WOOD BROS. HOMES, INC. v. WALKER ADJ. BUREAU

HODGES, Chief Justice.

Plaintiff-respondent, Walker Adjustment Bureau (Walker), brought suit in Colorado against defendant-petitioner, Wood Bros. Homes, Inc. (Wood), to recover on a contract between Walker's assignor, Fred Gagnon, and Wood. The trial court granted Wood's motion for summary judgment, ruling that under Colorado choice of law rules New Mexico law applied, and barred the action. In Walker Adjustment Bureau v. Wood Bros. Homes, Inc., 41 Colo.App. 26, 582 P.2d 1059 (1978) the court of appeals reversed the trial court's judgment, holding that under the traditional conflict of law rules or the Restatement (Second) of Conflict of Laws (Restatement (Second)) the law of Colorado applied and the contract was enforceable. We granted certiorari and now reverse the judgment of the court of appeals.

Fred Gagnon, a resident of California, contracted with Wood, a Delaware corporation having its principal place of business in Colorado, to perform rough carpentry work on a Wood's apartment complex in Albuquerque, New Mexico. Contract negotiations took place in California, Colorado, and New Mexico. Gagnon commenced work on the project before August 22, 1972, the date the contract was signed in Colorado.

Shortly after Gagnon commenced work, New Mexico officials ordered construction halted because he had not obtained a New Mexico contractor's license. The New Mexico Construction Industries Licensing Act prohibits any person from engaging in the business of a contractor without first obtaining a license from the appropriate state commission. N.M.Stat.Ann. sections 67-35-1 et seq. (now section 60-13-1 et seq.). Wood promptly cancelled Gagnon's contract and refused to pay him, although Wood did pay approximately $27,000 to employees of Gagnon for the work they had completed. Walker, as Gagnon's assignee, then brought suit in Colorado seeking recovery against Wood on either a contract or quantum meruit theory.

I.

The first issue is whether an unlicensed New Mexico contractor can recover either damages for breach of a construction contract to be performed in New Mexico or in quantum meruit for the value of services performed. Application of Colorado law would result in Wood being liable as there is no impediment to enforceability of the contract. Applying New Mexico law, however, the converse is true. N.M.Stat.Ann. section 67-35-33 (now section 60-13-30) provides:

It is thus necessary to determine which law applies to resolve this issue.2

Under the traditional conflict of laws rule for contract actions, the law of the place of execution governs questions regarding the formation of the contract, while the law of the place of performance governs issues relating to the performance of the contract. Western Enterprises, Inc. v. Robo, 28 Colo. App. 157, 470 P.2d 931 (1970); Cockburn v. Kinsley, 25 Colo.App. 89, 135 P. 1112 (1913). This rule, however, has frequently proven unduly inflexible, leading to harsh and unjust results. Courts have often been forced to employ a multitude of escape devices to reach an equitable result. Therefore the traditional choice of law rules no longer provide the predictability and uniformity which were considered their primary virtues. See First National Bank v. Rostek, 182 Colo. 437, 514 P.2d 314 (1973).

In adopting the Restatement (Second) approach for tort actions, this court recognized the shortcomings of the traditional conflict of laws rule and the benefits of the most significant relationship approach of the Restatement (Second). Dworak v. Olson Construction Co., 191 Colo. 161, 551 P.2d 198 (1976); First National Bank v. Rostek, supra. For the same reasons enunciated in Rostek we now adopt the Restatement (Second) approach for contract actions.

Where a conflict of laws question is raised, the objective of the Restatement (Second) is to locate the state having the "most significant relationship" to the particular issue. In analyzing which state has the most significant relationship, the principles set forth in Restatement (Second) sections 63 and 1884 are to be taken into account. Once the state having the most significant relationship is identified, the law of that state is then applied to resolve the particular issue.

In addition to the general principles set forth in sections 6 and 188, several sections of Chapter 8 (Contracts) of the Restatement (Second) apply to specific types of contracts. Section 196 applies to contracts for the rendition of services. It provides:

The effect of section 196 is to create a presumption that the state where services are to be performed is the state having the most significant relationship to the issue of the validity of the contract. The presumption is not conclusive. If another state has a more significant relationship, then the law of that state will be applied.

The court of appeals held that under the Restatement (Second) Colorado would be the state having the most significant relationship because of the "rule of validation." We disagree.

Colorado's interest in the validation of agreements and protection of the parties' expectations is a central policy underlying the law of contracts. See Restatement (Second) section 6, comment (2)(h) (1971). While this interest is strong, it does not necessarily supersede all others.

The New Mexico Construction Industries Licensing Act provides a comprehensive and mandatory system of licensing for persons engaged in construction work in New Mexico. The act is designed to protect New Mexico citizens against "substandard or hazardous construction . . . and by providing protection against the fiscal irresponsibility of persons engaged in construction occupations or trades. . . ." N.M. Stat.Ann. section 67-35-4 (now section 60-13-4) Potential contractors must present evidence of financial responsibility, demonstrate a familiarity with building regulations, submit proof of registration with the tax office, pass an examination, and must not have engaged illegally in the contracting business in New Mexico within the past year. Those who build without a license are subject to a criminal sanction and are expressly barred from obtaining judicial enforcement of their contract or from recovery for the value of services performed.

In this situation the value of protecting the parties' contractual expectations is outweighed by New Mexico's interest in applying its invalidating rule. A fortiori, the presumption of section 196 that New Mexico law applies has not been rebutted. The law of New Mexico applies to resolve this issue, and as discussed above, the action is consequently barred. This conclusion is in accord with Restatement (Second) section 202(2) (1971) which provides: "When performance is illegal in the place of performance, the contract will usually be denied enforcement."

II.

The second issue before us is whether Wood should be estopped from asserting that Gagnon was an unlicensed contractor in New Mexico. The court of appeals determined that under Colorado law Wood was estopped because it knew Gagnon did not have a New Mexico contractor's license and had indicated to Gagnon that he could work under its general contractor's license.

Assuming arguendo that Colorado has an interest in the resolution of this issue and that a conflict exists between the results of applying Colorado and New Mexico law, the state having the most significant relationship to resolution of this issue must be located. For the reasons set forth above, New Mexico's interest clearly preponderates, and therefore is the state having the most significant relationship to this issue.

Since under New Mexico law estoppel cannot be founded on an illegal contract, a defendant cannot be estopped from asserting a plaintiff's nonconformance with the licensing requirement of the New Mexico Construction Industries Licensing Act. Kaiser v. Thompson, 55 N.M. 270, 232 P.2d 142 (1951). Therefore Wood cannot be estopped from asserting Gagnon's failure to have a New Mexico contractor's license.

Accordingly, the judgment of the court of appeals is reversed.