By Richard A. Kaye, Partner, Barnes & Thornburg LLP

Many foreign industrial equipment manufacturers routinely sell their factory line equipment on a turnkey basis in the United States. In such an arrangement, the contract or invoice price includes the costs and expenses of installation at the factory site. From a U.S. immigration point of view, it is possible for a non-U.S. equipment manufacturer to send its employees to install equipment under the B-1 Visa category (whether a third-party installer may use the B-1 category is another story outside the scope of this article). Unfortunately, many non-U.S. equipment manufacturers fail to research the individual state laws and regulations governing their installation activities.

Many states (approximately 20) have their own unique set of laws regulating the activities of general and specialty contactors that may govern the installation of an industrial manufacturing line or fixed industrial equipment. Some states, such as California and Alabama, are highly regulated, while others, such as Kansas and Illinois, may have no specific regulations regarding building general contractors. The fact that the company may be the manufacturer of the equipment does not confer any exception or exemption from the enforcement of state contractor regulations. In some jurisdictions, an unlicensed equipment manufacturer that includes installation in its contract may, by virtue of bidding on or entering into the installation contract itself, violates state law. The contractual commitment to install the equipment itself in such a jurisdiction requires the manufacturer to hold a building contractor’s license in that state. Sellers should make it a best practice to review the laws of each state where an installation will occur.

In some jurisdictions, a turnkey equipment manufacturer would not be able to sue its customer for nonpayment in that state if it was not properly licensed at all times during the performance of the installation, or worse, be required to pay its customer back for any amounts it received as an unlicensed contactor during the installation process.

To illustrate these points, let’s examine California’s Contractor State License Law. Let’s assume that a foreign equipment manufacturer sells a turnkey widget factory line to a California company. The price includes the cost of the equipment and installation at the customer’s site. The line will be delivered to the customer’s factory in California and assembled, bolted and wired, and production tested for a fixed price. The manufacturer sends its installment team to California to unpack the crates, move the equipment in place, bolt the equipment to the floor and coordinate the electrical and exhaust hookups.

California law provides that all businesses that construct or alter, or offer to construct or alter, any building must be licensed by the California Contractors State License Board (CSLB). Section 7026 of the California Business and Professional Code (CBPC) provides in pertinent part as follows:

“Contractor,” for the purposes of this chapter, is synonymous with “builder” and, within the meaning of this chapter, a contractor is any person who undertakes to or offers to undertake to, or purports to have the capacity to undertake to, or submits a bid to, or does himself or herself or by or through others, construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building, … or other structure, project, development or improvement, or to do any part thereof, including the erection of scaffolding or other structures or works in connection therewith, or the cleaning of grounds or structures in connection therewith, … and whether or not the performance of work herein described involves the addition to, or fabrication into, any structure, project, development or improvement herein described of any material or article of merchandise. “Contractor” includes subcontractor and specialty contractor.

Contactors must even be licensed before submitting bids. So, if an equipment manufacturer offers installation of its products at a California facility involving the bolting of the equipment to the floor (or the offer is turnkey), it must FIRST be licensed as a contractor by the CSLB. If the equipment manufacturer does not hold a California contractor’s license at the time of entering into the contact, it may be in violation of California law, even if the actual installation may be performed by a third-party. As such, an unlicensed equipment manufacturer who includes installation in California in its total price may be guilty of a misdemeanor.

In this regard, Section 7028 of the CBPC provides in pertinent part that “… it is a misdemeanor for a person to engage in the business of, or act in the capacity of, a contractor within this state [if] (1) The person is not licensed in accordance with this chapter.” A conviction for a first offense is punishable by a fine not exceeding five thousand dollars ($5,000) or by imprisonment in a county jail not exceeding six months, or by both that fine and imprisonment.

One of the most punitive aspects of a failure to be licensed in California is that the manufacturer would not be able to sue its customer for nonpayment. Section 7031 of the CBPC provides that “no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract” where a contractor’s license is required.

And, further, a customer can sue the equipment manufacturer for reimbursement of all compensation paid to it by the customer, even if the project was successfully completed. Section 7031 further provides that a customer who utilizes the services of an unlicensed contractor may bring an action in any court in California to recover all compensation paid to the unlicensed contractor for performance of any act or contract. See the case of Twenty-Nine Palms Enterprises Corp. v. Bardos (2012), where the customer paid the unlicensed contractor $751,995, who then, only because it was unlicensed when it performed the work, was ordered by the court to repay the funds.

It is imperative that any equipment manufacturer installing its equipment in California (or any state with similar regulations) be properly licensed prior to bidding for the project, signing any contract for supply and installation or performing the installation itself.

What does licensure require? That differs from state to state and a prudent approach would be for the equipment manufacturer to inquire first with each state licensing board before bidding on or entering into a turnkey contract for the sale and installation of industrial line equipment.

Rich Kaye is a partner in the Atlanta office of Barnes & Thornburg LLP and is a member of the Corporate Department. He focuses on domestic and cross-border transactions, entity structuring, investments; complex commercial contracts; real estate; manufacturing, franchising; agency and distribution agreements.

This article should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.