A California appellate court recently held that the value of an original construction contract is admissible as evidence to limit a contractor’s right to recovery under Civil Code section 3123(a), even by a property buyer that was not a party to the construction contract. Appel v. Los Angeles Superior Court (CA No. B244590, Mar. 11, 2013). The net effect in this instance could be a reduction of the value of the contractor’s lien claim by at least $13.5 million. 

The underlying facts reflect an all-too-common scenario of a failed project. Here, a single-purpose entity developed a large condominium project, originally inked with a GMP of $65 million. Increases through construction by approved change orders moved the GMP to $81 million. Disputes arose, and the contractor thereafter claimed an additional $13.5 million above the $81 million GMP. Unfortunately here, several units of the project had been purchased by this point, and the buyers were then subject with the developer to the mechanic’s lien of the contractor. Prior to trial, the developer entity and its alter ego affiliates negotiated a pre-trial settlement with the contractor that included in part a restatement of the final contract GMP to $95.5 million, purportedly settling the issue of the “value” of the construction contract for the contractor to continue pursuing its lien claim against the unit buyers. During pre-trial motions, the trial court commented on the impact of the negotiated settlement and “expressed doubt as to whether the unit owners should be precluded from challenging the value of the GMP contract set forth in the settlement agreement:

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?

[CONTRACTOR]: 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 also stated that it saw “‘no purpose’ for the settling parties’ decision to raise the value of the GMP other than to hinder the unit owners’ lien foreclosure defense.” Although the trial court took the matter under submission, it later felt constrained to rely on an existing decision cited by neither party and ruled against the unit buyers, precluding them from challenging the post-lien GMP value set during the settlement between the developer and contractor.

In response, the homeowners filed a writ of mandate with the appellate court, seeking permission to introduce evidence of the true value of the GMP contract, relying on the plain language of Civil Code section 3123, which sets the value of the lien claim at the lesser of the contract price or the reasonable value of the work of improvements. Reviewing the legislative history and purpose of the statute, along with the intent of the mechanic’s lien law as a whole, the appellate court held that a preclusion of the true value of the contract by a party not in contract with the contractor would allow a contractor to recover a greater sum from a non-contracting party than that value by which the contractor had actually agreed to perform by contract. The appellate court stated that such a ruling would be inconsistent with the history and purpose of the law. Procedurally, the appellate court granted the pre-trial writ of mandate allowing the condominium owners to introduce evidence related to the actual value of the construction contract that was between the original contractor and the original developer, which may or may not be the stated value of the $95.5 million GMP in the settlement agreement between the developer and contractor.

In addition to the many red flags raised by the project and case history, this dispute is a continuing caution for developers/owners to secure valid GMPs, and a reminder for contractors to verify and/or negotiate valid change orders during the project or possibly find themselves limited to a lower recovery than the reasonable value of the work performed.