Monday, June 22, 2015

Bad Faith Contracting


Nearly every state requires notices and disclosures in construction contracts, especially residential contracts. What’s required varies from state to state. But most states require at least several of the following:
  • A signed and dated written contract
  • Contractor license or registration number
  • Date when work will start and be finished
  • Payment schedule
  • Mechanics’ lien warning
  • A statement about insurance or bonding
  • Three-day right to cancel

What happens if your contract omits one of these notices and disclosures? In most states, that’s an invalid contract. It’s enforceable against the contractor but almost certainly not binding on the owner. A recent Connecticut court decision makes the point: Aqua-Scapes sued Mason to collect final payment on a pool job. Mason refused to pay, claiming the contract didn’t comply with Connecticut law. The court (2014 Conn. Super. LEXIS 3819) ruled for Mason:

"There is nothing dishonest or sinister about homeowners proceeding on the assumption that there is a valid contract, enforcing its provisions, and later, in defense to a suit by the contractor, in learning that the contract is invalid, then exercising their right to repudiate it."

It’s easy to make Aqua-Scapes’ mistake in a construction contract. What’s required by state law can vary with the contract price, the type of work (residential, commercial or insured loss), where the contract was signed (on site or in an office), the number of payments, when payments are due and even the age of the owner. In the Aqua-Scapes case, the contract was void because it:
  • Omitted the contractor’s registration number
  • Wasn’t signed by the owner. The owner gave his OK by email.
  • Didn’t include starting and completion dates
  • Omitted a notice of the owner’s right to cancel

Take this as black letter law: If your contract is a dud, the owner wins every dispute. In most states, you’ll have to jump through legal hoops to collect anything the owner doesn’t want to pay.

Bad Faith Contracts
Now go one step further. Suppose the owner spots a defect in your contract right from the start. Something required by state law simply isn’t there. The owner knows you’ll have no right to collect if there’s a dispute. But the owner signs anyhow, saying nothing about the defect – in effect, laying a trap. Heads, the owner wins. Tails, you flip again.

Oops! That owner has given the contractor what’s called a bad faith defense. The owner knew the contractor had no right to collect and went ahead anyhow. That’s bad faith. But proving it won’t be easy. As quoted in the Aqua-Scapes decision:

“Bad faith of a nature to preclude enforcement of [The Home Improvement Act] must involve ‘actual or constructive fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfill some duty or contractual obligation, not prompted by an honest mistake as to one's rights or duties, but by some interested or sinister motive’.”

Aqual-Scapes couldn’t meet that challenge. You shouldn’t have to. There’s a better way. Use contracts that comply precisely with the law in your state, no matter the type of job. The best way to protect yourself is with Construction Contract Writer. The trial version is free.

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