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Although oral contracts for construction or renovation of residential home improvement projects may be voidable pursuant a California statute, they are not automatically void, and in fact a homeowner must demonstrate that the contractor is not entitled to have the contract enforced under one of the exceptions to the draconian impact of the statute.  Where a homeowner undertook a remodeling project for almost $1 million and was well educated, sophisticated, and had the benefit of an architect to design the project and process payment requests to the contractor, the trial court and appellate court found an oral contract to be enforceable and that the contractor was also entitled to recover the $200,000 in attorneys fees it incurred in recovering $200,000 in unpaid construction billings.

In Hinerfeld-Ward, Inc. v. Lipian, 188 Cal. Appl4th 86 (2010), the homeowner retained an architect to design renovations of a home and then retained a general contractor that left the job due to allegedly excessive design changes, and was replaced by another contractor with whom the owner never entered into a written contract.  Over the course of two years of construction, the contractor submitted and was paid on 19 payment applications.  Payment application number 20 was paid in part but then the contractor was terminated leaving an unpaid balance of about $200,000.  The contractor sued the owner for breach of oral contract, quantum meruit, and wrongful withholding of progress payments (this last of which would entitle the contractor to a penalty (including attorneys fees) from the homeowner.

The homeowner counter-sued for breach of contract, negligence, fraud, negligent misrepresentation, recovery on a bond, and sought a declaratory judgment that the oral construction contract was void.  A jury returned a verdict for the contractor – finding it had substantially complied with the terms of the oral contract.  The jury found that the homeowner breached the oral contract and awarded damages to the contractor for $202,181, plus granted an award on the theories of quantum meruit and foreclosure on the mechanics liens in the amount of $820.  The trial court entered judgment (but not in that full amount) together with attorneys fees of $200,000 and a penalty of a monthly two percent charge on amounts wrongfully withheld from payment.

On appeal, homeowner argued that the trial court erred in enforcing the oral home improvement contract because the Business and Professional Code of California required such contracts to be in writing.  Indeed, the statute applies to “ ‘home improvement contracts’ between a contractor and an ‘owner or tenant’ for ‘work upon a building or structure for proposed repairing [or] remodeling’ where the aggregate contract price exceeds $500.”   This rule, however, had previously been held by the California Supreme Court to be flexible and that a wide range of exceptions to enforcing it must be recognized. (Asdourain v. Araj (38 Cal. 3d 276).  Oral contracts are, therefore not void—they are merely voidable.   In the Asdourain case the supreme court held the oral contracts at issue were enforceable “because as real estate investors, the owners were not within the class of unsophisticated consumers the statute was designed to protect.”  The Supreme Court concluded that in this context, “the misdemeanor penalties provided in section 7159 were sufficient and that the policy underlying the statute would not be defeated if the contractor was allowed to recover for work performed.”

In the case at bar, the homeowner argued that the trial court should not have required them to prove that the Asdourain exception did not apply but instead should have put the burden of proof on the contractor.  In rejecting the owner’s argument, the court stated that the party (here the owner) that advances an affirmative defense to the plaintiff’s claims bears the burden of proof on the defense.”  The court considered the experience of the homeowner here and concluded they had some experience with contracts, and had some relevant training and experience.  They also had the benefit of an architect managing the project.  It also bothered the court that the owner would be unjustly enriched if the contractor were not allowed to recover.

For these reasons, the court concluded that they were the type of homeowners that fall within the meaning of the applicable code section, and stated “We agree with the trial court that this is a compelling case warranting enforcement of the oral home improvement contract….”  In reaching its decision to also award an interest penalty and attorneys fees to the contractor as a prevailing party, the court considered the legislative history of the statute and found that it would not be appropriate to merely look at the “natural meaning” found on the face of the statute, but that instead “resort to the legislative history is necessary in order to determine whether the Legislature intended attorneys fees to be available….”  The court held that the Legislature intended both the monthly two percent change and reasonable attorneys fees to be available to a party prevailing on an action under the statute to recover unpaid construction costs.

Comment: This is an interesting case in that it enforces a contract despite a state statute that requires as a general matter that home improvement contracts be in writing.  What saved this contractor was the fact that it was dealing with a sophisticated homeowner that the court felt did not need the protection that the statute was intended to afford to less sophisticated homeowners.  The court makes an important distinction between a contract that is void versus one that is voidable.  If the statute had rendered the contract void, the court could have done nothing by way of interpreting the legislation and the equities at issue to find that it could nevertheless be enforced for the benefit of the contractor.  Being a “voidable” contract means the court could consider the types of matters that it did to decide whether to void out the oral contract or not.   It could go either way – depending upon the subjective judgment of a court.  In this case, the factors lined up in favor of the contractor.

As a risk management comment, it is preferable to get a contract in writing even if there is no statute requiring a written instrument.  Among the benefits of a written agreement are the fact that the scope of service and the payment terms can be well defined so as to avoid uncertainty, ambiguity and later disagreements over what was intended.