9/20/2010

The Second District Court of Appeals recently determined that an oral contract for home improvement services may be valid and enforced by the contractor when the homeowner skillfully negotiated the services and if the homeowner would be unjustly enriched if the oral contract was to be held invalid.[1]

In 2000, the homeowners began to undertake a major remodel of a single-family home in Los Angeles. After retaining an architect, they retained a general contractor, but were dissatisfied with his work and abandoned the project for several years. They then retained a new general contractor, Hinerfeld-Ward, Inc. to perform the major remodel of their single-family home. Although the parties never entered into a written contract, the parties entered into a memorandum of understanding. The contractor submitted 19 payment applications that were paid. Upon receiving the twentieth payment application, the relationship between the parties soured over certain charges the contractor requested, including project management and supervision charges. After several months, the homeowners terminated the contractor's services but still owed an unpaid balance of $200,000.

The contractor filed a lawsuit against the homeowners for breach of oral contract, quantum meruit, wrongful withholding of progress payments, and other causes of action. The trial court entered judgment for the contractor of $202,181.58 plus prejudgment interest and costs. Further, the contractor was awarded $200,000 in attorney fees. The homeowners appealed the trial court's decision.

Business and Professions Code Section 7159 requires that 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 be in writing. Section 7159 is meant to protect consumers, and in particular, inexperienced homeowners.

The Court had to review whether an oral contract for home improvement services was voidable or void. Voidable would mean that the court could enforce the terms of the oral contract; however, if the oral contract was found to be void, a court could not enforce its terms.

The homeowners argued that they were unlike the exceptions to the written home improvement agreement requirement. Courts have found that Section 7159 does not apply to sophisticated investors; however, the homeowners here only owned a single-family home but were highly educated and had previously entered into employment contracts and office leases after negotiating with other parties. In addition, courts have found that consumer protection statutes such as Section 7159 may not extend to an agreement that an attorney helped to negotiate.

The Court emphasized that the homeowners were not doing a typical remodel because it was a high-end complex remodel based upon a design that evolved over the years of planning and construction. Further, the homeowners had used an architect during the construction process although the architect was not used during the negotiation of the construction contract.

In addition, the homeowners would be unjustly enriched because they received a near complete remodel on their home without paying the contract. Therefore, the Court agreed that an oral contract could be enforced under the circumstances for a home improvement project.

In addition, the contractor was able to recover his attorneys' fees from the homeowners because the homeowners withheld an excessive amount of progress payments owed to the contractor pursuant to Civil Code Section 3260.1.

Although the court enforced the oral contract between the homeowners and contractor, this does not mean that oral contracts may always be enforced. A written contract between the parties that clearly outlines the rights and responsibilities of each party is preferred because if there is ever a dispute, the written contract should be able to address the situation.

It is important when entering into agreements to clearly understand what rights and responsibilities each party has and to clearly state these terms in a written agreement. Please contact Anthony Marinaccio at anthony@agclawfirm.com or at (562) 699-5500 for more information regarding these issues or other real estate or contract matters.


[1] Hinerfield-Ward Inc. v. Lipian 2010 DJDAR 13999 (September 1, 2010) Cal Ct. of Appeal 2d Dist.


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