Opinion
5-7-1956
LEWIS & QUEEN, Plaintiffs and Appellants, v. N. M. BALL SONS, a partnership of Irving T. Ball, Stanley A. Ball, Gordon H. Ball, general partners, Dorothy Ball and Georgia Ball, limited partners, Glens Falls Indemnity Company, a corporation, American Re-Insurance Company, a corporation, Defendants and Respondents.* Civ. 16658.
Howard B. Crittenden, Jr., San Francisco, for appellants. Thelen, Marrin, Johnson & Bridges, San Francisco, for respondents.
LEWIS & QUEEN, Plaintiffs and Appellants,
v.
N. M. BALL SONS, a partnership of Irving T. Ball, Stanley A. Ball, Gordon H. Ball, general partners, Dorothy Ball and Georgia Ball, limited partners, Glens Falls Indemnity Company, a corporation, American Re-Insurance Company, a corporation, Defendants and Respondents.*
May 7, 1956.
As Corrected on Denial of Rehearing June 6, 1956.
Hearing Granted July 5, 1956.
Howard B. Crittenden, Jr., San Francisco, for appellants.
Thelen, Marrin, Johnson & Bridges, San Francisco, for respondents.
BRAY, Justice.
Plaintiffs appeal from a judgment in favor of defendants in an action for a money judgment based on a contract and on a labor and material bond and a stop notice bond. Questions Presented.
1. Was parol evidence admissible to show that the equipment rental agreements were actually subcontracts?
2. Were the rental agreements unlawful (a) because they attempted to circumvent the state highway contract specifications, (b) because plaintiff partnership had no contractor's license?
3. Does absence of contractor's license prevent recovery on statutory labor and material bond and on stop notice bond? Record.
The trial consumed 23 days. The reporter's transcript contains 2,385 pages. However, to present the main issues requires but a brief statement of the facts. The defendants Ball (hereafter referred to as 'Ball Sons') are contractors who held two contracts with the state for the construction of a portion of the Hollywood Parkway. Defendant Glens Falls Indemnity Company executed to the state, under each agreement hereafter mentioned, the labor and material bonds required by the Government Code. After a controversy arose plaintiffs filed a stop notice. Defendant American Re-Insurance Company executed the bond then provided for in section 1184d, Code of Civil Procedure. In July, 1949, two contracts were entered into between plaintiffs and Ball Sons relating to the work required under each contract between the latter and the state (four contracts in all). As to each state contract the contracts between plaintiffs and Ball Sons were as follows: One was admittedly a subcontract and was for concrete removal and application of water. The other is entitled 'Equipment Rental Agreement' and is in the form of a rental agreement rather than a subcontract. During the progress of the work the parties disagreed in a number of respects. Each party claims that the other breached the agreements. Plaintiffs filed suit for the rental provided in the agreements and for the reasonable value of the equipment alleged to have been held over after the agreements terminated, and for attorney's fees. Ball Sons cross-complained alleging that the moneys expended by them under the terms of the agreements for plaintiffs' benefit exceeded the moneys payable to plaintiffs and asked recovery of the excess. At the trial, evidence was received, over plaintiffs' objection, to the effect that the rental agreements were actually subcontracts made in rental agreement form in order to circumvent a provision, hereafter discussed, in the specifications which were a part of the contracts between the state and Ball Sons. Defendants claimed that therefore the agreements were illegal; that because of such illegality and also because plaintiffs did not have a contractor's license, plaintiffs were barred from recovery. Findings of Fact.
The court found that while plaintiff George W. Lewis had the contractor's license required by division 3, chapter 9, Business and Professions Code, the partnership of Lewis & Queen did not, nor did plaintiff Queen; that the subcontract and the rental agreement were actually one integrated subcontract and were actually performed as such, and that the form of rental agreement was used with the intent and for the purpose of circumventing certain provisions of the standard specifications of the Department of Public Works, Division of Highways, which were a part of the contracts between the state and Ball Sons. These provisions required the contractor to perform 'with his own organization and with the assistance of workmen under his immediate superintendence, work of a value of not less than firty per cent (50%) of the value of all work embraced in the contract.' They also required that 'No portion of the contract shall be sublet, assigned or otherwise disposed of except with the written consent of the Director of Public Works,' and all lists of subcontractors must be filed with the state. The court found that the parties agreed that plaintiffs' names would not be, and they were not, filed nor any consent obtained to the subletting of the work covered by the two rental agreements. The court further found that the value of the work subcontracted to all subcontractors and reported to the state amounted to 44.4 per cent of Ball Sons' contract with the state on job 1, and to 41.03 per cent on job 2. These percentages did not include any of the work included in the two rental agreements. If the value of that work were included in the value of the two jobs respectively, the value of work actually subcontracted would have exceeded 50 per cent of the value of all work embraced in Ball Sons' highway contracts.
The court further found that plaintiffs breached the agreements by failing to supply Ball Sons with equipment as therein required, and that plaintiffs abandoned their agreements requiring Ball Sons to use other equipment to finish the work. It found the value of the work done by plaintiffs, but expressly made no finding as to payments, credits, charges and offsets asserted by Ball Sons against plaintiffs or as to any asserted default or inadequacy of payment by defendants to plaintiffs under the rental agreements, 'such matters not having been tried * * *.'
Among the conclusions of law the court found that because of the failure to report the equipment agreements to the state, and to get its consent thereto, the rental agreements were contrary to and in violation of the provisions of the state highway contracts, of the policy of law and of public policy and contrary to good morals, and were invalid and unenforceable by either party thereto and the parties should be left where they are. Again, because plaintiff partnership had no contractor's license, plaintiffs are barred by section 7031, Business and Professions Code, from recovering any sums whatever under the agreements or for the work performed.
While the evidence was conflicting upon most of the matters there was ample evidence to support every one of the court's findings. As to the finding that the rental agreements were intended to be and actually were subcontracts integrated with the designated subcontracts, among other evidence to support it is the following: The testimony of defendants of that effect; the fact that plaintiffs' bid for subcontracts; and the work was carried on under the subcontracts and the rental agreements as a single, integrated operation. The prices in the rental agreements were not the usual rental prices found in rental agreements, but were unit prices such as are usually found in subcontracts. Plaintiffs retained and exercised control over the employees operating the equipment and in fact were plaintiffs' employees. There was no segregation of wages, payroll taxes and compensation insurance, all of which were paid in the first instance by Ball Sons, between the work under the designated subcontracts and the rental agreements. The equipment remained under plaintiffs' direction and control, and was moved by plaintiffs back and forth to and from other jobs. In case of conflict, the supervisory employees acted on behalf of plaintiffs. Monthly progress earnings and charges by defendants for disbursements for plaintiffs' accounts were invoiced together under the subcontracts and the rental agreements. 1. Parol Evidence.
It is well settled in California that parol evidence is admissible to show the illegality of a contract. Section 1856, Code of Civil Procedure, so provides. 'Parol evidence is always competent to show that a written contract, though lawful on its face, was illegal, or part of an illegal transaction * * *. 3 Williston on Contracts, 3060; Morey v. Paladini, 187 Cal. 727-739, 203 P. 760.' Endicott v. Rosenthal, 216 Cal. 721, 728, 16 P.2d 673, 676. See also De Armas v. Dickerman, 108 Cal.App.2d 548, 552, 239 P.2d 65, where the evidence was admitted to show that the so-called option agreement was executed to evade the provisions of the Housing and Rent Act of 1947, 50 U.S.C.A.Appendix, § 1881 et seq., and was, in fact, a lease. See also El Claro, etc., Co. v. Daugherty, 11 Cal.App.2d 274, at page 281, 53 P.2d 1028, at page 1031, 55 P.2d 488, where the court said: 'Framing the contract in two papers did not change its legal effect. It is settled law that an act which may not legally be done directly may not legally be done indirectly.' The fact that the agreements contain statements that they include 'all covenants, stipulations and provisions agreed upon by the parties' cannot and does not change or affect this rule. The evidence was admissible under another exception to the parol evidence rule, namely, the one expressed in section 1642, Civil Code: 'Several contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together.' 2. Illegality.
The court having found on substantial evidence that the rental agreements were actually subcontracts, raises the question whether plaintiffs may recover in this action because of (a) claimed illegality of the rental agreements in that they were purposely entered into to and did circumvent the provisions of the specifications above mentioned, and (b) plaintiff partnership not having a contractor's license. The claim under (a) is that these provisions of the specifications amount to a declaration of public policy and any agreement to circumvent or violate them is contrary to good morals and hence makes such agreements unlawful. In view of our decision hereafter under (b) which is determinative of this action, we deem it unecessary to discuss the first contention. We see no escape from the fact that as the plaintiff partnership did not have a contractor's license, it cannot maintain this action. The agreements were between the partnership and Ball Sons. The recovery, if any were had, would be by the partnership. Plaintiff Lewis had a contractor's license. Plaintiff Queen did not, nor did the partnership, nor did it ever apply for one.
Section 7028, Business and Professions Code, provides: 'It is unlawful for any person to engage in the business or act in the capacity of a contractor within this State without having a license' therefor. Section 7031, Business and Professions Code, provides: 'No person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action in any court of this State for the collection of compensation for the performance of any act or contract for which a license is required by this chapter without alleging and proving that he was a duly licensed contractor at all times during the performance of such act or contract.' Section 7025 defines "Person' as used in this chapter' as including 'an individual, a firm, copartnership, corporation, association or other organization, or any combination of any thereof.' (Emphasis added.)
In view of the decision in Loving & Evans v. Blick, 33 Cal.2d 603, 204 P.2d 23, there can be no question but that the partnership not having a contractor's license made the agreements between it and Ball Sons illegal and precludes recovery thereon. There, as here, only one of the two partners held a contractor's license, and the partnership did not. After completion of a building contract, the partnership sued the owner for work and services under the contract. The owner defendant, setting up the lack of license by the parties. In denying recovery the court said, 33 Cal.2d at page 607, 204 P.2d at page 25: 'There can be no question but that this case presents a clear violation of the statutes regulating the contracting business. Thus, while respondent Loving at all times possessed an individual contractor's license, his respondent partner Evans did not, and the partnership, as such, failed to procure such a license. As appellant maintains, it has been repeatedly declared in this state that 'a contract made contrary to the terms of a law designed for the protection of the public and prescribing a penalty for the violation thereof is illegal and void, and no action may be brought to enforce such contract' [citations]; and that 'whenever the illegality appears, whether the evidence comes from one side or the other, the disclosure is fatal to the case.'' There, as here, the plaintiffs contended that the cases of Catti v. Highland Park Builders, Inc., 27 Cal.2d 687, 166 P.2d 265, and Citizens State Bank v. Gentry, 20 Cal.App.2d 415, 67 P.2d 364, authorized a recovery where one of the partners had a license. The court, however, distinguished the Gatti case by pointing out that in it both plaintiffs possessed a license in their own names as individuals, and that during the performance of the contract a joint contractor's license was issued to both the parties and a third party. It distinguished the Citizens Bank case by pointing out that the contractor's license expired while the work was in progress but was renewed in the name of a corporation bearing the contractor's name and in which he was the dominant factor and that the work was completed by the corporation. In Norwood v. Judd, 90 Cal.App.2d 276, at page 283, 209 P.2d 24, at page 28, cited by plaintiffs, this court stated: 'The principle that participants to an illegal contract who are in pari delicto can secure no relief based on such contract, is an ancient and most salutary one. It is part of the general rule that he who comes into equity must come with clean hands. See, generally, 2 Pomeroy's Equity Jurisprudence, Fifth Ed., §§ 397-404. The rule in license cases is most frequently applied to those situations where a firm or person required to be licensed fails to secure a license and sues a third person for services rendered or material furnished. In such event the unlicensed firm or person cannot recover because to do so would be to defeat the very purpose of the licensing statute. The contractor's license law expressly so provides.' 'The subcontractor is also a contractor, B. & P.Code, sec. 7026. A person is nonetheless amenable to the act because he is a subcontractor. He is as such required to obtain a license and must allege such fact in order to maintain an action on his contract.' Albaugh v. Moss Construction Co., 125 Cal.App.2d 126, 132, 269 P.2d 936, 940.
The lack of a contractor's license made the agreements contrary to public policy, unlawful and unenforceable. The courts must leave the parties where they find them.
The amounts which the court found to have been earned by plaintiffs under the agreements were much less than those claimed by plaintiffs. The agreements provided that Ball Sons were to pay all labor in the operation, maintenance and repair of plaintiffs' equipment and many other costs incident to the work, and charge them against plaintiffs' earnings. Had the court proceeded to consider these charges and defendants' claims for damages due to plaintiffs' breach of the agreements, and offset them, it is doubtful if the balance would have favored plaintiffs. 3. Bonds.
Plaintiffs, relying on Pneucrete Corp. v. United States Fidelity & Guaranty Co., 7 Cal.App.2d 733, 46 P.2d 1000, and Lewis & Queen v. S. Edmondson & Sons, 113 Cal.App.2d 705, 248 P.2d 973, contend that as it is held in both cases that 'an action on a labor and material bond given by a contractor on a public work is a primary and direct obligation on the bond and enforcible without regard to the original prime contract and without reference to any contract between the contractor and the materialmen' the defenses of illegality of the contract cannot apply to their action on the labor and material bond. (See Lewis & Queen case, 113 Cal.App.2d at page 707, 248 P.2d at page 975.) They make the same contention as to the stop notice bond. Assuming, but not deciding, that their contention in this respect is correct, we are not concerned then with the legality or illegality of the plaintiffs' agreements with Ball Sons. But we are concerned with whether in view of section 7031, Business and Professions Code, plaintiffs may bring this action against the sureties. That section specifically prohibits the bringing of 'any' action for the collection of compensation 'for the performance of any act or contract for which a [contrator's] license is required * * * without alleging and proving that he was a duly licensed contractor at all times during the performance of such act or contract.' (Emphasis added.) The court found that the work plaintiffs were performing was subcontracting and was more then merely leasing equipment, which latter would not have required a license. Therefore, the 'acts' for which plaintiffs seek recovery, whether they be under the agreements or otherwise, required that plaintiffs have a license. Not having it, they are barred from bringing or maintaining this action against the sureties. See Loving & Evans v. Blick, supra, 33 Cal.2d 603, 204 P.2d 23; Franklin v. Nat C. Goldstone Agency, 33 Cal.2d 628, 204 P.2d 37. See also Cash v. Blackett, 87 Cal.App.2d 233, 196 P.2d 585, and Siemens v. Maconi, 44 Cal.App.2d 641, 112 P.2d 904, holding that section 7031 precludes an unlicensed contractor and architect respectively from enforcing mechanics' liens.
The purported appeal from the order denying motion for new trial is dismissed, and the judgment is affirmed.
PETERS, P. J., and FRED B. WOOD, J., concur. --------------- * Opinion vacated 308 P.2d 713. 1 They also purport to appeal from the order denying motion for new trial. Such order is not appealable. 2 This contract evidently was performed by plaintiffs and all payments thereunder made by Ball Sons to plaintiff. It is not an issue in this case. 3 To distinguish the rental agreements from the subcontracts we hereafter refer to them as 'agreements.' 4 Were the agreements true rental agreements, plaintiff partnership would not be required to have a contractor's license.