel claims are also barred. A contract with an unlicensed contractor is an illegal contract, and therefore can’t be enforced under a brach of contract claim. Furthermore, parties are unable to use promissory estoppel to achieve the same end as “enforcing an illegal contract.”
Promissory fraud was also dismissed. To have a claim for promissory fraud, there must be “a promise of future action without the present intention to carry out the promise.” Sifuentes was relying on the promise to pay upon completion. However, DEC had paid an invoice at a higher rate. Without further evidence, there was no way to prove that the contractor never intended to pay.
Unlicensed Tennessee contractors may find relief in quantum meruit
This is an interesting wrinkle in the available remedies for unlicensed contractors in Tennessee. Specifically for subcontractors, as the court emphasized that claims between construction professionals should be handled differently than claims between owners and contractors.
This case brought a fortunate outcome for Sifuentes, particularly given the fact that he liquidated his savings and retirement accounts in the process. Although contractors should always be licensed, this decision does offer some relief to unlicensed contractors. The options for unlicensed contractors to recover payment in Tennessee are incredibly limited, but a claim against another contractor for quantum meruit is still an option.
For more information on contractor licensing in Tennessee, visit the Tennessee Board of Licensing Contractors