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Oral Home Improvement Contract Enforceable

By September 7, 2010Blog, Litigation, Real Estate Law

A recent case by a California Court of Appeal provides a reminder for homeowners and contractors that California’s requirement that “home improvement contracts” must be in writing does not necessarily prevent a contractor from enforcing an oral contract for payment, when fairness and justice so require; and, that a homeowner’s tactics in dealing with a contractor should be considered very carefully.

Hinerfeld-Ward, Inc. v. Lipian (Sept. 1, 2010), involved a complex home improvement project. The homeowners did not have a written contract with the contractor, as required by California law.  The Lipians retained Hinerfeld as their contractor and work proceeded for the next two years, through 19 invoices.  The Lipians’ architect approved all of these bills, which were paid by the Lipians, until April 2006, when they disputed certain charges on the twentieth invoice.  At the time, the Lipians owed their contractor over $200,000.  Because of the dispute the Lipians terminated Hinerfeld.  Hinerfeld sued for payment, even though he did not have a written contract. The Lipians asserted their own claims against the contractor for fraud, breach of contract and defective work, and, significantly, claimed they owed nothing because the oral contract with Hinerfeld was void and unenforceable.  They contended that California’s statutory requirement that all “home improvement” contracts must be in writing prevented the court’s enforcement of the “void” oral home improvement contract.  The trial court disagreed and awarded Hinerfeld damages of $202,181, plus interest of $36,232, costs of $38,953, a monthly two percent assessment of $54,736, and attorneys’ fees of $200,000.  The Lipians appealed, but the Court of Appeal also ruled against them, and affirmed the trial court judgment.

California law requires that a contract for home improvements between an owner and a contractor must be in writing and contain specific provisions. (Business & Professions Code section 7159).  The Lipians contended that an oral contract violates the statute and is void, and could not be enforced by the contractor.  The appellate court disagreed, stating that other factors established that it would be unjust to declare the contract void, including:  (i) the Lipians were sophisticated individuals, and not within the class of unsophisticated consumers intended to be protected by the statute; (ii) the contract in question, for a unique, long-term, ever evolving construction project, was not the type that California’s public policy would declare void; (iii) the owners’ relationship with their architect, as their representative, was long-term and well-established, and served to protect the owner’s interests; and, (iv) the owners had accepted the benefits of the agreement.  In summary, the court said that “…this is a compelling case warranting enforcement of the oral home improvement contract…”  All of factors combined to support enforcement in favor of the contractor.

Thus, this case was a disaster for the homeowners.  Their difficulties were compounded by how they handled the final payment application submitted by the contractor. 

California law restricts the ability of a homeowner to hold back progress payments by limiting any amount withheld to 150% of value of any disputed item.  Rather than paying the amount that was undisputed, they withheld the entire amount of the billing, thus violating the statute. (The jury actually found that the Lipians were entitled to only $1,000).  The court strictly applied the statute against the Lipians.  Their violation cost the them the additional statutory penalties and attorneys’ fees, which are authorized by the statute.  So, the aggressive tactic of withholding the entire amount of a contractor’s billing seriously back-fired on the Lipians.

In any business relationship it is important to “get it in writing.”  But, as this case shows, even if a statute requires a written contract, exceptions will always exist, especially when a strict reading of the statute would work an injustice.  This case offers a number of lessons on how to manage and document a successful home construction project – some of them strategic, some of them psychological and some of them legal.

Stephen C. Gerrish, Employment Group

Thoits Law

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  • Time Billing says:

    I find it intriguing that their oral contract held up in court due to the client contractor relationship and their perceived sophistication. Really leaves a lot open to interpretation for similar cases in the future.