Renovation of Historic Home Illustrates Danger of Oral Contracts
On July 22, 2020, the Iowa Court of Appeals issued an opinion regarding a petition to foreclose a mechanic’s lien and claim for breach of contract. After a working relationship soured, a contractor attempted to foreclose a mechanic’s lien and claimed he was still owed compensation for services performed. Because there was no written contract or accounting of payments, the court relied on the district court’s findings and affirmed the ruling dismissing the mechanic’s lien and finding that the homeowners reasonably compensated the contractor for his services.
Two business partners purchased an historic Victorian home to restore to its “original grandeur.” One of the partners approached his mentor and childhood neighbor for help with the renovation. The mentor had extensive experience as a building trades contractor. The parties never entered into a written agreement or agreed to an hourly rate for the work. At the contractor’s request, the owners paid in cash so that it would not interfere with the contractor’s Social Security or Medicare.
The contractor worked on the house for two years before the relationship went south. Eventually, the contractor filed a mechanic’s lien on the property for unpaid labor and materials. The contractor sought to enforce the lien and filed suit for damages incurred for breach of contract.
Despite the lack of a written contract or accounting records, the district court found that the contractor was still entitled to compensation under the theory of quantum meruit. The court first determined the value of services and materials rendered and then determined whether the contractor was paid this amount.
After hearing testimony and considering the parties’ exhibits, the district court found that the total value of services performed was $113,877.13. The district court next determined if the owners had paid the contractor that amount. The contractor admitted to receiving at least $73,855. While doubting the owners paid the entire amount they claimed, the court still found substantial evidence that the owners had paid at least the remaining $39,992.13. Therefore, the district court found that there was no breach of contract or damages and dismissed the petition to foreclose the mechanic’s lien. The contractor appealed.
The theory of quantum meruit allows a party to recover the reasonable value of services and materials provided when there is no a written contract. This is known as an implied-in-fact contract. Both parties agreed an implied-in-fact contract existed and that the contractor should be compensated for his craftsmanship. The issue in this case was how much compensation was still due.
Because the two parties never agreed to a specific payment amount, the contractor first had to prove the reasonable value of his services. The district court did not find the contractor’s testimony credible regarding his hourly rate, the number of hours he claimed to work, or the value of the materials he provided. After reviewing the evidence regarding time spent working, the district court found that the contractor should be compensated for 1,364 hours at $40 per hour. Including labor and materials, the district valued the contractor’s services at $113,877.13. The court affirmed the district court’s detailed findings in the value of services provided.
The contractor next had to prove he was not paid that amount. The district court did not fully trust the testimony of either party or evidence concerning the payments. The owners submitted bank statements and claimed that almost every local large cash withdrawal was a payment. Conversely, the contractor only admitted to receiving $73,855. Attempting to “split the difference,” the district court found that the owners had at least paid the remaining amount owed. Declining to “tinker” with these findings, the court found substantial evidence that the owners paid the contractor the reasonable value of his services. The court affirmed the lower court’s ruling denying the petition to foreclose the mechanic’s lien.
This case illustrates the problem with verbal agreements. Written contracts provide more certainty regarding the terms that will be enforced during a disagreement. Written contracts also better ensure that both parties understand what the other party expects from the agreement.
Here, the owners assumed they would pay the contractor $40 per hour—the rate the owners paid the other contractors—while the contractor relied on trade magazines and assumed he would be compensated at $65 per hour. Without having this in writing, both parties were taken by surprise at what the other party expected, and the district court had to determine the reasonable rate.
Maintaining written records is also important. Another issue for the parties in this case was proving whether payments were made. The district court extensively analyzed testimony and evidence such as the bank statements, but had to “split the difference” in the absence of legitimate recordkeeping.
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