Arya Group, Inc. v. Cher

Arya Group, Inc. (Arya) appeals from the orders dismissing its action against the respondents herein, Cher, the Inshallah Trust, Janet L. Bussell, Tutt Design Group, Inc. (Tutt) and Hawthorne Savings, F.S.B., after demurrers to Arya’s second amended complaint were sustained without leave to amend. (Code Civ. Proc., § 581, subd. (f)(1).) Arya contends the trial court’s rulings constituted an abuse of discretion because the factual allegations in Arya’s second amended complaint show Arya “is entitled to relief under legal theories of breach of contract, promissory estoppel, quantum meruit and unjust enrichment, account stated, fraud, intentional interference with economic relationship, conversion, and violation of Civil Code [section] 1719.”

The Complaint

The material allegations of Arya’s second amended complaint, which we assume to be true for purposes of reviewing a ruling sustaining a demurrer without leave to amend (Mirkin v. Wasserman (1993) 5 Cal.4th 1082 , 1087 [ 23 Cal.Rptr.2d 101 , 858 P.2d 568 ]), may be summarized as follows. Cher is the beneficiary and trustor of the Inshallah Trust, which is the record owner of real property located in Malibu. In June 1996, representatives of Cher and the Inshallah Trust (hereafter referred to collectively as Cher) negotiated an oral agreement with Arya, whereby Arya was to design and construct a house on the Malibu property. Cher consented to pay Arya the sum of $4,217,529 for Arya’s provision of design, construction, general contracting and supervision services. She further agreed that Arya would “be paid progress payments upon periodic percentages of project completion.” The parties’ oral agreement was subsequently memorialized in a written contract bearing an August 1997 date, which was delivered to Cher in early October 1997. Cher never signed the contract, despite her promise to do so.

Between June 1996 and November 1997, Cher assured Arya that the contract would be honored and that Arya would receive full compensation for the construction services it provided under the contract. In fact, Arya did receive payment from Cher for a number of services it discharged under the contract, e.g., reviewing and revising construction plans, performing site stabilization, preparing a set of plans and specifications sufficient to obtain and maintain new permits for the property, setting up facilities and site supervision on the property, commencing construction on the project and “making substantial progress in several areas, including concrete, structural

Although the Supreme Court acknowledged that, generally speaking, “a contract made in violation of a regulatory statute is void,” it stressed that “ ‘the rule is not an inflexible one to be applied in its fullest rigor under any and all circumstances’ ” and “ ‘[a] wide range of exceptions has been recognized.’ ” (.Asdourian, supra, 38 Cal.3d at p. 291.) By way of example, the court pointed out that “the rule will not be applied where the penalties imposed by the Legislature exclude by implication the additional penalty of holding the contract void. [Citations.]” (Ibid.) In addition, the court noted that “[i]n compelling cases, illegal contracts will be enforced in order to ‘avoid unjust enrichment to a defendant and a disproportionately harsh penalty upon the plaintiff.’ [Citation.]” (Id. at p. 292.) The court explained, “ ‘ “In each case, the extent of enforceability and the kind of remedy granted depend upon a variety of factors, including the policy of the transgressed law, the kind of illegality and the particular facts.” ’ ” (Ibid.)

The court stated that the policy underlying section 7159 “is to encourage written contracts for home improvements in order to protect unsophisticated consumers.” (Asdourian, supra, 38 Cal.3d at p. 292.) In reviewing the evolution of section 7159, the court determined the Legislature intended neither that the express misdemeanor penalty provision of the statute would be exclusive nor that all contracts made in violation of the statute would be void, thereby opening the door to enforcement of nonconforming contracts in appropriate cases. (Asdourian, supra, 38 Cal.3d at p. 292.) The court concluded Asdourian was just such a case, citing the fact that (1) the defendants were not members of the group primarily in need of the statute’s protection, i.e., unsophisticated consumers, (2) contracts made in violation of section 7159 are not “ ‘intrinsically illegal,’ ” and (3) if the defendants were allowed to retain the value of the benefits bestowed by the plaintiff without compensating him, they would be unjustly enriched. (38 Cal.3d at pp. 292-293.)

The issue of whether the instant matter is truly a “compelling case” within the meaning of Asdourian cannot be definitively resolved at the demurrer stage. However, application of the principles and considerations identified in Asdourian to the facts established by Arya’s second amended complaint persuades us that this case is one in which Arya might be entitled to some relief. It appears from the operative pleading that Cher is a highly sophisticated homeowner with previous involvement in residential construction

In deciding that “upon the facts recited [Arya] has stated a cause of action which on its face should not have been dismissed” (Calwóod Structures, Inc. v. Herskovic, supra, 105 Cal.App.3d at p. 523, fn. 2), we recognize that the absence of a criminal penalty distinguishes section 7164 from section 7159, and also acknowledge the Asdourian court’s observation that the misdemeanor penalties sufficed to serve the underlying legislative policy of that statute. (Asdourian, supra, 38 Cal.3d at p. 292.) Nonetheless, this distinction does not persuade us the Legislature intended that any and all construction contracts which fall within the scope of section 7164 must be deemed void and wholly unenforceable if they are not “evidenced in writing signed by both parties,” as required by the statute. The Legislature has shown it is perfectly capable of drafting a statute which limits a party’s ability to sue, where that is its intent. Within the Contractors’ State License Law itself, the Legislature has generally precluded an unlicensed contractor from “bringing] or maintaining] any action, or recovering] in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract for which a license is required . . . , regardless of the merits of the cause of action brought by the person . . . .” (§ 7031, subd. (a).) In light of the clear statutory policy of deterring unlicensed contract work, the California Supreme Court has steadfastly held that unlicensed contractors are not only barred from pursuing breach of contract actions, but may not urge equitable theories of recovery, such as unjust enrichment or fraud based on a false promise to pay for unlicensed construction work. (Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d

We cannot accept respondent’s suggestion that “Asdourian has been seriously eroded, if not altogether superseded” by the California Supreme Court’s more recent decisions in Phillippe v. Shaped Industries (1987) 43 Cal.3d 1247 [ 241 Cal.Rptr. 22 , 743 P.2d 1279 ] (Phillippe) and Hydrotech, supra, 52 Cal.3d 988 . At issue in Phillippe was the provision of California’s statute of frauds dealing with brokerage commissions (currently subd. (a)(4) of Civ. Code, § 1624), which declares that oral agreements “authorizing or employing an agent, broker, or any other person to purchase or sell real estate ... for compensation or a commission” are invalid. Our high court has repeatedly withheld traditional equitable remedies from licensed real estate brokers whose commission agreements fail to adhere to the statute of frauds and, in Phillippe, the court rejected the notion that a licensed real estate broker can assert equitable estoppel against a statute of frauds defense to an oral commission agreement in the absence of a showing of actual fraud. (43 Cal.3d at pp. 1260-1264.) In so doing, the court reaffirmed the soundness of the Asdourian decision in the context of home improvement contracts, observing in pertinent part, “There are significant differences between home improvements and brokerage commissions. Home improvements are tangible and can be relatively easily verified and appraised to determine their reasonable value. Such was the case in Asdourian, in which the contractor recovered the reasonable value of his services. A broker’s services do not result in a tangible product so it is more likely that there will be disputes as to what the broker has done and what such services may be worth. As in Asdourian, a home improvement dispute will typically involve only a single contractor seeking to recover. Due to the nature of the real estate business, however, several competing brokers may claim a commission for a single transaction. Written contracts help minimize such confusion.” (Phillippe, supra, 43 Cal.3d at p. 1266, fn. 12.)

In Hydrotech, the California Supreme Court simply reaffirmed what is obvious from reading section 7031, that “[rjegardless of the equities, section 7031 bars all actions, however they are characterized, which effectively seek ‘compensation’ for illegal unlicensed contract work.” (Hydrotech, supra, 52 Cal.3d at p. 997.) However, section 7031 has no application to the facts of this case, and as we have previously indicated, the unequivocal language of section 7031 differs markedly from that of section 7164.