California Business and Professions Code 7031 is a provision prone to drawn out court battles with confusing fact patterns. In the recent case of Panterra GP, Inc. v. Superior Court, 74 Cal. App. 5th 697, 289 Cal. Rptr. 3d 743 (2022), review filed (Mar. 10, 2022), the justices were persuaded by the conclusion that the application of this section often results in a harsh outcome for many plaintiffs. Given that, they found that a licensed contractor who was not properly named in the contract could have its day in court to seek reformation of the contract to reflect the true intent of the parties.
Panterra, GP claims that it performed a renovation project for Studio Movie Grill and other defendants in Bakersfield, CA. Panterra, GP is a licensed general contractor. The contract between the parties, however, mistakenly named Panterra Development as the contractor and that entity is not licensed. Despite the mistake, Panterra GP contends that the defendants “knew, intended and agreed” that Panterra GP was the contractor on the project. Panterra, GP actually performed the work in question and is seeking full payment from defendants. The permits issued by the City of Bakersfield all refer to Panterra GP as the contractor on the project.
Once the project was complete defendants refused to pay Panterra GP the $2.6 million owed under the contract because Panterra Development had recorded a mechanic’s lien claiming that it was the contractor on the project. Panterra GP then sued the defendants for recovery under a mechanic lien release bond, breach of contract, account stated and open book account.
The trial court dismissed the case without leave to amend basing its decision on Business and Professions Code section 7031 subdivision(a). The court found that Panterra GP could not utilize equitable contract remedies to reform the contract when it was not a party identified in the contract and the entity listed in the contract was not a licensed general contractor, as required by that statute. The Court of Appeal vacated this decision finding that 7031 subdivision(a) is not applicable to the claims at issue in this case because Panterra GP was a licensed contractor.
Section 7031, Subdivision(a) is Not Applicable in This Case
The Business and Professions Code section 7031(a) prohibits a contractor from pursuing an action to collect under a contract where that party is unlicensed. Subdivision(a), “prevents unlicensed entities from recovering compensation regardless of the balance of the equities or the manner in which the claim is framed.” MW Erectors, Inc., v. Niederbauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th412, 435.
It is factually acknowledged by all parties involved in the matter that Panterra GP and Panterra Development are two legally distinct entities. Panterra GP is licensed while Panterra Development is not. The unlicensed party is not allowed to receive any compensation for performance under any contract that requires a license for the work. Section 7031 does not block licensed contractors from payment for their work. The defense argues that because Panterra Development is named in the contract, this section should apply to the circumstances of this case. The Court of Appeal disagreed holding that the plaintiff, Panterra GP, is in fact a licensed contractor and if the contract is in fact reformed to reflect this fact as Panterra GP requests, section 7031(a) will be inapplicable in this case.
Exhibits Cannot Establish at the Pleading Stage that the Complaint is Defective
The defense was granted judicial notice of Panterra GP’s second amended complaint and it cites several exhibits from that document including the mechanic’s lien filed by Panterra Development, and claims that Panterra GP could not assert new allegations inconsistent with those exhibits due to the sham pleading doctrine. This doctrine holds that “if a verified complaint contains allegations fatal to a cause of action, a plaintiff cannot cure the defect simply by omitting those allegations in an amended pleading without explanation.” Hendy v. Losse (1991) 54 Cal.3d 723, 742.
When a court takes judicial notice of a document, it does not mean that it is proclaiming the truth of its contents, or a party’s interpretation of it. A demurrer tests the legal sufficiency of a complaint and is not the appropriate juncture at which to argue the truth or falsity of contested facts. Judicial notice of facts contained in a demurrer will only be dispositive when there is complete agreement between the parties as to that fact. Cruz v. County of Los Angeles, (1985) 173 Cal. App.3d 1131, 1134.
The defense was also successfully sustained a demurrer in this case. The purpose of a demurrer is not to resolve contested facts. In fact, the demurrer requires that the court accept as true all properly pleaded facts in the complaint. “A hearing on a demurrer may not be turned into a contested evidentiary hearing through the guise of having the court take judicial notice of documents whose truthfulness is disputable.” Joslin v. H.A.S. Ins. Brokerage (1986) 184 Cal. App.3d 369, 374.
The Court explained that the allegation in the complaint that Panterra GP was the agreed upon general contractor for the project is not “wholly and necessarily negated by the fact that some documents-created after the formation of the contract and its subsequent performance- identify another entity as the contractor. Instead, the exhibits cited by Studio Movie Grill merely create a dispute as to the ultimate fact of whether Panterra GP indeed was the agreed upon contractor…..It is for a finder of fact to consider all the evidence to determine whether the complaint’s allegations are true. That determination cannot be made at the pleadings stage, it must be made following summary judgment or trial.”
The court identified several inadequacies with the defendant’s arguments. First, Panterra GP has consistently alleged throughout its complaint and amended complaints thereafter that it was in fact the general contractor for the renovation of the Studio Movie Grill and performed the work. It also has continuously held that it was the party who signed the agreement and negotiated all terms and payment with the defendant. Second, it is improper for a court to turn a demurrer “into a contested evidentiary matter by determining what the proper interpretation of the evidence is.” Mize v. Mentor Worldwide LLC (2020), 51 Cal.App.5th 850, 855. This kind of consideration at this point in the case would constitute an error by the court.
The court acknowledged that the claims of Panterra GP may later be shot down for other reasons. For example, if the defense provides evidence that Panterra GP did not perform the work in question, the plaintiff’s claim would fail on contract principles.
The exhibits and documents put forth by the defense as evidence of Panterra GP not being the general contractor on the project merely create an evidentiary dispute as to the ultimate question in the case. There are documents supporting both the defendant’s and the plaintiff’s case on this issue and it not a question meant to be resolved in the pleadings stage of the proceeding.
Reformation of the Contract
A reformation of a contract occurs when “through mutual mistake of the parties, or mistake of one party, which the other at the time knew or suspected, a written contract doesn’t truly express the intention of the parties, it may be revised on the application of an aggrieved party, so as to express that intention.” Civ. Code §3399. Reformation is an equitable contract remedy; not a cause of action. Reformation serves to enforce the meeting of the minds formulated and agreed upon by the parties. It does not create a new contract, but rather reflects the contracts intended by both parties of the agreement. Ramseier v. Oakley Sanitary Dist. (1961) 197 Cal. App.2d 722, 725.
In the case at hand, Panterra GP successfully alleged all of the elements necessary to establish a prima facie case for reformation. It stated that the defendants intended Panterra GP to perform the renovation at the Bakersfield Studio Movie Grill, but mistakenly drafted the contract as between Panterra Development and the defendants instead of Panterra GP.
The defendants argue that Panterra GP’s attempt to reform the contract is an equitable remedy, which is not allowed under 7031 subdivision (a). The court here found that although it is true that subdivision(a) precludes such reformation, as discussed above this section is inapplicable in this case because Panterra GP is not an unlicensed contractor.
In the alternative, the defense argues that reformation should not be permitted pursuant to the Supreme Court case of Mabb v. Merriam,129 Cal.663 (Cal. 1990). In this case, the court denied a party’s request to reform the contract because it was seeking to substitute one party for another. However, the court here pointed to the language of Civil Code section 3399 which allows reformation of a contract “upon the application of any aggrieved party.” It found that in some circumstances a plaintiff may be made a party to a contract through reformation, if the facts supports such a remedy. 5 Witkin Cal.Procedure (5th ed. 2020) Pleading §805. A new contract is not formed when a party who rightfully should have been named in the original contract is subsequently added to the document by way of reformation.
The defendants also argue that allowing reformation of this contract would “open the floodgates to litigation” and that every unlicensed contractor would sue for reformation in an effort to substitute a licensed contractor onto the agreement. The court found this argument wholly unpersuasive finding that reformation is only available to those who prove that the written contract failed to express the true intent of the parties and neither encourages nor provides easy access for unscrupulous unlicensed contractors to take advantage of the reformation process.
The court concluded that the purpose of section 7031 is to encourage contractors to follow licensing laws and to deter other parties from entering into construction contracts with parties who are unlicensed. In the current case, this purpose is not hindered in any way by reforming the contract to reflect the true intent of the parties. The parties here agreed to hire a licensed contractor, Panterra GP, to do the work, making section 7031 inapplicable. In addition, Panterra GP’s request to have its day in court and seek reformation of the contract is appropriate.