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Construction Contracts

California’s New Home Improvement Contract

Effective January 1, 2006, the California legislature changed the requirements for home improvement contracts. By changing the contract requirements, it tried to address complaints lodged by both homeowners and contractors. It also attempted to streamline the contracts and clarify the statutes while providing for mandatory notices to homeowners of their rights under the new statutes. This article summarizes some of the more important changes. To read the text of the 2006 statute, click the following link: http://www.cslb.ca.gov/laws/HomeImpConReq.asp

Section 7159(b) of the California Business and Professions Code defines “home improvement contract” as an “agreement…between a contractor and an owner…or tenant…that exceed $500. This definition applies to agreements between the contractor or the contractor’s salesperson and an owner or tenant.

Requirements

Several new requirements exist for both the form and content of California home improvement contracts. Changes that affect the form of the contract include:

  • The heading “Home Improvement” and (other headings) must be in 10-point boldface type
  • All other text must be in a minimum 10-point type (larger type is fine)
  • All writing must be legible

Changes that affect the content of the contract include:

  • The name, business address and license number of the contractor
  • The name and business address of the homeowner
  • The residence address of the homeowner
  • The date the buyer signed the contract on the first page
  • The name and address of the contractor to which the “Notice of Cancellation” shall be mailed
  • A statement that the contractor shall release the homeowner from any mechanic’s lien or claim upon payment
  • A statement near the signature that the contractor must have a performance and payment bond
  • The name and number of the salesperson who negotiate or solicited the contract

In addition, the new laws mandate some specific language:

  • You are entitled to a completely filled-in copy of this agreement, signed by both you and the contractor before any work may be started. “in 12-point boldface type;
  • Description of the Project and Description of the Significant Materials to be Used and Equipment to be Installed,” followed by those descriptions;
    and the heading, “Down Payment,” with a space for inserting the amount of the down payment along with the following statement in at least 12-point bold type: “THE DOWN PAYMENT MAY NOT EXCEED $1,000 OR 10 PERCENT OF THE CONTRACT PRICE, WHICHEVER IS LESS.

Furthermore, contractors are required to provide the contact information for the contractor’s insurance company and disclose the status of his workers compensation insurance. The contract must also specify the profit, labor, and materials as well as the entire cost of the contract under the heading, “Contract Price.” In addition, contracts with finance charges must include the heading, “Finance Charge” with space for the disclosure of any finance charge.

Change Orders

All change orders must now be in writing. There is no exception for nominal changes. A clear example of a change order must be included in the original contract. In addition, all change orders must clearly describe the work authorized by the change order as well as the cost of such work and the how the change will affect any progress payments. Finally, both parties must sign the change order before any change order work begins.

Progress Payments

If the contract includes progress payments, it must include the heading, “Schedule of Progress Payments,” followed by the actual schedule, including reference to the work performed, the materials used and equipment to be supplied. In addition, the following statement must be included in at least 12-point bold type:

“The schedule of progress payments must specifically describe each phase of work, including the type and amount of work or services scheduled to be supplied in each phase, along with the amount of each proposed progress payment. IT IS AGAINST THE LAW FOR A CONTRACTOR TO COLLECT PAYMENT FOR WORK NOT YET COMPLETED, OR FOR MATERIALS NOT YET DELIVERED. HOWEVER, A CONTRACTOR MAY REQUIRE A DOWN PAYMENT.”

Mechanics Lien Warning

As of January 2006, the mechanics lien notice can no longer be an attachment to the contract but must appear directly in the text of the document. Also, it must appear exactly as specified by the code—all 300 words of it.

Three-Day Right to Cancel—Requirements—Disaster Notice

In most cases, notice of the homeowner’s three-day right to cancel must be included in the contract or as an attachment to the contract. The notice must be written in at least 12-point bold type and in the same language as the principal language of the oral sale (e.g. Spanish). The notice must also be placed in immediate proximity to a space reserved for the homeowner’s signature and the homeowner must acknowledge receipt of the notice by signing and dating in the required space. If the notice is included, the following statement is required:

  • The law requires that the contractor gives you a notice explaining your right to cancel. Initial the checkbox if the contractor has given you a ‘Notice of the Three-Day Right to Cancel.

Lastly, a completed form in duplicate captioned “Notice of Cancelation” shall accompany the notice.

For contracts written for the repair of residences that were damaged by a “sudden or catastrophic event” that has been declared a state of emergency by the President of the United States, the Governor of California, or the executive officer of any city or county, the homeowner must receive a notice of the seven-day right to cancel that appears in the code.

Arbitration Provisions

The California State License Board provides a quick arbitration procedure as a default for contract disputes between contractors and homeowners. Any provision for private arbitration must be written in at least 10-point roman boldface type or in contrasting red print in at least 8-point roman boldface type. If the provision is included in a typed contract, it must be in all capital letters. Immediately prior to the signature space for the arbitration provision, the contract must include the following required notice:

“ARBITRATION OF DISPUTES

“NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE ‘ARBITRATION OF DISPUTES’ PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE ‘ARBITRATION OF DISPUTES’ PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE BUSINESS AND PROFESSIONS CODE OR OTHER APPLICABLE LAWS. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.

“WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE ‘ARBITRATION OF DISPUTES’ PROVISION TO NEUTRAL ARBITRATION.””

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