Contracts
Contracts are the most tested topic in this section. You need general contract law (what makes a contract valid, deadlines to sue, indemnity, liquidated damages) and California’s detailed home improvement contract rules: required contents, the down payment limit, the right to cancel, change orders, service and repair contracts, swimming pools, arbitration clauses, and solar and PACE financing.
1. What makes a contract valid
Civil Code §1550 lists four essentials: parties capable of contracting (capacity), their consent, a lawful object (lawful purpose), and sufficient consideration (something of value exchanged, such as money for work). Consent is shown by an offer and an acceptance, and it must be free, mutual, and communicated (Civil Code §1565). Doing the work requested in an offer can itself be an acceptance (Civil Code §1584). A contract can be express (stated in words) or implied (shown by conduct) (Civil Code §1619).
Oral contracts can be valid, but some contracts must be in writing under the statute of frauds (Civil Code §1624), including an agreement that by its terms cannot be performed within one year, a promise to pay another person’s debt, and a sale of real property or a lease longer than one year. Separately, the Contractors License Law requires home improvement contracts over $500 to be in writing. Electronic records and electronic signatures satisfy a legal requirement for a writing or a signature (Civil Code §1633.7).
| Deadline to sue (statute of limitations) | Time | Source |
|---|---|---|
| Breach of a written contract | 4 years | CCP §337 |
| Breach of an oral contract | 2 years | CCP §339 |
| Patent (visible) construction deficiency | 4 years after substantial completion (not for an owner-occupied single-unit residence) | CCP §337.1 |
| Latent (hidden) construction deficiency | 10 years after substantial completion | CCP §337.15 |
2. Unlicensed contractors and license notices
Know this
A contractor who was not licensed at all times during the work cannot sue to collect payment, and the person who hired an unlicensed contractor can sue to recover ALL compensation paid (B&P §7031). A licensee who contracts with an unlicensed contractor is subject to discipline (B&P §7118).
Every licensee must show its license number on contracts, subcontracts, and calls for bid (B&P §7030.5). On written contracts where you are the prime contractor (other than home improvement and service and repair contracts), B&P §7030(a) requires a CSLB notice in at least 10-point type stating that complaints about patent acts must be filed within four years and complaints about latent structural defects within 10 years. Home improvement and service and repair contracts use a different CSLB information notice in at least 12-point type.
3. Key contract clauses
| Clause | What California law says |
|---|---|
| Indemnity (one party agrees to cover another’s losses) | A construction contract clause that indemnifies someone for their own sole negligence or willful misconduct, or for design defects they furnished, is void (Civil Code §2782). For contracts entered on or after January 1, 2013, a subcontractor generally cannot be required to indemnify a general contractor for the GC’s active negligence or willful misconduct (Civil Code §2782.05). |
| Liquidated damages (a set amount, such as $500 per day of delay) | Generally valid unless the party challenging it proves it was unreasonable when the contract was made (Civil Code §1671(b)). In consumer contracts for personal or household purposes, it is valid only if actual damages would be impracticable or extremely difficult to fix (§1671(d)). |
| Force majeure / excused delay | Performance is excused when prevented by the other party’s act, by operation of law, or by an irresistible, superhuman cause, unless the parties agreed otherwise. A contract may require written notice within a reasonable time to claim an extension (Civil Code §1511). |
| Termination and rescission | A contract may be rescinded if all parties consent, or by one party for reasons such as fraud, mistake, duress, or failure of consideration (Civil Code §1689). Many contracts also allow termination for cause after written notice and a chance to cure. |
Breach means failing to do what the contract requires. Remedies include money damages, rescission, and, when the written contract rules were not followed, recovery of the reasonable value of work under equitable remedies that prevent unjust enrichment. Abandoning a project without legal excuse (B&P §7107) and failing to complete it for the contract price (B&P §7113) are also causes for CSLB discipline.
Subcontracts: a flow-down clause passes the prime contract’s duties to the subcontractor, so a subcontractor must read the prime contract too. Contracts often forbid assignment without written consent, and on public works a listed subcontract may not be assigned without the awarding authority’s consent (PCC §4107(b)). A “pay-when-paid” clause sets timing for paying a subcontractor; a “pay-if-paid” clause tries to make the owner’s payment a condition of ever paying the subcontractor. An owner, direct contractor, or subcontractor cannot, by contract, waive or impair another claimant’s lien or payment rights (Civil Code §8122), so be very careful relying on pay-if-paid language in California.
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