Contracts With Unlicensed Builders – Void or Voidable?

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Building or remodeling a home often leads to disputes between homeowners and their builders over the quality of workmanship, cost increases or the timeliness of performance. In those instances, it sometimes turns out that the builder failed to obtain a residential builder’s license, as required by Michigan’s Occupational Code. In such cases, MCL 339.2412(1) of the Occupational Code bars the builder from maintaining suit to collect for its work, providing: “a residential builder or residential maintenance and alteration contractor shall not bring or maintain an action in a court of this state for the collection of compensation for the performance of an act or contract for which a license is required by this article without alleging and proving that the person was licensed under this article during the performance of the act or contract.”

How does MCL 339.2412(1) affect the rights of the homeowner and the builder if their dispute goes to suit? Several questions immediately come to the forefront.

First, does that statute allow an unlicensed builder to file a complaint or a counterclaim against the homeowner for the unpaid contract price? Can the builder defend a claim brought by the homeowner under the same contract?

Second, does MCL 339.2412(1) provide the homeowner with an independent cause of action for damages, including the return of any compensation already paid to the unlicensed builder?

Third, is a contract for the services of an unlicensed builder void ab initio or is it only voidable with the possibility of a continuing legal existence?

All of these questions were answered by the Michigan Supreme Court in the recent decision in Epps v. 4 Quarters Restoration LLC, 2015 Mich LEXIS 2027 (September 28, 2015). This case involved a contractual dispute between the plaintiff homeowners and an unlicensed builder defendant. The plaintiffs entered into a building contract with the builder not knowing it was unlicensed. After the builder discontinued work on the plaintiffs’ residence, disputes arose regarding whether the job was completed and whether the work was performed in a satisfactory manner. The plaintiffs sued the builder, alleging its unlicensed status precluded it from receiving any compensation for its services and that the parties’ contract was void and unenforceable. The trial court granted summary disposition in favor of the plaintiffs.

The Court of Appeals disagreed that MCL 339.2421(1) mandated the trial court’s action, holding that the statute did not apply because it only operates to prevent an unlicensed builder from “bring[ing] or maintain[ing]” claims against the homeowner. However, it affirmed the trial court’s decision on different grounds, i.e., that the builder had committed fraud and converted payments for its services.

The Supreme Court found the Court of Appeals correctly held that the statute was inapplicable, stating that “it does not bar the compensation itself, but only an ‘action’ to collect it.” While the Court determined that a “cause of action” included a complaint, counterclaim, cross-claim or third-party claim, it found that this did not include the defense of a claim. Thus, the Court held that if it is the homeowner who seeks compensation or performance from the unlicensed builder, the homeowner has brought the “action” and the builder is entitled to defend against that claim, including the right to seek to retain compensation already paid. However, the unlicensed builder is still precluded by its statutory violation from suing the homeowner for damages.

As to the second question listed above, the Supreme Court also agreed with the Court of Appeals that MCL 339.2421(1) does not create a private cause of action by the homeowner against an unlicensed builder for the return of compensation already paid. Rather, the Supreme Court found “[t]he statute has but one purpose – to prevent an unlicensed builder from ‘bring[ing] or maintain[ing] action[s] . . . for the collection of compensation[.]”

The Supreme Court then addressed whether a contract between a homeowner and unlicensed builder is void ab initio because it contemplated the performance of an illegal act or rather was merely voidable. The Supreme Court’s thorough discussion of the differences between a void contract (deemed “a nullity from the outset”) and one that is voidable is well worth reading by the bench and bar. Noting the confusion that has arisen in the unlicensed builder contractor context, the Supreme Court held that in drafting MCL 339.2421(1) the Legislature intended that contracts between an innocent homeowner and an unlicensed builder are voidable. The Court found this interpretation provides the most protection for the homeowner by allowing them to enforce a contract with an unlicensed builder and to sue the builder for specific performance or damages, which relief would be unavailable in the absence of an enforceable agreement.

In summary, the Michigan Supreme Court’s decision in Epps clarifies several important issues that arise in suits between homeowners and unlicensed contractors. It should be standard reading for counsel representing both homeowners and builders alike.

For more information, please contact Leif Anderson at landerson@nagmlaw.com.