Background

In October 2012, the Trump Village Cooperative Apartments in Brighton Beach in Brooklyn sustained damage as a result of Hurricane Sandy. Section 4 of the co-op suffered damage to the underground electrical distribution feeders, and in 2014 it entered into a series of contracts with Electrical Contracting Solutions to replace the damaged feeders. ECS’ Principal, Joseph Kashinsky held the required master electrician’s license, but such license was “parked” with Mr. Kashinsky’s other company, QNCC Electrical Contracting Corp. Mr. Kashinsky supervised all of the work performed at the project by ECS’s employees, but ECS remained unpaid after that work and filed a mechanic’s lien in the amount of $345,199.29 to secure its right to payment. ECS ultimately sued to foreclose the lien, and Section 4 asserted an affirmative defense that ECS was prohibited from seeking recovery because it did not have the requisite electrical contractor’s license.

The matter was tried in court without a jury, and the court found in favor of ECS and granted it a judgment (after interest) in the amount of $458,584.84. As to ECS’ lack of an electrical contractor’s license, the court found, such was an “insubstantial and nominal” breach as a licensed electrical contractor (Mr. Kashinsky) performed the work, and that the use of the different entity “relates more to the Kashinsky ongoing divorce proceedings rather than anything of relevance to this litigation.”

Section 4 took an appeal, arguing that the lack of an electrical contractor’s license was fatal to ECS’ claims, and it is barred from recovery on these claims by operation of Section 27-3017(a) of New York City’s Administrative Code. In opposition, ECS argued that QNCC’s status as a duly licensed subcontractor (where Mr. Kashinsky “parked” his license) could not salvage the claim because the contract was entered into with ECS, and not Mr. Kashinsky or QNCC.

Decision

The appellate court reversed the trial court’s judgment and dismissed the complaint in its entirety. In doing so, that court found that ECS’ lack of an electrical license was fatal to its claims because “the purpose of the regulatory scheme is to protect the public health and safety.” However, the case law cited was in the context of unlicensed subcontractors attempting to collect payment even though it performed its work for, and under the supervision of, a duly licensed upstream/general contractor. In such context, courts are uniform that unlicensed subcontractors cannot rely upon their upstream contractors’ licensure status to remedy their own failure to comply with the licensing mandates of Section 27-3017(a) (and similar ordinances of other municipalities). Here, the court failed to cite any case law for the converse proposition that an unlicensed upstream/general contractor cannot subcontract work to an appropriately licensed subcontractor.

Comment

Given the ostensible purposes of the trade contractor licensing statutes, it makes sense that an unlicensed subcontractor cannot use the upstream contractor’s own license to shield it from the prohibition against recovery for unlicensed work. In that regard, the cases cited by the appellate court stand for that exact proposition. However, that was not the situation here; the unlicensed contractor was the upstream/general contractor, who (granted, rather informally) subcontracted the work to a licensed entity (QNCC) under the supervision of a master electrician (Mr. Kashinsky). The case law cited does not serve as a prohibition against such an arrangement. In fact, carried to its logical conclusion, the holding of Electrical Contracting Solutions provides a general contractor cannot contract to undertake a scope of work that requires a license without having its own license for that trade—regardless if it subcontracts that work to a licensed subcontractor. Given the number of trade and similar licenses required (plumbers, electricians, mechanical contractors, asbestos abatement contractors, riggers, fire suppression contractors, elevator contractors, and sign contractors, just to name a few), there will be little work that the upstream/general contractor can either perform with its own forces or subcontract directly; such will have to be accomplished by having multiple prime contractors on a project managed by a construction manager as agent.

There is a saying in the legal profession that bad facts make bad law. It seems that the facts of the relationship between ECS, QNCC, and Mr. Kashinsky—and the informal subcontracting to get around divorce issues—may have been an application of this maxim in action. Accordingly, we do not necessarily agree with the appellate court’s holding, and will keep you advised of any changes in the case, statutory, or regulatory law resulting from the appellate court’s holding here. However, in the meantime, contractors would be well advised to make sure that any licensed work is directly undertaken by a licensed contractor (and the retention is formally documented with a subcontract, and not the type of alter-ego arrangement that was present here). Further, if you have any questions about how to tailor your business to operate in the context of the licensing regulations, a consultation with experienced construction counsel could prove helpful.

About the author: Thomas H. Welby, an attorney and licensed professional engineer, is General Counsel to the Construction Industry Council of Westchester & Hudson Valley, Inc., and the Building Contractors Association, and is the Founder of and Senior Counsel to the law firm of Welby, Brady & Greenblatt, LLP. Gregory J. Spaun is General Counsel to the Queens and Bronx Building Association and an attorney and a partner with the firm, co-authors this series with Mr. Welby.