Construction Managers And Contractors: Improve Your Mergers & Acquisition And Dissolution Checklists To Avoid Expired License Exposure—And Worse

In Brief

Dissolving a newly acquired or existing affiliate of a construction or construction management firm can have adverse unintended legal consequences when the dissolved affiliate holds executory contracts and the related entity that takes over the performance of the contracts lacks the requisite professional licenses, or any required consents to assignment are not obtained. Both in-house and outside counsel can help clients avoid this risk, the reality of which is underscored by a recent California appellate decision, by expanding dissolution checklists as suggested by this Commentary.

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The construction industry is continuing to ride a more than decade-long wave of consolidation among contractors, design professionals, and construction management firms. When companies are acquired, it is common for the corporate family to be reorganized for marketing and client service reasons. This often entails consolidation and dissolution of affiliates into an existing or newly formed affiliate. But dissolving a construction firm that holds executory contracts that are to be completed by another member of the corporate family carries with it some significant risks in the event that the affiliate to which the contacts are to be assigned lacks the requisite professional licenses—risks that can be avoided with proper planning.

Under licensing laws of many states, a construction contractor who lacks the requisite professional license at any point during the performance of a contract may not bring an action to recover on a contract, and in California an owner actually may seek disgorgement of all amounts paid even in the absence of actual damages.1 In the context of dissolving an existing construction affiliate as part of a reorganization, innocent administrative mistakes that happen more often than they should can trigger exposure under licensing laws. The new entity to which the dissolved company's contracts are assigned may lack the proper professional licenses, creating the potential exposure that any unlicensed contractor faces (i.e., inability to bring an action to seek payment, the risk of an action by the owner seeking recoupment of all amounts paid under the contract, and/or other civil, administrative, and even criminal consequences).2 When the original party to the contracts is dissolved, that entity no longer exists and the license of the dissolved entity may have expired,3 all of which makes reversing the situation problematic. Lastly, the failure to obtain a written consent to assignment and to properly effectuate the assignment may add additional legal exposure, given that many contracts contain restrictions on assignment.

These issues are highlighted in the recent case of Judicial Council of California v. Jacobs Facilities, Inc., 239 Cal. App. 4th 882 (2015), a case that illustrates how California courts continue to take a hard line where the contractor or construction management firm has acted in good faith and a technical licensing violation did not cause any harm or damage to the owner. Fortunately, this type of legal risk can be minimized by expanding the due diligence checklists for dissolution as set forth in this Commentary.

Background of the Dispute in JCC v. Jacobs Facilities

The Judicial Council of California, Administrative Office of the Courts ("JCC"), entered into a contract with Jacobs Facilities ("Facilities"), a wholly owned subsidiary of Jacobs Engineering Group, Inc. ("JEG").4 The facilities maintenance and repair agreement required a license under California's Contractors' State License Law ("Licensing Law"),5 and Facilities was properly licensed when it commenced the work. As part of a subsequent corporate reorganization, parent company JEG dissolved Facilities and initially transferred the employees to JEG and then to another recently formed subsidiary, Jacobs Project Management ("Management"), with these employees continually performing the...