Dr. Gary Jystad practiced family medicine
and surgery for over 50 years in Montana. In 1991, he built a log home on Flathead
Lake in Rollins, MT, the “dream home” of his wife Mary Ellen. A tragic fire in 2016
devastated the main building, leaving the garage and guest house damaged but not
destroyed.
In February 2017, Dr. Jystad signed a
contract with Flathead Management Partners (FMP) to oversee reconstruction. FMP
agreed to “coordinate and facilitate” remediation and “work at the exclusive direction
of Dr. Jystad”. FMP didn’t plan to do any work with FMP crews.
Under the contract, FMP would:
- Assist Dr. Jystad in selecting an appropriate design,
- Select and contract with a general contractor to execute that work,
- Supervise & coordinate the work and logistics of designers, contractors, vendors, permits and . . . all else necessary to complete the agreed upon scope of work in a timely manner and within an agreed upon budget.
If you’ve been in construction for a
while, you probably recognize this as a fixed-price construction management (CM)
contract.
Work got off to a good start. FMP and
Dr. Jystad worked well together. FMP pulled the permits and helped Dr. Jystad select
a general contractor. Work started on the main house. But on June 10, 2017 there
was a falling out. Dr. Jystad, his son Robert and his daughter Sharon met with FMP.
The meeting didn’t go well. At the end of the conference, FMP was told that their
contract was "null and void and terminated."
That didn’t set well with FMP. They stopped work and filed a construction lien.
Later FMP filed suit against Dr. Jystad, asking foreclosure of their lien and claiming
damages for breach of contract.
To his point, it was a simple contract
dispute. When an owner breaches an agreement, the contractor is entitled to damages,
usually loss of profit. In this case, FMP claimed those profits would have been
$191,876. And that was the award of the trial court.
In the Montana Supreme Court
Dr. Jystad’s appeal made a simple point.
The contract with FMP was not enforceable under Montana Code § 28-2-2201. Since April of 2009, Montana contracts for
construction of a new residence “between a general contractor and an owner” have
to disclose in writing:
- The contractor’s liability and workers’ comp coverage,
- The billing cycle and payment schedule,
- How change orders will be handled,
- A schedule of inspections and tests,
- That the owner can pay for other tests and inspections;
- The general contractor’s one-year warranty.
FMP’s contract covered none of this.
And the Montana Supreme Court has already ruled that an oral contract for construction
of a new home that lacked these disclosures was void under § 28-2-2201.
You Decide
Was FMP a general contractor under Montana
law? If so, FMP’s award of $191,876 gets wiped out.
Before you decide, consider this. Several
states have wrestled with this issue: Is a construction management contractor like
FMP a “construction contractor” under state law? Or was FMP just a consultant?
This isn’t a trivial issue. There’s plenty
at stake here. Construction management contracting (consulting) is now big business,
and for good reason. Most states require that general contractors be either registered
or licensed. Consultants need only a business license.
Two states have weighed in on this issue:
Since January 2014, California Business
& Professions Code § 7026.1 has made it clear. Anyone who bids construction
work or manages construction projects is a “contractor” and has to be licensed.
Just last week, a Louisiana appellate
court decided that a “job coordinator” on a residential project was required to
meet warranty standards imposed on general contractors in Louisiana. (Palermo v.
Homes & More, Inc.)
Expect other states to resolve this issue
in the next few years. My guess is that nearly all states will decide that CM consultants
are “general contractors” and carry all the burdens and benefits that go with the
title.
So, what did the Montana Supreme Court
decide? Under Montana law, a construction management contractor is not a “general
contractor” and doesn’t have to comply with § 28-2-2201. FMP gets to keep their
$191,876. (Flathead Management Partners v. Jystad, decided December 17, 2019).
My advice: Don’t expect the FMP v. Jystad
decision to stand for very long. It opens a gaping loophole in Montana construction
contracting law. The Montana legislature is likely to consider a change to § 28-2-2201
at the next session. To be safe, give the notices required of construction contractors,
even if all you do is consulting. Staying legal is quick and easy with Montana Construction Contract Writer. The trial version is free.
If you’re new to construction management
contracting, Paper Contracting by Mitchell & Moselle is the best hands-on guide
available.
