Maryland Court of Special Appeals Holds that Contractor's "Substantial Compliance" with Licensing Statute Suffices

Although the general rule in many jurisdictions, including Maryland, California, Florida, Virginia, and Arizona, is that an unlicensed contractor cannot sue to enforce a construction contract, our firm has previously written about certain exceptions to that rule for federal contractors (click here).  This month, the Court of Special Appeals of Maryland addressed another exception to the general rule – substantial compliance with the licensure statute.

In Glen Valley Builders, LLC v. Whang, No. 1141, 2015 WL 58117349 (October 6, 2015), the Whangs hired a general contractor, Glen Valley Builders, LLC (“Glen Valley”), to construct an addition on their home in Potomac, Maryland for the sum of $3.5 million. Although Glen Valley never obtained the requisite state or local licenses for residential construction, its sole principal, Mr. Friedman, had obtained a Montgomery County license and also personally guaranteed performance of the contract. When disputes arose between the parties, and Glen Valley filed suit to collect payment in the Montgomery County Circuit Court, the Whangs moved for summary judgment on the grounds that Glen Valley’s lack of licensure barred its enforcement of the contract. The circuit court agreed, granting summary judgment against Glen Valley, on the primary basis that Glen Valley had made no attempt – before or after performance of the contract – to obtain the requisite licenses. Thereafter, Glen Valley appealed the case to the Maryland Court of Special Appeals on its defense that it had substantially complied with the licensure statute. 

On appeal, the Court stated that the focus of the “substantial compliance” test was on the following factors: 1) whether the contractor had a license at the time of executing the contract or obtained a license prior to performing the contract; 2) whether the purpose of the licensing law - to protect home owners from unskilled, financially unstable contractors and provide administrative remedies – was fulfilled; and 3) whether the consumer was prejudiced by the contractor’s failure to strictly adhere to the licensure statute.

Although Glen Valley had never attempted to obtain any license, and thus failed to satisfy the first factor of the substantial compliance test, the Court held that this failure did not preclude application of the test if the remaining two prongs were satisfied. With regards to the second factor, the Court held that Glen Valley had submitted ample evidence in opposition to summary judgment that Mr. Friedman had the requisite skill to perform residential construction; likewise, Glen Valley submitted evidence that it and Mr. Friedman were financially sound. Glen Valley also demonstrated that the Whangs may have been able to pursue administrative remedies against Mr. Friedman as the holder of a county license. On the third factor, the Court held that the issue of prejudice was for the fact-finder to determine in the event that Glen Valley was actually insolvent. In analyzing all of these factors, the Court found that the key fact saving Glen Valley from an inability to enforce the contract was that the sole principal held at least one valid construction license. Therefore, because there was evidence to satisfy two of the three factors, the Court remanded the case, holding that the Montgomery County Circuit Court erred in granting summary judgment.

The decision in Glen Valley by the Maryland Court of Special Appeals confirms that there is no bright-line test in Maryland to determine whether or not the court will apply the general bar to an unlicensed contractor. Whether a contractor failed, in good faith, to obtain the required license is a question of fact that probably cannot be determined short of trial. Across the Potomac River, Virginia applies a similar “good faith” exception, codified at Va. Code § 54.1-1115, which similarly provides an exception for an unlicensed contractor to pursue enforcement of its contract through an amorphous test that defies certainty in applicability. Despite these favorable tests for contractors, for certainty’s sake, contractors must make certain that they have the proper licensure for the given contract and jurisdiction before construction commences. Likewise, owners are advised to perform their own investigation into whether the proper licensure has been obtained by their contractor, as the lack of licensure may, at the end of the day, provide no defense to payment.  

Categories: Legal Updates