Sunday, February 19, 2012

Illegal Construction Contracts

All states set standards for construction contracts. The notices and disclosures required by state law vary with the size of the job, type of work, materials used, who signs the agreement and even where the contract is signed. To see what’s required where you do business, go to Construction-Contract.net and click on your state.

Some of what states require in construction contracts is pretty trivial stuff. For example, a contract may not be legal if a notice is in less than 12 point bold type or is printed someplace other than just above the signature line. Or, failure to specify when payments are due and the amount due may make a contract illegal. It’s easy to make a mistake. What happens then? If the contract is illegal, does the contractor lose the right to collect?

Two Connecticut cases shed some light on that question. Both cases were decided on the same day, January 19, 2012. Both jobs were done under Connecticut’s Home Improvement Act. In both cases, the owner wasn’t satisfied with the work and refused to make final payment. In both cases, the owner raised the issue of an illegal contract when the contractor filed a lien to collect the full price. The contractor won the first case. The owner won the second. Here are the details.

Zunda v. Hess Construction (2012 Conn. Super. LEXIS 198) involved a $700,000+ job and was heard by a court in Stamford. The contract omitted the transaction date, the commencement date and a notice of cancellation. All are required by Connecticut law. Plus, the contract wasn’t signed by the owner’s spouse.

Currier v. McCue (2012 Conn. Super. LEXIS 169) was heard by a court in New Haven and involved a job with $51,845.45 in financing. The signed "Homeowner/Contractor Agreement" didn’t describe the work to be done. Again, that’s required by Connecticut law.

Both courts found the contracts to be defective -- not in compliance with Connecticut law. But that’s where the similarities end. The New Haven court ruled that the contract was void. The lien was discharged. The contractor was out the final payment due under the agreement. The court in Stamford found defects in the contract to be “technical.” Hess Construction could collect the full amount due.

What’s the difference?
The New Haven court simply applied the law as written. Period. “No home improvement contract shall be valid or enforceable against an owner unless . . .”

The Stamford court found that substantial compliance with Connecticut law was enough. “The legislature intended the Act to protect homeowners from unscrupulous contractors not to lead to unworkable and unjust results. . . The homeowners here were not prejudiced in any way by the Contractor's failure to comply technically with the Act.”

My point here is that no contractor should have to depend on a judge’s decision to collect what’s owed. You won’t make a dime on a job if collection requires two years of litigation. Whether you’re building in Stamford or New Haven or anywhere else, don’t give an owner excuses to withhold final payment. Use contract forms as complete and professional as your work on the job.

Fortunately, that’s easy: Construction Contract Writer drafts construction contracts that comply with your state law. The trial version is free.

2 comments:

  1. I have a paper due on what is illegal in Illinois for contracts. can you helpme find the numerous laws that apply please?

    ReplyDelete
    Replies
    1. Here are the Illinois laws that affect the legality of Illinois construction contracts:

      The Home Repair and Remodeling Act (815 Illinois Compiled Statutes sections 513/1 to 513/999) applies to nearly all work done on existing residential buildings with 6 units or less and includes both yard improvements and repair work. For example, 815 Illinois Compiled Statutes section 513/15 imposes a fine up to $2,500 for beginning work before a contract is signed. Home improvement and repair contracts have to disclose the total cost of the work. That means cost plus (time and material) contracts are not permitted for home improvement and home repair work. Section 513/15.1 voids any agreement to arbitrate if specific language does not appear in the contract. If any part of the cost is expected to be covered by insurance, section 513/18(f) requires that the right of the owner to cancel appear in this contract in bold type. Section 513/20 requires delivery of a consumer rights brochure before the contract is signed. Section 513/25 requires nearly all home repair and remodeling contractors to have public liability and property damage insurance.

      The Consumer Fraud and Deceptive Business Practices Act (815 Illinois Compiled Statutes sections 505/1 to 505/12 define deceptive acts and practices in many types of businesses. Section 505/2Q deals with the home improvement and repair. For example, using an incorrect business name or business address in a contract can result in a two-year prison sentence and a fine up to $2,500. Section 505/2Q(c) gives the property owner the right to demand return of all payments if work is not started and finished as provided in the contract. Punishment can result in a suspension of the right to do business in Illinois and a fine of up to $50,000 under Section 505/7(c). Violation of Section 505/2Q gives an owner the right to recover any loss and collect punitive damages, attorney fees and court costs under Section 505/10a.

      The Home Repair Fraud Act (815 Illinois Compiled Statutes sections 515/1 to 515/5 imposes a fine of up to $2,500 and two years in prison for (1) misrepresenting material facts about the job or (2) making false promises about the job, or (3) charging more than four times the fair market value of the work or (4) failing to comply with the building code..

      If no residential building code is in effect at the construction site, the contract must identify the building code the project will follow. § 815 Illinois Compiled Statutes § 670/15.

      Any contract clause which would indemnify someone against their own negligence is void. 740 Illinois Compiled Statutes 35/1

      Any contract clause which attempts to waive lien rights before the work is done is void. 770 Illinois Compiled Statutes 60/1(d).

      Any contract clause which excuses payment of a subcontractor until the prime contractor has been paid is void. 770 Illinois Compiled Statutes 60/21(e).

      Federal law also affects Illinois construction contracts.

      Failure to include the disclosures required by 12 Code of Federal Regulations Section 226.15 extends the right of rescission to three years (rather than three days).

      Omitting insulation disclosures required by 16 Code of Federal Regulations Section 460 can result in an $11,000 fine.

      Delete