Construction Law Changes – 2011
As in so many other areas, 2011 has brought several changes to the legal landscape in construction.
Changes To Mechanic’s Lien Procedure:
A set of simple but important changes to the Mechanics lien statutes went into effect January 1, 2011. (AB 457.) These changes are: 1) the Mechanic’s lien form must contain new statutory “magic words” advising property owners about the effect of a lien foreclosure suit and the timelines involved (Civil Code § 3084(7)); 2) the lien must now be served (personally or by registered/certified mail) directly upon the property owner and a proof of service affidavit filled out (Civil Code § 3084 (a)(6), (c)(1)(A)); and 3) a Lis Pendens (notifying other lienholders of pending legal action) must be filed within 20 days after a lien foreclosure lawsuit is filed (Civil Code § 3146).
Practitioners should be aware that failure to comply with these statutory requirements can make a lien unenforceable as a matter of law.
LLCs May Now Hold A Contractor’s License:
In passing SB 392, the Legislature has finally enabled the Contractor’s State Licensing Board to issue licenses to limited liability companies, bringing California in line with the majority of states that permit a contractor to be formed as an LLC. However, the statute imposes additional insurance and bonding requirements on LLCs (e.g. a $100,000 surety bond to ensure payment of employee wages, interest, and fringe benefits, in addition to the $12,500 contractor’s bond required of all licensees.) These requirements may prove difficult for smaller start-up LLCs, or those with limited bonding capacity.
Bonded Stop Notice Deemed Valid, Even Though 20-Day Preliminary Notice Was Served On Incorrect Lender As Identified By Owner:
On private works of improvement, a bonded Stop Notice allows a contractor to freeze unexpended construction funds as damages for unpaid work. In Force Framing v. Chinatrust Bank (2010) 187 Cal.App.4th 1368, the appellate court considered the requirement that a 20-Day Preliminary Notice be served on the lender – or “reputed construction lender” – for a Stop Notice claim to be valid. (Civil Code § 3097.) Prior cases have held that it is incumbent upon the contractor to ascertain the lender’s identity from public records or building permits. In Force Framing, the trial court denied the Stop Notice claim, because the contractor’s Preliminary Notice was not served on the actual lender. The appellate court reversed. The owner had identified the wrong bank to the contractor at the start of the project. The contractor was reasonably entitled to rely upon owner-provided information in serving its Preliminary Notices.
It is widely known that the consumer protection penalties for “contracting without a license” in California are severe. In addition to criminal penalties, an unlicensed contractor cannot use legal process to collect payment (e.g. Mechanic’s Lien or breach of contract lawsuits) if a license was required for the work performed. Homeowners can usually sue for restitution of every dollar paid to an unlicensed contractor, even if the work was well done and the homeowner knew in advance that the contractor was unlicensed.
Alatriste v. Cesar’s Exterior Designs, Inc. (2010) 183 Cal.App.4th 656 reaffirmed the bright-line rule against compensating unlicensed contractors. The appellate court held that: (1) The affirmative defenses of unjust enrichment, estoppel, or unclean hands did not bar the homeowner’s claim; (2) the contractor was not entitled to offset for work after the contractor obtained license; (3) the contractor was not entitled to an offset for materials it had purchased; and (4) the defense of fraud did not bar the homeowner’s claim.
One of the few exceptions to the licensure penalties is the so-called “Substantial Compliance” exception described in Business & Professions Code § 7031(e). However, “Substantial compliance” is defined quite narrowly, and is only available when the contractor: (1) was properly licensed prior to performance, (2) acted reasonably and in good faith to maintain proper licensure, (3) had no reason to know its license was deficient during performance, and (4) acted promptly and in good faith to reinstate the license upon learning it was invalid.
The Second District Court of Appeal recently considered the substantial compliance exception in Pacific Caisson & Shoring, Inc. v. Bernards Bros. Inc. (March 2011) — Cal.Rptr.3d —-, 2011 WL 727979. Much of the opinion discusses the trial court’s ruling that the plaintiff did not have a specialty license as an “Earthwork and Paving” contractor. The appellate court overturned this ruling because the plaintiff had been licensed as a “Class A” General Engineering Contractor, which is a broader classification that subsumed the more restrictive specialty license requirements. However, the contractor’s Class A license had become suspended during the subject project. This created an issue of fact that the trial court had not considered – namely, whether the contractor had satisfied the four prongs of the substantial compliance exception. In that case the plaintiff did have a valid license before performing the work. The Second District reversed and remanded the case for further trial as to the contractor’s knowledge and good faith response to the licensing suspension.
Failure To Comply With Home Improvement Act Does Not Bar Contractor Payment Claim:
Another consumer protection statute imposes several requirements on contractors entering into contracts with homeowners. Among other things, the “Home Improvement Act” (HIA) has long required a specific notice to owners regarding Mechanics liens, as well as a 3-day right of rescission and several other mandatory contract terms. (Business & Professions Code § 7159.) Unlike the contractors’ licensing laws, however, we have seen some court-created exceptions to this statute.
In Hinerfeld-Ward, Inc. v. Lipian (2010) 188 Cal.App.4th 86, the plaintiff contractor remodeled a home under an oral contract and sued for nonpayment. In response, the owners raised the contractor’s noncompliance with the HIA’s written contract requirement. The court allowed the contractor to recover after examining a line of cases holding that the HIA was intended to protect “unsophisticated consumers.” In Asdurian v. Araj (1985) 38 Cal.3d 276, the Supreme Court created a “sophisticated owner” exception to uphold a contract between a contractor and an experienced real estate investor, even though it did not meet the statutory requirements. Similarly in Hinerfeld-Ward, Inc., the owners used an AIA form contract, with input by their independent architect. In certain situations, therefore, sophisticated owners will not be allowed to use the HIA statute as a shield to avoid paying a contractor.
Mark Coffin is a partner in the Santa Barbara law firm Kelley Clarke PC. His practice includes construction law and representation of construction professionals.
Read about foreclosure and remedies related to foreclosure HERE.
Read about Preliminary Notice in Construction Mechanic Liens HERE.