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.

Sunday, November 19, 2017

Bad Faith 3-Day Rescission

Every contractor knows about the 3-day notice required on residential jobs. Owners get three days to back out of any deal. Starting work sooner than three business days after signing is like giving an owner a loaded cannon. I’ll explain.

The federal three-day right to cancel is called the Reg-Z Notice. Some states also require a state 3-day notice. Most states waive their 3-day notice if you give the federal Reg-Z notice. Other states require their 3-day notice even if you give the federal Reg-Z notice. And there are exceptions – such as for emergencies – under both state and federal law. This isn’t simple. And it’s an issue in nearly every residential construction contract.

Don’t even think about omitting the required 3-day notice (or notices) from a residential contract. If your client wants to start work right away and has a reason, that’s fine. Your owner can waive the 3-day notice. But the waiver has to be done just right – in the owner’s handwriting, in the owner’s own words and covering specific key points. At your option, Construction Contract Writer can include a page that coaches your client through the waiver process.

Now back to that loaded cannon. Here’s an example:

The owner signs your contract. Work starts the next day. The owner sits back perfectly content as work progresses, even for several days or weeks, never letting out a squawk. When work is done, you present a final invoice. That’s when the owner opens fire.

Too bad. I’m not paying. I got your 3-day notice. But you didn’t give me the three days. So the law says I can rescind. That’s what I’m doing. I rescind. Here’s your signed cancellation notice. Now write me a check for what I paid and stay off my property.

Don’t laugh. It happens.
As in a Pennsylvania case decided last week, Waldron Electric v. Caseber. According to the court, Casebar agreed to have Waldron install surge and lightning protection. Waldron had the good sense to offer a valid Pennsylvania home improvement contract for signature. Casebar signed with no waiver of the 3-days. Waldron finished the job the same day. That was Saturday. The following Monday, a notice of cancellation arrived by certified mail at Waldron’s office. Casebar demanded a full refund -- and got it. Then Casebar ordered Waldron off his property. You decide if that was bad faith rescission.

The court didn’t use those words in giving judgment to Waldron. Instead, the court concluded: Because there was an otherwise valid Pennsylvania contract, nothing prevented the trial court from awarding Waldron reasonable value for his services – even without waiting the 3 days to start work. "We recognize that this . . . may provide contractors an incentive to complete work before the three-day rescission period ends . . . The result, however, is compelled by the statutory language.”

Pennsylvania law saved Waldron. If you do work anywhere else, be careful. The law in your state may not be so forgiving to contractors. On every residential job, get a valid contract. Construction Contract Writer will do that. The trial version is free. Then either wait three days or get a waiver.

Please don’t misunderstand my point. I’m not dissing the 3-day right to rescind. It’s just about eliminated high-pressure selling tactics for home improvement work. But the right to rescind can do damage too. With a little care, any contractor can keep this dangerous weapon out of the hands of clients.


Thursday, October 19, 2017

Oppotunities for PACE Contractors

If you haven’t heard of PACE yet, it won’t be long.

PACE stands for Property Assessed Clean Energy. It’s a new way to finance clean energy improvements and works with almost any property – residential, commercial or industrial. Most states now have a PACE program for commercial properties. California’s new (October 4, 2017) PACE program is likely to become a model for residential clean energy financing in other states.

Here’s how PACE works. First, find an owner who needs clean energy property improvement. The job could be better insulation, a cool roof, seismic or hurricane retrofit, solar photovoltaic, upgrading to more efficient windows or HVAC. May types of work qualify.
Then pitch PACE: 100% of the cost will be financed by a loan attached to the property, not the owner. There’s no up-front cost to the owner. The loan is repaid over 5 to 25 years through tax assessments on the property. If the property is sold before the loan is paid in full, the seller pays only for benefits to the date of sale. If done wisely, improvements will reduce energy costs enough to cover the extra taxes.

Residential PACE programs depend on contractors to sell the concept. Nothing happens until a contractor suggests PACE financing for clean energy home improvement.

Selling with PACE
Once you’ve settled on the scope of work and the price, write a contract for the job with Construction Contract Writer. Then draft an assessment contract for approval by a PACE lender. Three days after financing is approved, you’re free to start work. You get paid directly by the lender.

As you might expect, PACE contracting comes with some limits. For example, in California:
  • The bid price has to be the same as if the owner were paying cash.
  • The contractor has to meet requirements for licensing, permit and business registration.
  • Utility savings aren’t guaranteed and won’t affect the extra amount due on property taxes.
  • Owners with a recent bankruptcy aren’t good candidates for PACE financing.
  • The lender will call the owner to verify full understanding of the assessment contract.
  • The owner has three days to cancel the job after an assessment contract is approved.
  • Any claim about deductibility of construction cost has to be based on state and federal law.
  • The lender can underwrite training expense for contractors but can’t offer any other incentive.
  • As with any loan, the owner has to meet income and ability-to-pay standards.
Interest rates for PACE loans are usually a few percent higher than traditional mortgage loans. Administrative fees can add another 5%. But PACE financing rates compare favorably with rates for credit card loans or line of credit loans.

If financing prevents closing a clean energy deal, find a PACE lender authorized to approve assessment contracts in your community. To get in touch with the nearest residential PACE lender, go to