Sharp Elbows, Slapbacks and the Law

“Boggling” said the trial court judge. “[I]t totally boggles my mind, because you could agree to anything, anything . . .”

Thrown Under A BusAnd that’s exactly what they did. They agreed among themselves, years after the project was completed, what the value of the construction contract was – and, by extension, the value of the mechanics lien.

In Appel v. Superior Court, Case No. B244590 (March 11, 2013), the California Court of Appeals for the Second District held that a contractor and condominium developer could not agree to an artificially set contract price as part of a settlement agreement in order to prevent condominium owners from challenging the value of the contractor’s mechanics lien.

Background

In 2003, Webcor Construction, Inc. (“Webcor”) entered into a construction contract with Wilshire Landmark (“Wilshire”) to construct a 23-story condominium project in Los Angeles for $65.5 million. Numerous change orders were approved increasing the price of the contract to $81 million but Webcor contended that it was entitled to $13.5 million more.

In 2007, after the project was completed, Webcor filed suit against Wilshire for breach of contract and against numerous homeowners who had purchased the condominium units for foreclosure of Webcor’s mechanics lien. Prior to trial, Webcor settled with Wilshire who was insolvent, and Wilshire agreed to a meaningless paper judgment of $32 million. In addition, as part of the settlement, Webcor and Wilshire agreed that:

(1) No part of the $32 million settlement would serve as an offset against Webcor’s foreclosure of mechanics lien claim against the condominium owners; and

(2) The agreed price of the contract was $95.5 million.

[Note: How an extra $1 million got added to the $95.5 million when the value of the contract with agreed change orders was $81 million, and Webcor’s entire claim was only $13.5 million, is also boggling.]

At trial against the condominium owners, Webcor, relying on Civil Code section 3123, which provides that the value of a mechanics lien is the lesser of: (1) the reasonable value of the work performed; or (2) the price agreed upon in the contract, argued that the condominium owners could not challenge the agreed-upon price of the contract because condominium owners were not parties to the construction contract and Webcor and Wilshire had agreed in their settlement agreement that the “official” price of the contract was $95.5 million.

Seem unfair to you? It certainly did to the trial judge:

COURT: Are you saying [the unit owners] don’t have a right to attack the . . . value of the contract which was agreed after the fact as part of the settlement?

WEBCOR: We don’t believe they have a right to attack that.

COURT: Well, that is just boggling to my mind . . . . [I]t totally boggles my mind, because you could agree to anything, anything [in the settlement].

The trial court, finding that it saw “no purpose” for the settling parties to raise the value of the contract (from $81 million to $95.5 million) other than to limit the condominium owner’s defenses, held that because the condominium owners did not contract with Webcor that the price of the contract agreed upon in the settlement agreement (the second measure of value under Section 3123) was irrelevant and only the reasonable value of the work performed (the first measure of value under Section 3123) would be considered.

Appel v. Superior Court

But no said the Court of Appeals. The trial court got it wrong.

Contrary to the trial court’s interpretation of Civil Code section 3123 – that where a mechanics lien claimant is seeking to foreclose on a mechanics lien against a property owner who was not a party to the construction contract that the amount of the mechanics lien is determined solely based on the reasonable value of the work performed – the Court of Appeals held that no such limitation is found in the statute:

The statutory language includes no limitation that renders the second measure of value [i.e., the contract price] inapplicable when the claimant is attempting to enforce the lien against a property owner who was not a party to the contract for work. If the Legislature had intended such a limitation, it could have altered the statutory language to state that the amount of the lien is the lesser of the reasonable value of the work and the price agreed upon by the claimant and the person against whom the lien is being enforced. The Legislature did not do so.

Rather, explained the Court, the plain language of Civil Code section 3123 provides that the value of a mechanics lien is the lesser of: (1) the reasonable value of the work performed; or (2) the price agreed upon in the contract. Thus, the price agreed upon in the contract must also be considered.

BUT, held the Court of Appeals, the burden was on Webcor to show the price “agreed upon” in the contract, and a post-hoc agreement on the value of the contract in a settlement agreement with an insolvent developer does not satisfy that burden. How’s that for a twist – trial court slams contractor, Court of Appeals says you got it wrong trial court, THIS is how you do it.

Conclusion

For contractors, the take away from the case is to make sure that if there is a change in your scope of work that it be accompanied by a signed change order to prevent an argument later that the price of the contract (and, by extension, the value of any mechanics lien you record) is less than what was agreed to.

2 Responses to “Sharp Elbows, Slapbacks and the Law”

  1. Marty Wilson

    Great Change Order Advice . . .

    I ran a San Francisco commercial general contracting company that built 150+ projects/year. The single biggest source (greatly exceeding all others combined!) of problems, disputes, delayed payments, disappointments, stress and sleepless nights related to those projects . . . was the added work being done that wasn’t covered by signed change orders.

    It is a universal problem endemic in construction that afflicts even the biggest and most successful firms — as detailed in your case summary. Solving and preventing that change order problem should be every contractor’s primary operational goal.

    I now offer construction consulting and project management services; ironically the fear of change orders and their associated problems now provide me new business opportunities.

    Reply
    • Garret Murai

      Thanks for the comment Marty. As someone who “has been there” as you have, and as an attorney who has litigated construction cases as I have, scope changes without accompanying change orders are unfortunately a not uncommon problem for both small and large contractors on all types of projects whether big or small, residential or commercial, etc. Sometimes it’s the rush of projects, but I have also seen more than one contractor (or owner) tell a subcontractor (or general), “don’t worry about it, we’ll get you a change order, just get the work done,” only to have the change order never materialize and disputes ensue. If a change order is not forthcoming “before” you begin changed work, at the very least I tell my clients, send a letter, fax, email, anything which confirms: (1) the change in scope; (2) the price (or deduction) associated with the changed work; and (3) any extra time (or reduction in time) from the project schedule.

      Reply

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