Do
you know any contractor who collects in full on every job?
Even
if there’s no real dispute about quality of work, every contractor is going to have
trouble collecting, at least now and then. Why? It’s simply human nature to get
the best deal possible. When it comes time for final payment, an owner has all the
leverage. If there’s any doubt about the amount due, you’re going to hear complaints
and excuses.
An
iron-clad agreement drafted with Construction Contract Writer leaves an owner little
wiggle room. That’s a point made many times in this blog. But there’s one collection
pitfall I’ve never mentioned: licensing. Where contractors need a license, unlicensed
contractors have no right to sue. Legally, that makes payment voluntary.
About
half the states and many cities and counties require a license for at least some
types of construction. Contractors without the right license lose every time in
court. That’s black letter law. And having the right license isn’t a simple matter.
Note a case decided earlier this month in Maryland: Glen Valley Builders v. Whang.
Glen
Valley agreed to make improvements to the home of James S. Whang in Potomac, Maryland.
This was no small project. Living area of the Whang home was 17,000 square feet
before work started. Remodeling would nearly double the size of this home.
Two
years into the job, Whang fell into a dispute with Glen Valley Builders. Whang had
paid $2,220,000 for work done so far but refused to pay any more. So Glen Valley
sued. Whang’s attorney did what every attorney should do when defending a construction
case. He checked licenses and discovered that Glen Valley Builders was never licensed,
either in Montgomery County or in the state of Maryland. He asked the court to dismiss
the action. The trial court agreed, ruling that Glen Valley Builders was unlicensed
and had no right to collect what was due.
But
the case didn’t end there.
Lewis Friedman, sole owner of Glen Valley Builders, had
a perfectly valid Montgomery County (Maryland) New Home Builder license. Friedman’s
name was on the contract as guarantor of the work. Even more persuasive, Friedman's
license number appeared on the building permit application. Friedman’s attorney
appealed the trial court decision, arguing that Friedman's agreement as a licensed
builder made him responsible for the work. Being licensed in Montgomery County as
a new home builder qualified Friedman under Maryland law to handle a $2 million remodeling project. No other license was needed.
The
appellate court agreed with Glen Valley Builders. The appellate court sent the case back to the trial court to decide two issues. Did Mr. Freidman's guarantee make him a party to the construction contract? If so, does a new construction
license from Montgomery County exempt a builder from Maryland’s Home Improvement
Law?
Four take-aways from this
case.
Glen
Valley Builders has another bite at the apple. Eventually the trial court will decide if Glen Valley Builders gets paid. In the meantime, it's easy to avoid Glen Valley’s mistake:
- Understand that unlicensed contractors can't sue to collect.
- Have the licenses your state, city and county require.
- Limit work to what's allowed under your license.
- Write contracts in the name of the license holder.
