Bad Contract, Good Result

Frank Salame owns a home in Pomona, California. Eleven months out of the year, Frank works in Lebanon as an engineer on building projects. When no one is home in Pomona, Frank has a friend, Antoinette Auon, look after his house.

While Frank was in Lebanon, neighbors noticed a liquid leaking from under the garage door. Turns out, a water filter under the kitchen sink had sprung a leak. By the time Frank got word of what had happened, water had seeped into kitchen cabinets, flooring, down walls and into the ceiling of the garage below. Mold was blooming everywhere.

Because he was in Lebanon, Frank asked his friend, Antoinette, to "take care of" the problem. She did, signing contracts with Star Restoration to put Frank’s home back in livable condition.

Star Restoration got to work. A plumber removed the leaking water filter. A mold expert assessed what had to go. When contaminated materials had been removed, restoration started: framing, sheetrock, plaster, painting, tile floor in the kitchen, kitchen cabinets, new countertop and sink.

Meanwhile, Frank filed a claim with his insurance carrier, giving Antoinette "full power of attorney to handle" his claim. Frank collected $28,000 from the insurance company. But when Star Restoration sent their invoice for $42,360, Frank refused to pay. Instead, he offered to settle for $28,000. Star refused the offer and filed suit.

You decide. Did Frank owe the full $42,360?

At trial, Star Restoration had some problems.

Frank Never Signed the Contract

But the court decided Antoinette was acting as Frank’s agent when she signed. Remember that Frank had given Antoinette “full power of attorney” to handle his claim with the insurance carrier. Plus, at one point, Frank gave Star instructions to "finish the job". The court concluded Antoinette had signed with Frank’s consent.

The Star Restoration Contract Was Lame

To be valid, California home improvement contracts need 18 distinct notices and disclosures: start date, end date, the contract price in dollars and cents, a description of the work and so on. Star Restoration’s contract had none of that. Contracts that don’t comply with state law are presumed void. That’s true anywhere you do business.

If the contract was void, Frank owed Star Renovation nothing.

The court had a different view. Where the contract is not otherwise illegal, courts can enforce a bad contract if:

(1) the owner is not in the class the statute was enacted to protect, and

(2) the owner would be unjustly enriched if the contract were voided.

Here, both (1) and (2) apply. Frank is an engineer with years of construction experience, not an unsophisticated consumer likely to be swindled. Second, Frank would be unjustly enriched if he kept the $28,000 and got his home renovated at zero cost.

But Star Restoration’s contract wasn’t a complete bust. The agreement gave Star 1.5% per month interest on any unpaid balance plus attorney fees if suit was necessary to collect.

The trial court entered judgment for Star totaling $212,504.09: $35,360.62 in damages, $36,375.91 in prejudgment interest, $5,926.49 in costs and $132,290 in attorney fees. Last month, an appellate court affirmed the trial court judgment.

Star Restoration also got a warning from the state license board: From now on, use only contracts that comply with state law. The best way to do that is with Construction Contract Writer. The trial version is free.

Making a Mountain Out of a Molehill

Most of my blog posts are about missed opportunities -- how a good contract could have avoided a costly mistake. But occasionally, a contractor does it right – and saves thousands. Consider a case decided last week by a Ventura, CA court. Plyley v. Renovating Specialist, Inc. (RSI). Here’s a summary.

The job was simple. Replace two oak doors with two sliding glass doors. Plyley agreed to pay $3,885. RSI wrote the contract, got it signed and did the work. The new doors passed inspection. Plyley rated the work as “Excellent” on RSI’s job completion certificate. But satisfaction didn’t last. A dispute followed. Eventually, Plyley filed a 42-page complaint, insisting the new doors didn’t meet contract specs and didn’t comply with the building code.

Essence of the dispute was height of the door sill. The sill on the old doors was nearly flush with the interior floor level. The new doors slid in the old frame, making the height of the new sill almost two inches above the interior floor level. Even worse, the drop from the new sill to the exterior patio was now 9 inches. The building code limits step height to 7-3/4 inches.

Sliding a replacement door into an existing frame is called retrofit construction. As anyone doing window and door replacement knows, there’s another choice. Remove and replace the entire frame: demo existing siding around the door perimeter, remove the old sill and frame, install a new door and frame, waterproof the opening and restore the siding. That’s like new construction. It’s also more work and more expense. But doing it that way would leave the height of the new door sill nearly the same as the old sill.

When Plyley sued, RSI was forced to defend both their work and their contract. The trial ran for 6 days. The trial court found no problem with either RSI’s work or their contract, awarding RSI costs of $1,223 plus $95,531 in attorney fees. Plyley appealed. Key points in that appeal: 

1. The contract violated California Business and Professions Code § 7159 which requires written contracts and written change orders.
   The appellate court found no violation of § 7159 in the RSI contract. A contract doesn’t have to list all job specs.
2. RSI had agreed to perform new construction, not retrofit construction.
   The appellate court allowed RSI’s salesman to testify about what he told Plyley. Retrofit replacement and new construction are different. In retrofit, the sill was going to be higher. Plyley insisted on retrofit.
3. The contract was unconscionable, allowing RSI to install the unsafe doors in violation of the building code.
   The appellate court didn’t agree. “Appellant cites no authority to the effect that building codes are implied terms of all home improvement contracts and that the contractor must comply with them at his own expense despite the homeowner's insistence that he not comply.”
4. RSI violated Business and Professions Code §7160. Their contract included 'false or fraudulent representation or false statements knowingly made'.
   The trial court found no false or misleading statements in the contract. The appellate court agreed.
5. Because RSI’s contract required the losing party to pay attorney fees of the winning party, the appellate court affirmed an award of $95,531 to RSI.

The appellate court’s conclusion: Plyley's complaint was “making a mountain out of a molehill”. Chalk one up for good contracts.

If you want to draft nothing but good contracts, regardless of the type of project or the state where you work, have a look at Construction Contract Writer. The trial version is free.

Home Improvement California Style

Anna-Becky Redlich needed some work done on the bedroom, sitting room, closet and bathroom of her Hillsborough, California home. Nothing structural. The only changes would be cosmetic. Reliance Management Group offered to do the work on a cost-plus basis. The estimated initial contract price was $250,000. The down payment would be $1,000 plus a "retainer" of 10%.

If you’ve done any home improvement work in California, you probably see a problem already. California home improvement contracts have to show the cost of work in dollars and cents. Cost-plus-fee (time and material) contracts for home improvement work are legal only if there’s a guaranteed maximum price (GMP). OK. Reliance had that covered. As recited in the contract, the GMP was $5 million.

Second problem: The 10% “retainer” came to $25,000. California limits initial payments to $1,000.

These issues aside, Anna-Becky signed the contract. During construction, six written change orders added $160,000 to the job. Eventually, work was completed to Anna-Becky’s satisfaction -- at a total cost of $459,000. If that seems a little high for a bathroom remodel, there’s something else to understand about this job.

Reliance’s manager on the Redlich job was Paul Burton. According to Judge Banke, Burton and Anna-Becky “became personally and romantically involved”. Another issue: According to Judge Banke, Burton was taking large cash kickbacks from subs, rigging the bidding process to favor specific contractors.

In the end, Anna-Becky wasn’t happy. She wanted her money back, $459,000 to be exact. To drive the point home, Anna-Becky’s legal counsel pulled out all the stops.

1. The contract was void.
2. Reliance didn’t have worker's compensation coverage.
3. Reliance didn’t have a "responsible managing employee or officer" on the job.

In short, Anna-Becky was entitled to a refund.

At Trial

The court disposed of the second and third points with little effort. Facts simply didn’t support either claim. The first point presented a more difficult issue for the court. True, Anna-Becky’s contract was "void, and unenforceable." Did that entitle her to recover the full amount paid without any offset for the value of work done?

In the court’s words, “the public importance of discouraging prohibited transactions outweighs equitable considerations of possible injustice between the parties”. In other words, contractors who draft bad agreements are on their own. But the court refused to order a full refund, awarding Anna-Becky only $40,689.68, including $25,000 for the overcharge on initial payment. Redlich v. Reliance Mgmt. Grp. (June 9, 2021).

Take-away from this case: Write a bad contract and you’re on your own. Don’t expect any help enforcing a bum contract if the job turns bad. Apparently, Reliance learned their lesson. Counsel for Reliance stipulated their client would never again use the Redlich contract form.

Word to the Wise

All residential contracts have to meet standards set by state and federal law. It’s easy to draft a perfectly legal construction contract in any state and for nearly any job. Get Construction Contract Writer. The trial version is free.

 

Construction Contract Law Gibberish

The law in most states puts residential contractors at a disadvantage. Omit a required notice or disclosure and your contract is probably unenforceable (at best) and could earn you a fine (or worse). That’s called consumer protection law. No use complaining. It’s not going away.

To help protect consumers, several states require that contracts be written in plain English. Among these, my favorite is Connecticut’s objective test of understandability. By law, every consumer contract in Connecticut:

(1) Has to average less than twenty-two words per sentence.

(2) Can’t have any sentence with more than fifty words.
(3) Can’t average more than seventy-five words per paragraph.
(4) Can’t average more than 1.55 syllables per word.
 

OK. So if construction contracts have to be easy to understand, shouldn’t construction contract law also be easy to understand? That makes perfect sense to me. It’s a two-way street. Contractors shouldn’t have to guess at what the law requires. Lawyers shouldn’t have to apologize to clients about gibberish in the law. If a legislature really wants contractors to comply with the law, shouldn’t they make the law easy to understand?

Case In Point

Last week a California contractor asked me a simple question: “Nearly all my jobs are for home owner associations. Do my agreements with HOAs have to include all the notices and disclosures required in California home improvement contracts?”
 

That’s easy, I thought. A HOA isn’t a consumer in the classic sense. Consumer protection law shouldn’t apply. But just to be sure, I looked up the law before answering. Here’s what I found.

 

California Business and Professions Code § 7159 prescribes the 18 notices and disclosures required in home improvement contracts. But § 7159 refers to § 7151.2 for the definition of “home improvement contract:”

 

"Home improvement contract" means an agreement, whether oral or written, or contained in one or more documents, between a contractor and an owner or between a contractor and a tenant, regardless of the number of residence or dwelling units contained in the building in which the tenant resides, if the work is to be performed in, to, or upon the residence or dwelling unit of the tenant, for the performance of a home improvement as defined in California Business & Professions Code § 7151, and includes all labor, services, and materials to be furnished and performed thereunder.”

 

Read those words any way you want. I don’t believe they answer the contractor’s question, “Is an agreement with a HOA a home improvement contract?” No California court has interpreted § 7151.2 and nothing on the State License Board web site helps define “home improvement contract”. So we’re left to guess.

 

Here’s my best guess. Insert the words “of the owner” after “upon the residence.” That would make it clear. It’s home improvement only if work is done on the residence of the owner. That makes sense. Consumer protection law protects consumers, not a business entity such as a HOA. As amended, work done for a HOA would not be home improvement.

 

Here’s My Point

As written, § 7151.2 doesn’t answer a simple question. That’s bad. Even worse, California § 7151.2 is far from plain English, at least as Connecticut sees it. No sentence can have more than 50 words. Section 7151.2 weighs in at 95.
 

My recommendation: If you want to comply with state law but aren’t eager to parse the fine points, rely on Construction Contract Writer to keep you legal. The trial version is free.

California Business and Professions Code § 7159

If you're a licensed contractor in California, you probably know all about Cal B&P 7159. It's caused more than a little grief for more than a few California contractors, some of them now former California contractors. Cal B&P 7159 is Sacramento's effort to rewrite every contract for home improvement, remodeling and repair work throughout the state – adding about eight pages to even the shortest agreement.

If there was an award for legislative ineptitude, California would be among the prime contenders. Their $billion budget deficits put California in a class by itself. But this legislature that can't shoot straight has no trouble targeting home improvement contractors. Cal B&P 7159 is the result.

A California contractor put it to me this way: "I'm a contractor. I'm not a lawyer. I shouldn't have to hire a lawyer before taking on a kitchen or bath job. I value my reputation as a builder and have nothing but satisfied clients. That's the best any contractor can do. But those guys at the state license board are looking for a way to pull my ticket. Until that happens, I'm going to go on doing business on a handshake – and keep my fingers crossed."

I can empathize – on two grounds. First, nothing the California legislature has done will add to the list of good, reputable, honest home improvement contractors. Second, I'm a California attorney and I agree completely – the crew for a kitchen or bath job shouldn't require a lawyer.

My impression is that many – perhaps most – California residential contractors simply ignore the law, like my friend who's keeping his fingers crossed. Their feeling: "The law is simply too complex and asks too much. Only a few dozen contractors get their license suspended each month. My chance of skating by is pretty good."

True. But there's another perspective. Suppose your homeowner client turns out to be a real nutcase. Or, suppose your client is a perfect angel but runs short of cash before the job is done. What then? Most likely, your dispute will end up on the desk of two attorneys, yours and your client's.

When a job goes bad, your contract better be good.

Anything less and your client’s attorney is going to turn you every which way but loose. Doing home improvement work without a letter-perfect contract is like driving without a license. Nothing bad happens until something goes wrong. Then it can go very wrong.

If you don't like the idea of finishing jobs and not getting paid, my advice is simple. Get your client's signature on an enforceable contract before breaking ground. There’s no better tool for drafting legal California contracts than Construction Contract Writer. The trial version is free.