Wednesday, July 26, 2017

Calamity in Connecticut


Every experienced contractor has seen a job go bad – sometimes really bad. That’s what happened recently to Tankworks Removal and Replacement, LLC, a Connecticut home improvement contractor. One of their projects turned into a financial black hole nearly overnight. And it didn’t have to happen. Two good contracts would have saved the day. I’ll explain.

The home at 575 Thrall Avenue in Suffield, Connecticut had two old heating fuel tanks in the back yard, one below ground and another nearby above ground. Niagara Bank owned the home as part of an estate and was preparing the property for a sale. It’s hard to sell a home with obsolete fuel tanks. So the bank signed an agreement with Tankworks to remove both tanks and install a new tank in the basement.

Tankworks is a licensed Connecticut home improvement contractor. Part of what they do is remove and replace oil storage tanks for residential furnaces. That’s a common home improvement project in Connecticut. Tankworks and the bank signed their home improvement contract on March 3, 2014. From that point, almost nothing went as planned. I’ll list Tankworks’ mistakes.

1. The Tankworks contract didn’t comply with Connecticut’s Home Improvement Act. For example, there was no start date or completion date and no three-day notice of the right to rescind.
2. Work started without notice to the bank.
3. No one from Tankworks was on site during excavation.
4. The excavation crew didn’t have instructions on the order of work.
5. A tractor hooked the supply line from the above-ground tank, stretching the line until it broke.
6. The excavation crew left the site on Friday with the fuel line broken.
7. By Monday morning, fuel oil had puddled around the house to the front yard, flooding a swale by Thrall Avenue.

The bank paid $60,000 for cleanup and sued Tankworks for reimbursement. Last month, a Connecticut court awarded the bank $60,000 for negligence (2017 Conn. Super. LEXIS 3581) plus the bank’s attorney fees. That’s unusual. An award of attorney fees is rare in tort cases. But there was a reason.

Any violation of Connecticut’s Home Improvement Act is an “unfair or deceptive trade practice,” qualifying the plaintiff for an award of attorney fees. By using a lame home improvement contract, Tankworks opened the door to an award of plaintiff’s legal fees – perhaps several times cost of the cleanup.

A Prime Contract and a Subcontract
I’m not going to comment on the mistakes listed above. You be the judge on these. But there’s one point you shouldn’t miss: two good contracts could have saved this job.

First, a legal Connecticut home improvement contract with the bank would have insulated Tankworks against a claim for the bank’s attorney fees. Without a valid home improvement contract, Tankworks had no defense against the bank’s claim of an unfair trade practice.

Second, excavation on this job was done by Red Door Construction, a subcontractor to Tankworks. That should not be a surprise. Many residential contractors use an excavation sub. But a good subcontract could have: (1) made Red Door liable for their own negligence, (2) required Red Door to carry liability insurance and (3) indemnified Tankworks for any loss due to negligence of Red Door.

Don’t make a Tankworks mistake. Construction Contract Writer drafts letter-perfect contracts and subcontracts that comply precisely with state law and protect you when a good job goes bad.
 

Tuesday, June 13, 2017

Is This How You Do Business?


Chris Chase runs Chase Building Movers, Inc. in Wells, Maine. Chase specializes in timber frame barn moving and restoration. In May of 2011, Chris responded to an ad Ken and Nancy Lavin placed on Craig’s List. The Lavins needed a contractor to repair a timber-frame barn behind their home. On May 5, 2011, Chris met with Nancy Lavin on site to discuss the project.

Rot was plainly visible on the barn’s north wall. Chris pulled off several rotted shingles to get a closer look. He drew a rough sketch of the barn footprint and made a note, "Replace 6” x 6” sill with p.t." and "Replace studs as needed."

Chris offered to do the work at $45 per hour, his standard rate. Nancy agreed to provide the materials. Chris didn’t say anything about a written contract but agreed to start work when the barn was cleaned out and when Nancy had a building permit. That didn’t happen for over a year.

In October 2012, Nancy went to the Wells town hall to get her permit. She described the job as: "Replace 37 linear feet of existing garage wall and sill plates to match original. Total of 370 Sq. Ft." The value of the work was pegged at $10,000.

Chris had a crew working on site from October 18 to October 26, 2012. Nancy was there nearly every day and took pictures. After work started, Chris discovered that the sill under the west wall was also rotted. According to Chris, Nancy gave her OK to repair the west wall. Again, there was no written agreement for extra work.

By the following Monday, work was substantially complete. Chris presented Nancy with a bill for $8,460 -- 188 hours of work at $45 per hour. Nancy was surprised at the size of the bill. She wrote Chris a check for $5,000 and refused to pay any more. That left $3,460 unpaid.

Lavin vs. Chase Building Movers
Ken and Nancy sued, claiming breach of contract, breach of warranty, fraud, and violation of Maine’s Home Construction Contract Act. The Act requires a written agreement with 14 separate notices and disclosures. All changes to the contract must be in writing. Chris admitted at trial that he violated Maine’s HCCA. Under Maine’s Unfair Trade Practices Act, any violation of the HCCA is prima facie evidence of fraud. That gave Ken and Nancy the right to collect damages plus attorney's fees and costs. The cost to Chris could be many thousands of dollars – all because Chris didn’t bother to get a signed contract.

The case came to trial on April 12, 2017. Expert testimony convinced judge Douglas that work on the barn was structurally sound and substantially complete. He awarded Chris $2,520 of the $3,460 Chase Building Movers claimed and denied all claims of the Lavins. Chris wasn’t charged any of the $1,000 civil penalty that comes with violation of Maine’s HCCA.

Chris got off easy. Still, it took nearly five years to collect. Chris paid attorney's fees for much of that time, including the two-day trial. In the end, Chris got paid less than 90% of what he expected. No contractor wants results like that.

If you’re still working without written contracts, understand that times have changed. Modern consumer protection law in nearly all states puts residential contractors at a disadvantage. Without a signed agreement, you’re wide open to what happened to Chase Building Movers.

With Construction Contract Writer, it’s easy to draft contracts perfectly legal in any state and for any type of construction. The trial version is free.
 

Tuesday, May 9, 2017

Changes in Indiana Contract Law


Residential contractors in Indiana can trash their old contracts effective June 30, 2017. On July 1, Indiana’s old Home Improvement Act is replaced by Indiana’s Real Property Improvement Act (Indiana Code Annotated § 24-5-11-1 to § 24-5-11-14) To have a legal agreement after 7/1/17, residential contractors in Indiana have to make some changes:
  1. Work formerly classified as home improvement is now real property improvement.
  2. A written contract is now required for every interior or exterior improvement on residences with four units or less: new construction, alteration, replacement, reconstruction or repair, including work done to a basement.
  3. The 3-day cancellation notice has to change. Owners now have three days to cancel after the later of either (A) both the owner and the contractor signing the agreement or (B) a final written determination of insurance coverage for any claim of loss.
  4. Use of Email: The contract must include the email address of both the contractor and someone who will respond to inquiries from the owner. An owner can cancel the job by email.
Several new statements are now required in the contract:
  • The contractor, subs and suppliers are prohibited from making a claim against the owner’s insurance company.
  • The contract is conditional until all licenses and permits have been granted.
  • Disclosure that the project will require labor, materials or equipment from third-party subs or suppliers.
  • The full contract price (less any discounts offered) has to appear in the agreement.
How important are these changes? You decide. An agreement that violates the new Real Property Improvement Contracts Act gives an owner the right to collect damages up to $500. For a willful deceptive act, an Indiana court can award an owner three times actual damages or $1,000, whichever is greater, plus attorney fees.

Why all these changes?
The answer begins with a November 2010 audit of sales tax collected by Lowes Home Centers. The Indiana Dept. of State Revenue discovered that Lowes was charging sales tax on their home improvement contracts based on the wholesale cost of materials to Lowes, not the retail price of materials sold at Lowes outlets.

The Indiana Dept. of State Revenue objected and issued an assessment against Lowes. Lowes appealed that assessment and won in the Indiana Tax Court. The court’s December 2014 decision: Indiana’s Dept. of State Revenue didn’t have authority to equate Lowes time and material home improvement contracts with lump sum real property improvement contracts on which sales tax was due on the full retail cost of materials. That decision gave Lowes an advantage over residential contractors across the state. Lowes could charge their customers less sales tax! As you might expect, the advantage didn’t last long.

Indiana Senate Bill 353, signed by Governor Holcomb on April 25, 2017, re-set the balance. Under the new Real Property Improvement Act, Lowes and every residential contractor in the state is labeled a real property improvement supplier. That part of the Act was made retroactive back to 2010. All have to pay sales tax on the retail price of materials -- a clear victory for the Indiana Dept. of State Revenue. But other parts of the Act make obsolete nearly every residential agreement used by Indiana contractors.

If you need contracts that comply with Indiana’s new Real Property Improvement Act, have a look at Construction ContractWriter. The trial version is free.

Thursday, April 27, 2017

Can I Use My Contract Across State Lines?


“My company is based in Kansas. But I build in Missouri too. Can I use my KS contract on construction projects in MO?”

Good question. The answer is “No.” But it takes some explaining.

Contract law lets people decide where and how disputes will be settled – which court (the forum) and which state law (choice of law) will apply. If the contract makes reasonable decisions on forum and choice of law, courts will usually enforce the agreement as written. For example, the following would usually be a good choice: the state where the contract was signed or where goods were delivered or the home state of the vendor. On that basis, a Kansas contractor could use Kansas contracts on Missouri jobs. But keep reading. Construction contract law is different.

Most states require that disputes about construction in that state be settled by a state court applying law of that state. Twenty-six states fall in this “home rule” category: AZ, CA, CT, FL, IL, IN, KS, LA, MN, MT, NC, NE, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, and WI. In those states, decisions about forum and choice of law are made for you. Anything to the contrary in your contract is a waste of time.

“OK,” you say. “But MO isn’t on that list of 26 states. Doesn’t that mean my KS contract will work in Missouri?”

The answer is still “No.”

Most of the other 24 states, including Missouri, follow § 187(2) of the Restatement (Second) of Conflict of Laws, "The law of the state chosen by the parties to govern their contractual rights and duties will be applied...unless...(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue." Following that logic, no Missouri court has ever applied the law of another state to resolve a dispute about construction in Missouri.

“Fine. But I’m not trying to use Kansas law or Kansas courts to settle disputes on my Missouri jobs. I just want to use the same basic contract on all my jobs. Can I do that?”

Again, the answer is “No.”

Every state requires very specific notices and disclosures in construction contracts. Nothing in your contract about forum or choice of law is going to change the law at your construction site.

If your Kansas contract is legal, it includes several of these KS notices. All will be worthless on a Missouri job. For example, the notice required by the Kansas Residential Construction Defect Act does nothing on a job in Missouri. Terms required by the Kansas Fairness in Private Construction Contract Act are irrelevant in Missouri. The arbitration notice required by Kansas law is rubbish in a contract for construction in Missouri.

Worse, your transplanted Kansas contract won’t have notices required for construction in Missouri. For example, if any part of the work will be covered by insurance, the contract has to include disclosures required by Missouri Statutes § 407.725. Lien rights may be forfeit if the owner doesn’t get the notice required by Missouri Statutes § 429.012. Omit the notice required by Missouri’s Right to Repair Act and you lose the right to inspect any claimed defect and make repairs.

Other Examples
I’ve been talking about MO and KS. But you’ll have nearly the same problem in any pair of states. Take this to the bank: Contracts have to comply with law at the construction site. And construction contract law is different every state.

If you handle jobs in two or more states, there’s an easy answer. Construction Contract Writer drafts perfectly legal agreements for any state you select. The single-state version is $99. Or get CCW for all 50 states for $299. The trial version of either is free.

Once the 50-states version of CCW is installed on your computer, try this: Change the construction site address in any contract to a different state. The agreement morphs into a contract perfectly legal in the state just selected.

So, I guess the answer to the first question above is a qualified “Yes.” With Construction Contract Writer, you can make essentially the same construction contract work in every state.
 

Sunday, March 12, 2017

More Trouble for Tomi Akins


You may have heard the name Titilayo Akinyoyenu. "Tomi Akins,” as he’s known, is a Washington DC pharmacist facing federal charges of selling meds online to some 38,000 people without legitimate prescriptions. According to the US attorney, Tomi’s online sales netted $8.3 million. But the federal charges aren’t Tomi’s only problem. He got more bad news last week – in a dispute with his construction contractor. Here’s the story.

Back in 2011 Tomi signed a contract with Keswick Homes to build a $1,500,000 home on a one-acre lot in the Avenel neighborhood in Montgomery County, Maryland. The contract price was later increased by several written change orders. Before Tomi moved in, Keswick presented a bill for an additional $477,000 for site work -- engineering, soil testing, imported soil, a storm water-management system and 400 feet of 8’ to 16’ high retaining wall. Tomi refused to pay, claiming he never signed a change order for that work. Section § 10-505(3) of Maryland’s Custom Home Protection Act requires that new home contracts:

Expressly state that any and all changes that are to be made to the contract shall be recorded as "change orders" that specify the change in the work ordered and the effect of the change on the price of the house;

Keswick’s contract did that. But an addendum to the contract treated site work as an allowance. Keswick was to “manage, coordinate, and process payments to contractors upon completion of their work” and “submit accounting of all paid invoices at final draw with allowance to be adjusted to final cost at final change order.” In essence, the change order for site work was for an amount to be determined on completion. Did that comply with Maryland law?

The trial court ruled that it did. The jury awarded Keswick the full $477,000. Tomi appealed, contending a change order for work to be determined at price not stated was a violation of Maryland’s Custom Home Protection Act.

Last week the appellate court (2017 Md. App. LEXIS 233) agreed with Tomi. The change order for site work was void. But the appellate court didn't stop there. Under Maryland law, a void change order does not make the contract unenforceable absent proof that the owners were actually injured by the violation. In this case, Tomi didn’t prove an injury. “Consequently, the owners were not entitled to a judgment in their favor on the builder's claims. Instead, the court was entitled to submit the builder's claims to the jury, which found against the owners.”

So Keswick will collect the $477,000. The appellate court also reversed the trial court’s denial of attorney fees. Keswick is entitled to claim reimbursement for their $266,520 in attorney fees. As we said, it was a bad week for Tomi Akins.

So Can I Ignore Maryland Law on Change Orders?
Not recommended. Keswick won the case – but at a high price. Getting a signed change order is always easier than explaining why you didn’t get a signed order. But, you ask, “How can I quote a price on site work when I don’t know what’s needed?” That’s easy. And it works in all states that require a contract price in dollars and cents. Quote a Guaranteed Maximum Price (GMP) for the change order and then agree to split any savings with the owner. That’s essentially the same as a cost-plus contract but complies fully with state law. If you need help drafting a GPM contract, have a look at Construction Contract Writer. The trial version is free.



 

Saturday, February 4, 2017

Who Should Sign the Contract?


Every construction contractor can tell a story about working for a demanding, indecisive or argumentative property owner. But what you don't know about an owner could be far worse. A case decided in Washington DC this week illustrates the point.

Winmar Construction agreed with Restaurants America to convert leased space in a large office building at 700 6th Street, NW, Washington, DC to use as a restaurant. Work on the $1,024,824 project proceeded until May 10, 2013 when Restaurants America fell behind in their payments. Winmar was owed $575,732 and elected to sue to collect. Now, Winmar had a problem. Who, exactly, was Restaurants America, the project owner?

As it turned out, Restaurants America was a short name for Restaurants America Consulting Group, Inc., ("RACGI"), an Illinois corporation. Roger Greenfield was the sole shareholder, director, President, Secretary, and Treasurer. But Greenfield hadn’t signed the agreement with Winmar. Instead, Theodore Kasemir had signed on behalf of Restaurants America, a company that didn’t actually exist at the time.

Winmar sued in Washington DC superior court. When RACGI did not file a response, the court gave Winmar a default judgment for the full $575,732. To begin collection, Winmar registered the judgment in Cook County, Illinois, superior court where RACGI was incorporated. But RACGI didn’t have assets in Illinois. That should not have been a surprise. RACGI had been capitalized at $1,000, only enough to pay the filing fee for a new Illinois corporation. So Winmar filed a motion to hold Greenfield and Kasemir personally liable for the Washington, DC judgment.

Good idea. But the Illinois court didn’t agree. To collect from Greenfield and Kasemir, the court ruled Winmar would have to sue Greenfield and Kasemir. So, that was Winmar’s next step, filing suit in Illinois.

This time, the defendants filed an answer, insisting that the case be bounced back to Washington, DC, the place where work was done. The Illinois court agreed. So over a year and a half after work stopped, the case was back in Washington, DC, this time in U.S. District Court.

Now, the defendants filed for summary judgment, claiming they had no obligation to pay Winmar for the work. Greenfield and Kasemir didn’t have a contract with Winmar. Greenfield was only a consultant. The contract should have been with the building tenant, Townhouse DC, LLC, not the consultants. Anyhow, Winmar had already won the suit against RACGI. If the superior court agreed that the contract was with RACGI, how could Winmar now claim that the contract was with Greenfield and Kasemir?

The court wasn’t persuaded, ruling (2017 U.S. Dist. LEXIS 14869) on February 2 that the case could proceed. Winmar will have another chance to prove who owes the $575,732.

Don’t Make Winmar’s Mistake
Stay out of any “hide the owner” shell game. Your county assessor’s web site should settle any question about property ownership. If the property is owned by individuals, such as a husband and wife, both should sign your contract. If the owner is a corporation, an officer or director should sign for the corporation. If an LLC, ask a manager to sign. But check with your secretary of state to be sure the corporation or LLC really exists. If a partnership, any partner has authority to sign your contract. If the property is owned by a trust, the trustee can sign. If the property is leased, be sure the owner is informed of your work. You may not have lien rights against leased property. If you’re doing work for an unincorporated association, such as on the common area of a condominium, the owners’ association is your client. Be sure the association manager has authority to contract for the work. A resolution by the board of directors is your best evidence of that. In every case, be sure the project owner has resources to pay your bill. A copy of a loan commitment, tax return or financial statement will settle that issue.

Saturday, January 28, 2017

Contract Termination Your Way


Earlier this month I got a question from a construction contractor negotiating a deal with the owner’s attorney. The attorney wanted a termination clause in the agreement. The contractor wanted the job but didn’t want to give his client the right to back out of the deal once work started.

“Why even have a contract if the owner can terminate the job any time he wants?”

Good question. But there’s a good answer. First, a few basics.

There are two types of termination in construction contracts. Type one is termination for cause. For example, repeated failure to correct defects could be grounds to terminate for cause. That’s not what the attorney in this case wanted. He wanted the right to terminate at any time for “convenience of the owner.” That means for any reason at all – or even no reason at all. I know that sounds horrible to most contractors. But stay with me.

Termination for convenience clauses are very common on larger jobs. Public works contracts usually give government the right to terminate for convenience. After all, governments are political organizations supported by taxpayers. Politicians come and go. Taxpayers can be fickle. A new mayor or governor or agency head may have different priorities. Governments need some legal way to revoke commitments made by deposed politicians.

Even contracts for larger private projects commonly give owners the right to terminate at will. For example, Section 14.4 of A.I.A. contract form 101 allows an owner “terminate the contract for convenience and without cause.” Again, you can think of many reasons why an owner might have to terminate. Maybe a lender defaulted on a loan commitment. Or maybe rock discovered on site makes the cost of work prohibitive.

Make Termination Work for You
So, let’s assume your contract will include a clause allowing termination for convenience of the owner. Now what? That’s easy. It’s time to do some contract drafting. On termination, you collect:
  • For all work completed, including labor, material, overhead and profit.
  • Overhead and profit on the portion of the job not yet completed.
  • For all charges imposed by subs, suppliers and others that result from termination.
Then, be sure your contract includes protective language. Termination for convenience:
  • Must be in writing and must show an effective date.
  • Constitutes a waiver of any breach by the contractor.
  • Is acceptance of work done to that date.
  • Relieves the contractor of further responsibility under the agreement.
  • Requires payment in full within 30 days after contractor submits an invoice.
  • Any partial termination must describe the work being terminated.
  • Changes in the job require a change order, not a partial termination.

With those clauses in your agreement, what contractor wouldn’t be willing to turn the job over to others? I’m not suggesting that, of course. Contractors thrive on building a reputation for professional work and a list of satisfied clients. But if the job turns sour, it’s better to walk away with a good financial settlement.

Where can you get help with contract drafting like this? That’s easy. Construction Contract Writer covers all the bases: Have a look at the trial version. It’s free. Then you decide what fits best in your agreements. Termination by either the owner or the contractor and either for cause or for convenience. It’s your call.