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In a curious decision issued in December 2004, the Idaho Supreme Court in Quality Interiors v Pacific West Construction, Inc., held that Quality Interiors was to be paid for work it had performed on the Bannock Regional Medical Center project. The project required a public works license, even though Quality Interiors had neither the required public works license nor a signed contract from Pacific West Construction, Inc. The decision should be carefully considered by both contractors and subcontractors regarding public works contracts.

PacWest was the general contractor on a public works project and had used a bid from Quality, which indicated the bid covered work described in two sections, Sections 09260 and 09511. PacWest maintained that the work under a third section, Section 09111, was part of Quality’s bid and sent a proposed unsigned subcontract to Quality Interiors. At a later date, Quality signed the subcontract but did not return it to PacWest.

Quality commenced work on February 1, and sometime prior to March 8 the parties debated whether Section 09111 was included. No agreement was reached. On March 8, PacWest learned that Quality had no public works license and indicated that Quality could continue work “as PacWest employees.” The following week, a dispute arose again over Section 09111 and Quality ceased working on the project with approximately two weeks left to completion of its work.

Two points of the Supreme Court’s decision are noteworthy. First, it easily decided that a contract had been formed, even though the parties had neither signed a written contract nor agreed as to whether Section 09111 was included. Second, the Court found a way to require payment to Quality even though it determined the contract was “illegal and void.”

On the first issue, the Court followed existing Idaho law holding that a contract is formed when a subcontractor starts work with the general contractor’s approval, even though a written contract is contemplated by the parties but not signed.

The unusual feature of the case is the Court’s treatment of the illegality of the “contract.” The issue was not raised by either party and, therefore, not considered by the trial court. Idaho Code § 54 1901 requires every contractor or subcontractor performing work on a state or local government-owned project have a public works construction license. Idaho Code § 54 1902 makes it unlawful to perform such work without a public works license. Therefore, the Court ruled that the “contract” constituted an agreement to perform an illegal act, was void, and could not be enforced by the Court.

The Court then reasoned that it would be a harsh result to let PacWest receive the benefit of Quality’s work, including payment by the Hospital for such work, even though the contract was illegal. It allowed Quality to recover under what it termed “an unjust enrichment theory,” which would limit Quality to recovering an amount necessary to put it in the position it was in before it performed the work. The Court held that that recovery would include the value of the work performed and, apparently, could include other costs incurred by Quality, but could not include an element of profit related to work on the project.

Contractors and subcontractors should carefully consider the first issue on all projects. Once more the Supreme Court has ruled that it is quite easy for a contractor and subcontractor to reach an agreement with no clear mutual understanding as to the nature, scope or price of the work to be performed, and with no written contract in place. It is fairly clear that if a subcontractor starts work with the consent of the general contractor, some kind of contract exists, even though its terms may only be decided by a court at the end of an expensive lawsuit.

The Court’s decision on the second issue is also instructive. In Idaho, a contractor’s license is only required to perform work on a public works project (work performed for the State, county, city, school districts and other governmental units created by the State). A license is required for all subcontractors, even though the general contractor on a public works bid is only required to list the name and license of the subcontractors performing electrical and mechanical work. Consequently, a subcontractor submitting a bid for a project for which he is not licensed (including a contract with a price which exceeds his class of license) is at risk that at least part of his payment will be denied by the general contractor, even if the general contractor accepts the bid knowing that the subcontractor is unlicensed.

There is a second and greater danger for both parties. In its decision, the Supreme Court specifically indicated that its decision did not apply to a situation where the governmental unit refused to pay based upon the illegal conduct of the general contractor and an unlicensed subcontractor in performing work on the project. There is a significant risk that the State may be allowed to refuse to pay the general contractor either in full or for the value of the work performed by the unlicensed subcontractor.

It is critical that all subcontractors are properly licensed on public works projects.