Friday, June 22, 2018

Changes in Construction Contract Law – First Half of 2018

So far this year, eighteen states have changed how construction contractors have to do business. Some changes are trivial. Others will affect most contractors in the state. Here’s a state-by-state run-down on the most significant changes.

Wisconsin – The statute of repose for construction has been reduced from 10 years to seven years. Every state sets a limit for making claims against a contractor. That limit is six years in WI. But the claim period for construction defects doesn’t start running until the defect is discovered. That could be many years. The statute of repose now bars all claims seven years after substantial completion. Wisconsin Statutes § 893.89, effective April 18, 2018

West Virginia – Now requires that agreements for jobs over $10,000 cover 15 specific terms – start and completion dates, change orders, etc. A written contract is required with both the owner and your subs. The license Board is authorized to request a copy of the contract for any such job and has authority to discipline any contractor who fails to respond. West Virginia Code of State Rules § 28-4-4, effective April 16, 2018.

Virginia – Contracts by unlicensed contractors are now unenforceable. Virginia Code Annotated § 54.1-1115, effective April 30, 2018. The consumer information disclosure statement required in contracts has been revised. 18 Virginia Administrative Code § 50-22-RBC, effective January 1, 2018. The list of prohibited acts for all contractors has been revised. 18 Virginia Administrative Code § 50-22-260, effective January 1, 2018..

Tennessee – Has added to the list of actions by home improvement contractors that constitute consumer fraud. Tennessee Code Annotated § 39-14-154(b), effective July 1, 2018.

South Dakota – No matter what the contract says, South Dakota Codified Laws § 5-26-6 requires that money due subs and suppliers on state public works projects begins accruing interest at the rate of 10% per year 30 days after the prime contractor has been paid. Effective July 1, 2018.

Nebraska -- If insurance will cover at least part of the cost of a residential repair project, the Insured Homeowners Protection Act, § 44-8601 to 44-8608: (1) Requires new contract disclosures in 14-point caps, (2) Restricts any assignment of rights by the insured, (3) Requires an itemized description and price for the work to be done, and (4) Voids the agreement if the contractor violates any provision of the Act. Effective July 19, 2018.

Maryland -- Maryland Business Regulation Code § 8-620 gives the Maryland Home Improvement Commission authority to impose civil penalties of up to $5,000 for each violation of the code, whether or not the offender is licensed. Effective July 1, 2018.

Kentucky – Courts in most states won’t enforce a “pay-when-paid” clause in subcontracts because the clause defeats lien rights. With a “pay-when-paid” clause, subs have no right to collect if the prime contractor isn’t paid. A recent court decision indicates that Kentucky courts will enforce pay-when-paid clauses in subcontracts.

California – Big changes are coming for California solar contractors. Solar energy projects will have to include a “Solar Energy System Disclosure Document” as part of the contract. The aim is to standardize and simplify disclosures required for all residential solar projects. The Contractors State License Board is required by law to release a prototype disclosure statement by July 1, 2018. As of this writing, that hasn’t happened.

No matter where you build, clients expect you to know and comply with the law. Construction Contract Writer covers all these changes and many more. Regular updates are quick and automatic. CCW is the best way to be sure your contracts comply fully with the law of your state, no matter how the law changes. The trial version is free.

Wednesday, May 30, 2018

The Wrong Way to Close-Out a Project

A few years ago, Eric Novelli, a Tennessee contractor, agreed to have Wagner Heating & Air install the HVAC system in a new 3-story home Novelli had under construction. There was no written contract.

When work was done, Wagner called for final inspection by the City of Chattanooga. The inspector found no deficiencies. Two months passed. Novelli didn’t make a final payment on the job. Instead, Novelli showed up at the inspector's office with pictures showing what he claimed were defects in Wagner’s work. A senior building inspector re-checked the job and found some problems. Wagner made repairs and called for another inspection. This time, the entire system passed. But that wasn’t the end of the story. When Wagner presented his final bill, Novelli wadded it up, threw it away and told Wagner not to come back to the job. With no other option, Wagner filed a claim for $12,000.

Substantial Completion
The case of Wagner v. Novelli (2018 Tenn. App. LEXIS 281) was decided last week. Wagner got his $12,000. But it’s a classic example of what should NOT happen when work is complete. Here’s what should have happen at substantial completion of the Novelli job.

Work is a candidate for substantial completion when it could be used for the intended purpose – even if minor defects remain. The completing contractor should schedule the walk-through inspection. Everyone doing the walk-through needs a pencil and a tablet to make notes. Consolidate these separate lists into a single punch list of items to be completed after occupancy. Wagner said that he never got a punch list on the Novelli job. So we can assume there was never a final walk-through. Call for a walk-through when:
  • Installed equipment has been tested and is working, 
  • Testing required by the specs has been completed, 
  • Manuals, warranties, keys and controls have been delivered, 
  • Debris, waste, and excess materials have been removed, 
  • Work has passed final inspection,
  • Occupancy has been approved by the public authority,
  • Utilities and services are connected and working.

Terminate and rescheduled the walk-through if you discover:
  •  Anything that would limit the intended use, 
  •  Any problem hard to fix when the building is occupied, 
  •  Too many items incomplete, regardless of the type,
  •  Anything that would take days or weeks to complete.

The owner has to make a decision at the end of the walk-through. Is the job substantially complete? Or should another walk-through be scheduled later? Acknowledging substantial completion means, of course, that the remaining contract price is due less any retainage and maybe 150% of the value of work identified in the punch list. Clearly, the owner can’t have it both ways – denying substantial completion while using the premises for the intended purpose.

The most difficult question during walk-through is discovery of a problem overlooked by everyone, including the inspector. What happens then? Every case has to be decided on its own merit. But one consideration applies no matter the type of defect:

It’s the owner’s building. The owner has to live with the defect. If the owner considers the problem trivial, forget it. If the owner feels the defect has to be corrected, the contractor has to either make the correction or offer a discount. In the Tennessee case cited above, Novelli complained to the inspector and Wagner made the correction. I’m OK with that.

But I’m not OK with doing any significant construction work without a contract. Construction Contract Writer can head off problems such as project close-out issues before they morph into an expensive dispute. The trial version is free.

Saturday, April 21, 2018

Benefits from a Liquidated Damages Contract

Contractors get busy in springtime. Some of this work will come with a deadline. For example: “Can you finish in time for a June wedding?” Or, "Can it be ready for cousins visiting in July?” Any owner with a deadline will want assurance you’re going to finish on time – and may ask for a discount if you can’t. That discount is called liquidated damages. But it can work two ways, as I’ll explain.

Agreements with a deadline are usually referred to as “time is of the essence” contracts. You’ll see those words somewhere in the agreement. Any time you see those words, the contractor carries a dual burden:

  • Finish the work as planned;
  • Finish the work by a specific date.
The owner sets a deadline because some opportunity or advantage will be lost if work is finished late. Actual damages for late completion are notoriously hard to measure and prove. If time is of the essence, it’s much better to use a liquidated damages clause in the contract. Damages to the owner are set at a specific dollar amount for each calendar day of delay. That removes any uncertainty about the amount of damage and simplifies figuring the loss.

Courts like that. But courts won’t enforce a pure penalty for late completion. The damage amount has to be a reasonable estimate, for example, the cost of hotel space if work isn’t done in time for the wedding.

Benefits from Liquidated Damages
I wouldn’t turn down any reasonable request for completion by a deadline. There’s money to be made from liquidated damages. If you’ve got the resources and feel comfortable about on-time completion, bid the job based on the owner’s deadline.

But build some gravy into the job for your extra trouble. For example, write a bonus into the contract for:

  1. Meeting intermediate milestones in the construction schedule;
  2. Substantial completion (everything but the punch list) by the deadline date;
  3. Punch list items corrected by a set date.
Then protect yourself. The contract should extend the completion date for:

  • Changes in job plans or specs;
  • Shortages of labor, materials or equipment;
  • Unusually adverse weather;
  • Delay caused by any act or omission of the owner.
Other points your contract should cover: If the job has several parts and if some part is completed on time and another part is not completed when due, your contract should prorate liquidated damages. Then make liquidated damages the exclusive remedy for late completion. Finally, cap liquidated damages at the amount you’re owed. Liquidated damages shouldn’t put you in the hole.

Obviously, drafting a liquidated damages contract takes some care. Consider the contract language carefully. Be sure the most likely problems are covered and resolved in your favor. With the right liquidated damages contract, you can make good money.

I don’t know of a better source for drafting liquidated damages contracts than Construction Contract Writer. The trial version is free.

Saturday, March 31, 2018

Limits on Warranty Claims

Is this your worst nightmare?

You get a call out of the blue complaining about a job you finished many years ago. The caller complains your work was defective – required a lot of repairs, many thousands worth in fact. And the person complaining isn’t even someone you know. It’s someone who bought the house years later!

In a nutshell, that’s what happened to Chip Buerger of Chip Buerger Custom Homes, Inc. in Spicewood, Texas. When Chip didn’t pay what was asked, James and Maureen Maroney filed suit. That was February 2016. Last week, the Texas Court of Appeals decided the case. I’ll explain what the appellate court ruled. But first I’ll make an important point about warranty claims, and not just in Texas.

All states have a statute of limitation on warranty claims. It varies by state, of course. But the statute in many states includes separate warranty periods, one for cosmetic or finish items and another structural components such as foundation and frame. In Texas, the warranty period runs for either two or four years. An owner who fails to bring suit in that time is forever barred from making a claim.

So, with a four-year limit on warranty claims in Texas, how could Jim and Maureen make a warranty claim nearly seven years after work was completed? The trial court ruled they couldn’t, granting a summary judgment to Chip Buerger on the warranty issue plus $54,000 in attorney fees. Jim and Maureen appealed. And that’s when it got interesting.

The Discovery Rule
Jim and Maurine claimed defective construction had allowed water into the frame, causing structural problems. Full extent of the damage wasn’t discovered until March 2015, less than a year before they filed suit. Under Texas law, and the law of nearly all states, the time to make a warranty claim doesn’t start running until the defect is either discovered or reasonably should have been discovered. Discovery doesn’t require knowledge of the full extent of the defect. It’s enough if the plaintiff is put on notice that there’s a problem. Using that standard, the appellate court in the Chip Buerger case proceeded to examine when each of the defects had been discovered.

  • Poor waterproofing of the two-story porch had allowed water to penetrate the wood frame. Jim and Maurine saw cosmetic cracks in the mortar veneer as early as 2011. But they had no reason to suspect damage to the frame until much later. So, the warranty claim on the porch was filed within the time allowed by statute.
  • Two columns on the lake side of the house were set on untreated wood 2 x 4s. Jim was aware of that in 2011 and had these column bases replaced. The Maroneys had notice of the defective columns long before they filed a warranty claim. The statute had run.
  • House waterproofing was defective -- left openings all around, especially where wood trim met the masonry. Insects and pests got in "from the beginning". Eventually, Jim had the house envelope sealed, applying caulk at every gap. Jim and Maurine may not have known what was causing the "bug infestation", but they were on notice of open seams more than four years before filing suit. The claim for waterproofing was filed too late.
When the appellate court ruled Chip liable for re-construction of the two-story porch, that made James and Maureen winners of the law suit. In Texas, the prevailing party collects legal fees from the losing party. Not only didn’t Chip get to collect the $54,000 in attorney fees awarded by the trial court, he now had to pay the Maroney’s legal fees.

But what about the argument that Jim and Maureen didn’t buy the home from Buerger Custom Homes? The Maroneys were second owners. Buerger never promised the Maroneys anything. The court ruled that didn’t matter. Maroney v. Chip Buerger Custom Homes, Inc., 2018 Tex. App. LEXIS 2082. Under Texas law, the implied warranties of habitability and good workmanship protect a second buyer the same as the first buyer. Contract has nothing to do with it.

“OK”, you say. “Now please explain how I can fix this. I don’t want to be blind-sided like Chip Buerger.” For a possible answer, see my blog post of June 12, 2014. Courts in some states rule that implied warranties can be disclaimed by contract. Homes in those states can be sold “as is and with all defects”. To do that, you better have a good contract. I recommend Construction Contract Writer. The trial version is free.

Wednesday, February 28, 2018

The No-Contract Contract

Construction contract law can be more than a little complex. Every state has different requirements – notices, disclosures, warranties, waiting periods, penalties. The list grows longer every year as consumer protection laws multiply. What’s a contractor to do?

I’m going to have a suggestion a little later. But first I’ll offer an example of what not to do.

Noelle Tognella of Portland, ME asked Jon Talty of Talty Construction for a quote on home improvements. Jon drafted a proposal -- electrical, plumbing, drywall, tile, carpentry -- and quoted a cost. And that’s when the problems started.

Maine construction contract law for residential jobs isn’t simple. The contract has to set estimated start and completion dates, include a warranty statement, a statement on dispute resolution, a statement on change orders and has to inform the owner about the Maine Attorney General's website. Jon’s contract didn’t have any of that. No problem! That’s because nobody bothered to sign Jon’s proposal, not Noelle, not Jon. So there wasn’t any contract. Perfect. If there’s no contract, Jon hasn’t done anything wrong. Right?

Not quite. As I’ve said more than once in this space, when the job goes bad, you better have a good contract. And you can guess what happened next on this job.

Noelle thought the job was taking too long. She found fault with the quality of Jon’s work. And Jon’s invoices didn’t include the detail she wanted. The “no-contract” contract was changed several times to reflect higher costs and to clarify what work was covered. None of these modifications were signed by both Noelle and Jon.

By November 2016, Noelle had paid Jon $40,000, including $9,000 for work she claimed Jon had not yet completed. She asked for $9,000 back and terminated their non-agreement agreement. When Jon didn’t pay the $9,000, Noelle filed suit.

Maine construction contract law sets a forfeiture of "not less than $100 nor more than $1,000" for each defect in a construction contract. Jon insisted he shouldn’t have to pay. No contract existed. He never contracted to do the work. The proposal he offered was never signed by Noelle.

In short, is having no agreement at all better for Maine contractors than having a defective construction contract?

How Would You Decide the Case?

The Maine court confirmed that Noelle was entitled to a refund for work not completed. And then the court answered the contract question. The “course of conduct between the parties” was evidence of an intent to form a contract. That an agreement was never signed did not protect Jon from requirements of Maine contract law. Jon was found to have committed at least ten violations of Maine law and was assessed a civil forfeiture of $200 per violation. Last month, the appellate court upheld the decision of the trial court.

I agree with the court. Maine contractors have two splendid reasons to draft (and sign) valid construction contracts. First, good contracts add protection if the job goes bad. Second, valid contracts avoid the civil forfeitures written into Maine law.

So here’s a tip for any contractor: No matter where you build, you won’t find a better tool for drafting letter-perfect construction contracts than Construction Contract Writer. The trial version is free.

Sunday, January 7, 2018

Get the Name Right on Your Contracts

In January of 2015, Nicholas and Monica Koudela selected Bill and Bob Johnson to build their new single-family craftsman style home in Willowick, Ohio. The Johnsons offered a contract to do the work for $227,200. The heading on the signed agreement showed "Johnson & Johnson Builders" as the contractor.

Johnson & Johnson Custom Builders, LLC is a limited liability company licensed to do business in Ohio. The Johnson’s contract with the Koudelas omitted the words "Custom" and "LLC" from the company name. A little mistake. But it kept the Johnsons in court for two years, as you’ll soon see.

By May of 2016, the Johnsons and Koudelas were mired in dispute – mostly about the work. As I’ve said before in this space, when a job turns bad, you better have a good contract.

Attorney for the Koudelas reviewed the Johnson’s agreement and found some problems. Most obvious, there is no such company as "Johnson & Johnson Builders”. The Koudelas claimed failure to disclose the unregistered and fictitious name in the agreement was fraud. That prevented a meeting of the minds. So, there was no valid contract.

Before you laugh, consider how important a name can be. Many states license contractors, especially residential construction contractors. Where contractors are licensed, the contract better show the true name of the license holder. Anything else could be interpreted as contracting without a license. Even in states where contractors are not licensed or registered, the correct business name should be on the contract. For example, Ohio prohibits anyone doing business under a trade name or fictitious name from filing suit until the name is properly registered.

You Decide.
Was the contract void because Bill Johnson was careless about listing the company name?

Koudela v. Johnson was decided by the Ohio Court of Appeals last week. 2017 Ohio 9331 Fortunately for the Johnsons, they did some things right. First, page one, paragraph one of the contract included a statement that the builder was an Ohio LLC. Second, the contract required arbitration by the Ohio Arbitration and Mediation Center. Third, the arbitration clause was initialed by Koudela.

Every state stays legal proceedings if arbitration is required. Even better, arbitrators don’t have to observe all the rules that apply in court. For example, nothing prohibits arbitration of a contract with a company name that isn’t quite right.

The appellate court thought omission of "Custom" from the contract heading was immaterial. The Koudelas weren’t deceived by a mistake in the company name. They knew exactly who to sue, showing the correct company name on their legal complaint.

So the Johnson’s won. Right? Sure. But you can bet the Johnsons are much more careful now about listing the company name on their contracts.

Your takeaway from this little episode: Every mistake in a contract becomes a hook the owner’s attorney can hang a hat on. My advice: Avoid problems like the Johnsons had. Make your contracts as good as your work on the job. It’s easy to avoid the most common mistakes. Construction Contract Writer drafts letter perfect contracts no matter the type of work and no matter the state where you build. The trial version is free.

Sunday, December 31, 2017

Changes in Construction Contract Law for 2018

Eighteen states have made changes to construction contract law in the last few months. Some of these changes are trivial. A few will affect nearly every contractor in the state. Here’s a state-by-state summary of the highlights:

Arizona: Pool and spa work has to follow a new payment schedule if there’s no bond on the project. Payments can’t exceed 15% down, 25% more on completion of excavation, another 25% after installation of the pool or spa shell, 25% more after installation of the deck, and final payment just prior to application of finishing materials. Arizona Revised Statutes § 32-1158.01

Arkansas: Most residential contractors will have to show proof of current workers' compensation coverage before taking out or renewing a license. Arkansas Code Annotated § 17-25-514

California Labor Code Section 218.7(a) makes prime contractors liable if a sub at any level fails to pay wages or make benefit contributions. To protect yourself, write into subcontracts the right to review the sub’s payroll records. Then be sure subcontracts include the right to charge the sub if the contractor has to pay twice.

Connecticut General Statutes § 42-158k requires that retainage be released no later than 30 days after completion.

Kentucky’s Insured Roof Repair Act (§367.628) prohibits damaging a roof to increase the scope of work. Any violation entitles the owner to recover two times the amount of any damages.

Louisiana contracts for home improvement work offered by registered or licensed contractors have to include proof of liability and workers’ compensation insurance. Louisiana Revised Statutes § 37:2175.2. Penalties for residential contracting fraud have been increased (§ 202.1) to as much as twenty years at hard labor and a fifty thousand dollar fine or both.

Maine Revised Statutes Annotated Title 17 § 908 makes it a criminal act to write a residential construction or repair contract that: (1) Includes misrepresentations or (2) Gives a false impression, or (3) Makes false promises, or (4) Is intentionally deceptive, or (5) Is for repair of damage done by the contractor.

Montana Code § 28-3-704 makes the right to collect attorney fees reciprocal. If your contract includes the right to collect attorney fees if you win in court, you’ll have to pay attorney fees if you lose.

Rhode Island General Laws § 5-65-27 requires a special 3-day cancellation notice in home improvement contracts if one or more of the owners is age 60 or more.

Tennessee Code Annotated § 39-14-154(b) makes it a crime for a new home builder or home improvement contractor to either: (1) Refuse to make a refund when due or (2) Deviate from the approved plans and specs.

Vermont’s Home Improvement Contracts Act (Title 9, § 4010) requires that the following appear in any agreement: (1) Either the maximum price or, if time and materials, a statement that there is no maximum price, (2) A start date and a completion date, (3) Scope of the work including materials to be used, (4) A specific warranty, (5) A specific statement on change orders, (6) A maximum down payment of one-third of the contract price or the price of materials, whichever is greater. A contract that does not cover each of these points is unenforceable against an owner.

You won’t find good news for contractors on this list. Contract requirements for 2018 are stiffer. The penalties are greater. But there’s an easy way to keep your contracts legal, no matter the state. Construction Contract Writer will draft letter-perfect contracts no matter how the law changes. The trial version is free.