Friday, October 16, 2015

Construction Contracts and Licenses

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.