Every Contract Requires a Meeting of the Minds

Dr. Julie Clark, a Tennessee veterinarian, wanted to fix up her home before selling. After a meeting on site, Dr. Clark selected Jeffrey Givens, a handyman, to do the work.

According to Dr. Clark, she agreed to pay Givens $9,775 for a total of four tasks:

• $8,500 to paint the house,
• $400 to remove and repair kitchen cabinets,
• $675 to strip, prime and paint those cabinets, and
• $200 to replace the bathroom countertops.

Givens didn’t remember it that way. He remembered bidding $11,575 for the entire job, including work on the driveway and garage floor, painting and replacing handrails on the porch. Dr. Clark admitted asking for a quote on that extra work. But Dr. Clark insisted none of this extra work was authorized.

Dr. Clark hoped the work would be finished in two weeks. But she didn’t specify a deadline or completion date. Givens estimated six-weeks would be needed just for painting the inside of the house. But his understanding was he could take as much time as necessary to do a good job.

Dr. Clark kept detailed notes on their conversation and the bid price. But there was no written contract. You know what’s going to happen next. When the job ran off the rails, Dr. Clark and Givens launched a 7-year court battle. Here’s how it happened.

Dr. Clark advanced Givens $2,500 to start work. That was January 2016. Two weeks later, she checked on the job and was disappointed. Not much progress. Givens assured her he would pick up the pace. Givens asked for and got another $2,000.

Dr. Clark returned to the job site a week later. Still little progress. According to Dr. Clark, she gave Givens a deadline. She would hire someone else if he didn’t do better in the coming week. Two weeks later, she hired a new painter.

Now What?

Dr. Clark demanded return of $3,700, part of the $4,500 she had paid Givens. When Givens didn’t pay, she filed suit for breach of an oral contract. In court, Givens claimed he was actually due more than the $4,500 he had already been paid. The trial court found there was a “mutual mistake” in an oral contract and entered a $5,075 judgment in favor of Givens. Both Dr. Clark and Givens appealed.

The appellate court reversed the trial court decision and remanded the case back to the trial court for another decision. After an attempt at mediation, the second trial court decision awarded Givens $4,500, the amount he had already been paid. This time, the trial court ruled there was no oral contract. Givens could collect for his time and materials and nothing more. Every contract requires a “meeting of the minds”. Dr. Clark and Givens had never agreed on the cost, contract terms or the work to be done. Again, both Dr. Clark and Givens appealed the trial court decision.

Last month (November 2023) the appellate court affirmed the second trial court decision. “The oral contract contemplated by the parties was not sufficiently definite to be enforceable because the parties did not agree on essential terms.”

After seven years, including two trials, mediation and two appellate decisions, the case of Clark v. Givens may finally be resolved. My advice. It’s easy to avoid legal nightmares like this. Take a few minutes to write a good, enforceable contract, even for simple jobs. There’s no better tool for creating a meeting of the minds than Construction Contract Writer. The trial version is free.

Note for Tennessee contractors: Anyone can work for wages. But Tennessee is one of 31 states that requires a written contract for home improvement work. Tennessee’s Home Improvement Contractor Act prohibits oral contracts on home improvement jobs.

 

Working Without a Written Subcontract

Do you write contracts for work assigned to subs? Many prime contractors don’t. And for good reasons, as I’ll explain later. But first, consider a Kansas case decided last month. Lux Building v. Prof’l Mech. Contractors.

Lux, the building owner, selected Farah Construction to turn a former Wichita office building into a mixed-use Leadership in Energy and Environmental Design (LEED) certified property. Farha subcontracted with PMC to install the chilled water Daikin VRV HVAC system. Unfortunately, there were problems. After doing call-backs for several years, PMC refused to do any more repair work. Lux and Farha had to hire another sub to keep the HVAC system working – at a cost of over $2 million. Farah sued PMC, claiming breach of their subcontract. But there was a problem. The PMC subcontract was in Farah’s file. But the subcontract had never been signed! How did that happen?

Farah and PMC had drafted and re-drafted the written agreement. It was ready for signature. And PMC started work. But PMC never signed the final draft of the agreement. Not a problem. For commercial work, Kansas does not require a signed written agreement. An oral contract is enough. Except for one little issue.

Under Kansas law, the statute of limitations on oral contracts is three years. Three years after breach, Kansas courts don’t permit suit on oral contracts. In the Lux case, more than three years had passed since the claimed breach. OK. But there’s a five-year statute of limitations on written contracts. PMC would still be on the hook for contract claims if the agreement had been signed. But a written agreement requires that all material terms be in writing, including a signature. The trial court’s ruling: A contract which is partly in writing and partly oral is an oral contract. The three-year statute applies.

Ted Farah explained why he didn’t always get written subcontracts:

“Depends on the sub and the scope of work. There are subs I have worked with for 20-plus years and, you know, have relationships and we often don't have -- we go to work without subcontracts, written subcontracts on I would say on-not today, but used to on a regular basis. I have worked with trusted [subcontractors] on small jobs in the past without a written subcontract. I would never work on a job of this size [the Lux job] with a party with whom I had not worked before without a written subcontract."

In essence, Ted admitted it was his mistake. He should have insisted on a signed contract before PMC started work.

The Kansas appellate court upheld the trial court decision. Farah Construction’s unsigned agreement was no longer an enforceable contract. PMC wasn’t liable for the extra $2,000,000 in repair work.

Word to the wise: Don’t get stuck like Farah Construction. On larger and more complex jobs, get a written and signed agreement with your subs. It’s easy. Construction Contract Writer drafts letter-perfect agreements for both prime contracts and subcontracts – no matter the state and no matter the type of work. The trial version is free.

Non-disparagement Construction Contracts

 Owners start most residential jobs with a Web search. Yelp and Angi and Thumbtack and a few others offer lists of local contractors categorized by construction specialty. Some include reviews volunteered by owners claiming to be former clients. Contractors can buy good placement and solicit kind words on these bulletin boards. That’s not cheap or easy and there’s plenty of competition.

Still, good reviews are like a magnet. They attract potential clients. But one angry customer with access to the Web can do plenty of damage to your reputation. A single one-star review carries more weight than a half-dozen five-star reviews. And getting bad reviews deleted, even fake bad reviews, takes time and effort – even when possible.

Unfavorable comments are called disparagement. They’re perfectly legal. Defamation is different and isn’t legal. Defamation is saying or writing something false with intent to do damage. So, what can you do to keep negative comments off the Web?

Non-disparagement contracts are common in many business situations. Most agreements that settle a lawsuit include a non-disparagement clause. Major employers commonly require a non-disparagement agreement before cutting an employee’s severance check.

In construction, disparagement wasn’t a high-profile issue until recently. The Web has changed that. Contractors who live off favorable Web listings recognize the importance of five-star ratings. When a job runs off the rails, dissatisfaction can run deep. That’s when disparagement becomes a hot topic.

Any time a business relationship ends on other than favorable terms, it’s best to have a non-disparagement agreement. Of course, the easiest time to get that agreement is before work starts. In construction, that’s when the owner signs the contract. For example:

Owner agrees not to disparage contractor by making any statement that would impugn the character, integrity, reputation or professionalism of contractor. Any evaluation of contractor provided by owner for distribution on public media will give contractor a neutral or better rating. Nothing in this agreement prevents owner from making truthful statements reasonably necessary to comply with law or regulation.

Notice that the sample clause above is unilateral. Only the owner is restricted. The clause works about as well if it were mutual. Both owner and contractor could agree not to make disparaging comments. Little harm in that. I don’t know any contractor who tried to destroy an owner’s business reputation.

Can You Enforce Non-disparagement?

It depends. First, understand that every negative comment isn’t disparagement. Suppose an owner posted on some Web site:

Case 1. “Their work was terrible. I’ll never call them again.”

Case 2: “They left the gate open and the dog got out.”

Both statements could be true. And both are likely to discourage potential clients. But the first is a hatchet job based on impressions. The second is not an attack on the contractor’s character, integrity, reputation or professionalism. It’s a legitimate caution. Anyone with a dog in the back yard might want to know.

Second, nothing can prevent an owner from responding truthfully to an inquiry from government (such as a building inspector) or legal process (such as a deposition).

If you have a non-disparagement contract and true disparagement (such as Case 1 above), the remedy is money damages, the value of your lost reputation. Proving that is mostly smoke and mirrors. But collecting money damages isn’t the purpose of non-disparagement clauses. Instead, non-disparagement forces an owner to think twice before making careless accusations.

Construction Contract Writer makes it easy to include non-disparagement in your agreements. The trial version is free.

Play by the Rules in Minnesota

Warranties come in two flavors, express (written in the contract) and implied, either by court decision or by state law. Forty-six states and the District of Columbia enforce an “implied” warranty on nearly every construction project. All states enforce the terms of any express warranty in the contract.

In Minnesota, nearly every residential contract has to include three paragraphs of express warranty: a one year guarantee on materials and workmanship, two years on plumbing, electrical and HVAC and ten years on any "major construction defect". Minnesota also implies a guarantee that work will comply with the building code. Minnesota’s Housing Statutory Warranties Act also:

• Prohibits waiving or disclaiming these warranties.
• Covers both the first owner and subsequent owners for a period of the warranty.
• Any contractor who ignores the law can be assessed a penalty of up to $10,000.
• Claims for breach of warranty must be made in writing within six months of discovery.
• Breach of warranty entitles the owner to sue for repair or collect the cost of repair.
• On home improvement jobs, the warranty begins running when work is completed.

With that background, consider the case of Liberte Construction v. Dustin Smith, decided last month by the Minnesota Court of Appeals.

Wind and hail damaged Dustin Smith’s Brooklyn Park home, including roofing, siding and gutters. Liberte bid $62,755 to make repairs. The contract included a warranty. You decide. Does this warranty comply with Minnesota’s Housing Statutory Warranties Act?

LIBERTE DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, EXCEPT AS SPECIFICALLY EXPRESSED HEREIN. Liberte warrants that for the one-year period from and after the substantial completion of the Scope of Work, the home improvement shall be free from defects caused by faulty workmanship or defective materials due to noncompliance with building standards. This Agreement and warranty shall not be assigned except by or with the written permission of Liberte.

Smith signed the agreement and made a $19,000 initial payment. Liberte started work.

A month into the job, Smith and the owner of Liberte did a walk-around inspection. Smith found some problems with siding and roof tiles. A month later, the City of Brooklyn Park did its first inspection. Cardboard shims under siding corners had to be replaced with proper shims. A second inspection a month later found no correction. A month later, a third inspection found proper shims. But a section of siding was loose.

Over ten months after the contract completion date, a city inspector returned to the property for the fourth time. This inspector found siding had been installed with drywall screws, not siding screws. One corner of the siding was loose. The inspector also found more cardboard shims. Again, the job failed inspection.

Liberte agreed to start repairs that month and asked for payment upon satisfactory completion. Smith wouldn’t agree to let Liberte do any more work on his home. Liberte filed to foreclose on its $35,719.18 mechanic's lien and for breach of contract. Smith counterclaimed, citing breaches of contract, statutory warranty, express warranty, and implied warranty.

At trial, Smith's expert testified that work Liberte did was so defective that the only proper repair was to start over. The trial court (1) awarded $12,000 to Liberte for breach of contract; (2) denied recovery on the express warranty because the job never got to substantial completion; (3) awarded Smith $28,697.75 in damages for Liberte's breach of implied warranty; (4) awarded Smith nothing for breach of an express warranty and (5) quashed Liberte's mechanic's lien.

What’s Wrong with this Case?

I don’t question the result. Smith got what he paid for. A defective roofing and siding job at a $60,000 discount. My complaint: Neither Liberte nor Smith played by the rules. Minnesota’s Housing Statutory Warranties Act lays out a set of procedures designed to avoid disputes like this. From the court’s report, neither Liberte nor Smith did what the law requires: (1) Liberte’s contract omitted the required warranty terms. (2) Smith didn’t give written notice when he discovered defects. (3) Liberte didn’t inspect those defects within 30 days. (4) The dispute wasn’t referred to Minnesota’s list of qualified neutrals for resolution. (5) Smith kicked Liberte off the job before substantial completion.

My advice: To avoid headaches and unnecessary expense, follow the rules. That begins with a good contract. The best resource is Construction Contract Writer. The trial version is free.

 

Mistake in the Plans

 Most surprises on a construction site fall into one of three categories:

• Differing site conditions – hidden or highly unusual conditions no one would have anticipated.
• Change in scope of the work – something discovered later, such as by the inspector.
• Mistake or omission in the plans – something the designer got wrong or didn’t consider.

I’ve covered differing site conditions and changes in the scope of work elsewhere. Mistake in the plans is different.

Earlier this month, a perfect example came across my desk. When it came time to connect the building sewer line to the sewer main, the plumbing sub discovered two mistakes -- both the diameter and location of the sewer main were wrong on the site plan. As with every surprise, the question was, “Who pays?”

Of course, construction contractors have to follow the plans. But it’s not that simple. Courts usually put it this way: A contractor has an implied duty to give notice when something in the plans either isn’t clear or seems defective. If the plans or specs seem inconsistent or wrong, take it up with the designer, engineer and owner before work starts.

But that wasn’t the issue with the plumbing contract on my desk. Nothing on the site plan was either missing or obviously wrong. Work was nearly done when the mistake was discovered. The civil engineer either made an error or didn’t bother to check district records.

What Should the Contractor Do?

1. Make the connection. Settle up on costs later.
2. Complete the job as shown in the plans. Leave the sewer line connected to nothing.
3. Stop work until the owner and prime contractor write a change order.

Before you answer, consider a case from the Wyoming Supreme Court (Hogan v. Postin).

The millwork sub, Hogan, agreed to make and install windows for restoration of the historic Tivoli Building in downtown Cheyenne. Postin was the architect and supervised Hogan’s work. When Hogan got started, he discovered a problem. The ceiling height on the plans wasn’t the same as the actual ceiling height. Hogan notified Postin of the mistake in his plans. Postin told Hogan to make the windows the size shown on the plans. To do that, the sill height had to be raised to 39 inches, not 27 inches as shown on the plans. Hogan built the storefront in his shop exactly as shown on the plans.

When Hogan installed the windows, Postin had a beef. He didn’t like the sill height. Postin wanted the sill height one foot lower (27 inches). Hogan agreed to re-do the windows and offered to keep track of the extra time and materials. The general contractor agreed that a 39” sill height was wrong and told Hogan to make the change. When Hogan tried to collect for the extra work, both the City of Cheyenne and the general contractor had a defense. There was no written change order, as required by both the prime and subcontracts.

So Hogan sued the architect, Postin. His plans were wrong. The trial court found in favor of Hogan, ruling the architect had to pay. Postin appealed. The district court reversed, ruling the architect was not personally liable for his mistake. Hogan appealed to the Wyoming Supreme Court. A majority of the supreme court affirmed the district court’s decision. Postin was not personally liable for his mistake in the plans. According to the majority, Postin was speaking for the City when he told Hogan to re-do the windows. As an agent of the City, Postin was not personally liable for a commitment made to benefit the City. But Hogan couldn’t collect from the City. There was no written change order. Pure Catch 22.

I prefer the dissent by Justices Rooney and Cardine. In directing Hogan to do the extra work, Postin waived the requirement for a written change order. Let Hogan collect from the City.

My Point

Mistakes in the plans can be a minefield. Tread carefully. The best protection is a well-written contract. In my sewer connection case, the plumber had an agreement drafted with Construction Contract Writer, including plenty of good language covering mistakes .Problem solved.

 

Get Reimbursed for Your Attorney Fees

Dianne Lee bought a new home in Contra Costs County, just east of San Francisco Bay. Her new house didn’t have a pool. And she wanted some exterior improvements. Dianne selected David Cardiff of Advantage Pools Bay Area to do the work: a pool and spa for $88,400, a pavilion with outdoor kitchen, fireplace and landscaping for $143,000.

It didn’t go well. After a dispute, Cardiff stopped work and walked off the job.

Dianne filed suit, claiming Cardiff’s work was defective. The trial court rejected most of Dianne's claims about the pool but agreed with some of her claims about the pavilion and landscaping. The court also agreed that Cardiff had violated state law by hiring workers as unlicensed independent contractors and not employees. The court ordered Cardiff to refund $238,470 plus contract and tort damages of $236,634. Of that, $35,000 was for defects in the pool.

Dianne won the case. But the court didn’t award reimbursement of her attorney fees. That was a surprise. California Business and Professions Code § 7168 authorizes an award of attorney fees to the “prevailing party” on swimming pool claims. Claims on other types of construction don’t qualify for an award of attorney fees -- absent specific language in the contract. Dianne’s contract with Cardiff didn’t say anything about attorney fees.

Dianne appealed the trial court decision, asking for an award of attorney fees. The appellate court had to decide:

• Was Dianne’s suit a swimming pool claim?
• Was she the prevailing party?
• Should the trial court have awarded Dianne her attorney fees?

The decision (Lee v. Cardiff, July 13, 2023): Reimbursement of attorney fees under § 7168 applies only to pools. Not spas. And not to Dianne’s other home improvements. Moreover, Dianne was not the “prevailing party” on the pool claim. True, pool plaster, tile and coping were defective. The trial court awarded Dianne $35,000 for that. But Cardiff had already offered to fix those problems before Dianne filed suit. So, on the pool issue, Dianne wasn’t the “prevailing party”. Her legal fees would not be reimbursed.

What About Your Contracts?

Should your contracts include the statement: Any judgment enforcing terms of this agreement shall include an award of court costs and reasonable attorney's fees to the successful party.

A clause like this raises the stakes. An owner with frivolous claims or weak defenses has an incentive to settle. But law on awards of attorney fees is different in every state. For example:

California -- The right to collect attorney's fees is reciprocal. If a contractor can collect attorney's fees after winning a contract dispute, an owner has the same right. California Civil Code § 1717.

Arizona -- Courts can award "reasonable" attorney's fees to the successful party in any contract dispute. Arizona Revised Statutes § 12-341.01

Connecticut -- If a contractor has the right to collect attorney’s fees, a home owner is given the same right. Connecticut General Statutes § 42-150bb.

Georgia – Better to leave attorney’s fees out of the contract. Official Code of Georgia Annotated § 13-11-8 gives contractors the right to collect attorney's fees if the dispute is over delinquent payment.

Most states won't award attorney's fees if the contract omits that subject. All states will enforce a contract clause awarding attorney’s fees to the prevailing party. But some states will enforce a one-sided clause – an award of attorney’s fees only if suit is necessary to collect what’s due. That always favors the contractor. 

To see what your state allows, have a look at Construction Contract Writer. The trial version is free.

 

Lame Contract is Worse Than No Contract at All

When a job goes bad, you better have a good contract. That’s a point emphasized many times on these pages.

But a New York case decided last month offers an interesting twist on this theme. When a Syracuse, NY job went south, the contractor claimed the agreement he drafted was void and unenforceable. Let’s see how a New York appellate court handled that. Hint: It cost the contractor plenty. The case is White Knight Construction v. Haugh.

Holly Anne Haugh of Madison County, NY wanted a new custom home. Kenneth Kovalewski of White Knight Construction agreed to build the home Holly Anne wanted. Kenny drafted the agreement, including a "New Home Cost Breakdown" listing both projected and actual expenses. The contract price was $93,287. But it wasn’t that simple. According to the court, Holly Anne and Kenny developed a “romantic relationship” before breaking ground.

This blog is about good and bad construction contracts. I’ll leave other issues to your judgment.

Well before final completion, Holly Anne’s romantic relationship with Kenny had cooled. But White Knight must have done considerably more work for Holly Anne than the contract required – without a change order. White Knight collected the contract price. But Kenny felt White Knight was entitled to more, lots more. White Knight filed a mechanic's lien for an extra $317,128 and sued to foreclose the lien.

At trial, White Knight had a problem – the original contract. With no contract or only an oral agreement, the $317,128 lien might be valid. With a good contract, White Knight could collect only the contract price. To collect on the lien, counsel for White Knight had to show the written agreement was void.

No Problem

Under New York General Business Law § 771, every home improvement contract has to include specific notices and disclosures. Kenny’s contract didn’t cite a start date or a completion date and omitted several other notices required by statute. Without these, White Knight could not recover for breach of contract.

But noncompliance with § 771 does not necessarily render the contract void. The statute bars a contractor from collecting under a defective agreement but doesn’t prevent a homeowner from recovery against the contractor. 

According to the appellate court:

“Given the context of the case at bar, it is crucial to recognize that General Business Law § 771 is a consumer protection statute designed to protect the homeowner. To allow a contractor to draft a noncompliant contract and then use its noncompliance to invalidate the contract so as to entitle him or her to relief that would otherwise be precluded by a valid contract would incentivize contractors to disregard the statute, thereby thwarting the intent of the statute.”

In other words, an owner may be able to enforce a lame agreement even if the contractor can’t. The appellate court dismissed the case and vacated the mechanic's lien. White Knight was out $317,128. 

Contractor Beware

Thirty-one states and the District of Columbia have consumer protection statutes that require written agreements on residential jobs: AR, AZ, CA, CT, DC, DE, HI, IL, IN, KY, LA, MA, MD, ME, MI, MS, ND, NH, NJ, NV, NY, OH, OR, PA, RI, TN, TX, VA, VT, WI, WV and WY. Twelve states don’t require a written agreement but do require a written notice or disclosure before work starts: AK, AL, FL, GA, ID, KS, MN, MO, MT, OK, SD and WA.

If you do work in any of these states, don’t make White Knight’s mistake. A bad construction contract may be worse than no contract at all. My advice: Use only contracts that comply precisely with state law. Construction Contract Writer drafts letter-perfect agreements no matter the site and no matter the type of job. The trial version is free.

 

Storm Damage Wipe-out in Nebraska

Insurance restoration contracting tends to be good work. No matter the season, no matter the economy, pipes break, kitchens burn, trees fall over, roofing gets blown away. With the insurance carrier funding repairs, payment is virtually guaranteed – or should be.

If you agree with that statement, keep reading. There’s more to understand. 

Twenty states (AL, AZ, CO, GA, IL, IN, KY, LA, MI, MO, MS, NE, NY, OK, SC, SD, TN, TX, UT, WI, WV) now set standards for insured repair contracts. These laws vary. But all require a very specific notice in the contract. The owner has at least a few days to cancel after any part of the insurance claim is denied. The contractor can not offer to rebate the deductible. And the contractor is prohibited from acting as the adjuster -- advocating for the owner, setting the scope of work.

Another difference: Property loss jobs have many more moving parts. The homeowner, the insurance adjuster, city and county officials if it’s a fire loss. If the site is a crime scene, law enforcement will be involved. And everyone comes with their own lawyer: the insurance company, the real estate company, the driver who hit the house, the owner, the city, the building department. Any time lawyers are hovering, you better have the best possible contract. 

A case decided earlier this year makes the point. RAD Services v. State Farm.

Here’s What Happened

Storms damaged twenty Nebraska homes, all insured by State Farm. State Farm's policy provides two payments:

1. Until repair or replacement is complete, State Farm pays only Actual Cash Value of the property before it was lost or damaged. ACV is the depreciated value based on age and condition. That’s like a tire warranty. If your 50,000 mile tires give out at 40,000 miles, you get a 20% credit on new tires.
2. When repair or replacement is complete, State Farm pays the cost to remediate damage less what was already paid as ACV. Replacement cost is usually far more that ACV. The owner gets a new roof to replace a roof many years old. That’s called “betterment” in insurance jargon. Not all home insurance policies cover betterment. 

State Farm made the first payment, value at the time of loss. When work was done, the contractor filed a claim for the second installment -- and discovered an expensive mistake.

There were no construction contracts. Instead, each of the 20 owners had assigned their claim rights to their contractor. Worse, the assignments didn’t show any contract price or scope of work.

That makes perfect sense – sort of. The scope of work should be whatever State Farm was willing to cover. The owner had to pay the deductible. The contractor and State Farm would settle up on the rest. No construction contract needed.

The court didn’t like that. In the opinion of the court, an assignment without an agreement on either scope of work or the price isn’t an assignment at all. As a matter of law, the 20 assignments were too vague to be enforced. Case closed. The contractor didn’t collect the second payment. Wipe-out.

If you do insurance repair work, you probably don’t agree. Property loss adjusters are very good at settling claims – both the scope of work and the price. Insurance carriers, owners and contractors need flexibility to negotiate settlements once scope of work is known. But until courts find a way to agree, you better have a good contract, especially on property loss jobs.

The best tool I know for drafting construction contracts is Construction Contract Writer. That’s true no matter the type of job or the site. The trial version is free.

If you’re new to property loss work, I can recommend another reference, Insurance Restoration Contracting by Paul Bianchina. Now available as an E-book from Craftsman.

Arbitration Road Blocks and Detours

When you sign a contract to buy a car or a cellphone, or apply for a credit card, you’re probably agreeing to arbitrate disputes. Why? Because lawyers who write these contracts agree. Arbitration saves time and money. And sellers usually win in arbitration.

So why doesn’t every construction contract require arbitration? Easy question. An agreement to arbitrate is an agreement not to litigate – sue in a court of law. That’s giving up an important right.

There are two broad currents running here -- in opposite directions. One limits access to arbitration. Another encourages arbitration. I’ll explain.

The current running against arbitration flows through state legislatures. Eleven states (CA, IL, MD, MA, MO, NE, OR, PA, SC, TX and VT) void any arbitration clause in a construction contract if the agreement omits certain disclosures. For example, specific language has to be in a certain location or in bold type or in caps or be initialed by the owner. Make a mistake in the contract and your dispute is headed to court. Why all these restrictions? Simple. It’s consumer protection law. No one should give up the right to sue by accident.

A second current runs in the opposite direction. Judges favor arbitration. It reduces their workload. Any hint in the contract that the parties agreed to arbitrate will get a sympathetic hearing in court.

Case on Point

Here’s an example, the recent California case of Leeor Builders, Inc. v. Forehand. You decide if the court got it right.

Leeor Builders agreed to improve LeRoy and Elizabeth Forehand’s southern California home. Near the bottom of the first page of the contract was a box with the text:

"ARBITRATION OWNER: Initial this box if you agree to arbitration.” The box was large enough to fit only one set of initials. In the box was written "EF" for Elizabeth Forehand.

The arbitration notice required by California law (in 10-point bold type) was on another contract page:

WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION TO NEUTRAL ARBITRATION.

Initials of “Direct Contractor” and Elizabeth were beside that notice. LeRoy’s initials are missing. He signed the contract but never initialed the agreement to arbitrate.

Below the space for initials, the contract provided, "in the event that Contractor and Owner have not each initialed the arbitration provision above, then it shall be conclusively agreed without a subsequent written agreement by all parties, that neither party agrees to arbitrate and the arbitration of disputes provision shall not be deemed to be a part of this agreement."

No doubt about who the “Owner” is, both LeRoy and Elizabeth Forehand. If Elizabeth agreed to arbitrate and LeRoy didn’t, then the contract did not require arbitration.

You can guess what came next. The Forehand job had problems. Eventually LeRoy brought a demand for arbitration. Leeor Builders objected, insisting the arbitration agreement was invalid. The reason: LeRoy was an owner, just like Elizabeth. Le Roy never initialed the arbitration clause required by California law. When the arbitrator refused to halt the proceeding, Leeor filed a complaint in superior court, asking for an injunction to stop arbitration.

This wasn’t a trivial issue. The arbitrator’s award came to $902,749. Now the court had to decide, does California law require initials of all owners. Or is one owner enough. The court’s decision: Elizabeth's initials were enough. The arbitrator’s award was confirmed. Hard cases make bad law.

Now you see the current running two ways. State law throws up road blocks to arbitration. State courts favor arbitration.

This time, I think the court got it right. But next time? Suppose one owner really didn’t want to arbitrate and refused to initial the contract. What then? In my opinion, the California legislature wanted to protect all owners. Any owner should be able to object to arbitration. Just don’t initial the arbitration notice.

If You Decide to Arbitrate

Don’t take a chance. Get the details right. Comply exactly with the laws of your state.

• The contract has to be clear, “owner and contractor will submit all disputes related to this job to binding arbitration.”
• Identify the arbitrator. AAA, CDRS and JAMS provide arbitration services nationwide. Disputes under $10,000 can usually be settled by email or video conference.
• Identify the arbitration rules. AAA, CDRS and JAMS rules are considered both fair and comprehensive.
• Make the arbitrator’s decision final. The words are, “Judgment on the award may be entered in any court having jurisdiction.”

Construction Contract Writer will help get it right, no matter the type of work or job site. The trial version is free.

 

Good Ways to Stay on Schedule

Have you ever had the electrician show up to rough-in the wiring before ceiling joists were installed? Have you ever had to keep the plumber waiting while relocating a partition wall? Whose fault is it when the inspector shows up for final inspection before the electricians are finished?

Coordination and scheduling are important tasks for every contractor. On the smallest projects, one person can keep track of nearly everything that has to happen. On a larger project, a calendar or checklist may be all that’s needed to remind you of important dates. As work becomes more complex and timing becomes more critical, someone has to begin laying out work schedules and charting progress.

Every task completed is a link in the chain that follows some prior link and precedes a later link. Scheduling is just making sure that each link falls neatly in sequence so work can go from start to finish by the most direct, most profitable route possible.

A schedule is a list of tasks to be executed in order – from top to bottom. Scheduling with pencil and paper works fine – until something changes. Then you need a good eraser. Some contractors schedule with a chalkboard or a grease pencil. That’s OK too. But you’ll need a big board to handle a large project. Years ago, most construction schedules were made with bar charts and arrow diagrams. Today, most scheduling is done with a computer.

Any scheduling tool you select has to be flexible. Schedules change. Revising the schedule should be a simple process. If the project lasts more than a month, you’ll want to review the schedule at least weekly. Identify both work completed on time and work not completed as planned. Consider ways to get back on schedule without increasing costs and without sacrificing quality. Then revise the schedule based on work yet to be done and what you’ve learned about performance of the trade contractors assigned.

A good schedule may be a contractor’s most useful tool. It makes prompt completion more likely and reduces idle or wasted time. A good schedule should also reduce or eliminate resource crises: essential labor or materials not on site when needed.

What’s in Your Schedule?

You’ve probably heard the terms CPM (critical path method) and PERT (Program Evaluation and Review Technique). They’re the same in many respects and can be referred to collectively as echeloning tools. Each identifies when a task can begin, how long it should take and when it should end. Detailed schedules show both a sequence of trades on the job and the sequence of tasks to be performed by each trade. With a detailed schedule, you can set both delivery times for materials and arrival times for trade contractors.

Every project schedule begins with a list of work elements (trades). Assemble those elements into a logical sequence. Excavation has to come before foundations, wall construction has to precede roof framing, subbase and base preparation come before paving. Identify the first day of work as Day One. Every day thereafter is assigned a number in sequence.

Of course, you don’t have to wait until every element is complete before beginning the next element. For example, plumbing and wiring rough-in can begin before the last roofing tile is laid.

Be especially sensitive to durations that don’t involve construction trades. For example, it takes time to get permits. Inspections aren’t always completed on the day scheduled. And, of course, nearly every job gets delayed by weather at one time or another. Delay is nearly inevitable – and can be expensive. That’s why a good schedule includes at least some float, the time a particular task can be delayed without delaying the entire project.

Even with the best schedule, delay can plague nearly any significant construction project. Protect yourself. Be sure your contracts cut extra slack when you need more time. Construction Contract Writer can resolve disputes in your favor any time there’s a schedule issue. The trial version is free.

What's this Going to Cost?

 How do you answer when an owner asks about cost?

Quote a price that’s higher than expected and the job may not happen. Quote a price that’s too low and your casual comment could end up being quoted in a legal brief. Refuse to quote any price and you’ll be considered devious or uncooperative.

So, what should you say when an owner asks about cost?

My advice: Welcome the question. It’s an invitation to start asking questions yourself. For example:

• “That depends a lot on what you decide. It’s a little too early to nail down a price. But I’m sure we can live within your budget. What figure do you have in mind?”
• “I’ve seen jobs like this go for between $X and $Y. Of course, the cost could be less or more, depending on choices you make later. A lot depends on finish materials and when you want to get started. When I know more about the job, I’ll give you a written estimate.”
• “I don’t want to quote a number off the top of my head. But I have some good references back at the office. I’ll work up numbers based on those figures and get back to you tomorrow with typical square foot costs.”

The cost question comes with an obvious advantage. It’s an open invitation to come back later with an answer. But don’t leave without qualifying your prospect. Too many on-site meetings are a waste of time. I call it a prayer meeting when:

• The owner is undercapitalized or isn’t a good prospect for potential lenders.
• Code or zoning restrictions make the work impractical.
• The owner isn’t being realistic about the cost or what can be built.
• The perceived need is based on assumptions that aren’t realistic.
• The owner has been turned down by several builders or lenders.
• Your prospect may not have authority to contract for the project as conceived.

To be sure you’re not in a prayer meeting, ask some questions yourself:

• “Have you talked to anyone about financing?” Obviously, financing is a key question. Every owner wants to improve their property. Not every owner can qualify for the financing needed to carry a project.
• “Do you have a budget in mind?” This is another key question, the beginning of price negotiations.
• “When would you like to see this job finished?” Identify unrealistic expectations as soon as possible.
• “Have you talked to any other builder [architect, engineer, or consultant] about this job?” If so, ask, “What did they say?”
• “Have you considered . . . ?” Try to identify zoning problems, potential issues with neighbors, design review committees, setback requirements or anything else that could halt the project.

If you plan to come back later with a proposal (and contract), be sure to collect job details:

• Name and address of each property owner
• Construction site – either street address or legal description (for lien purposes)
• Phone numbers –day phone and cell
• Email address
• A good concept of what the job requires – including rough dimensions and square footage Potential access issues, the availability of water, electric, sanitary facilities, etc.
• Who will pull the permit?
• Utility companies that will be involved.

When you come back with a price, bring a contract ready for signature. Construction Contract Writer drafts letter-perfect agreements for any residential or commercial project in any state. The trial version is free.

 

Court Cripples Ohio’s Home Construction Act

Ohio’s Home Construction Service Suppliers Act ("HCSSA") has been law since 2012. Apparently the law has never been interpreted or enforced by an appellate court -- until last month. That’s when Ohio’s Eleventh District Court of Appeals decided the case of Beder v. Cerha Kitchen & Bath Design Studio, LLC.

By way of background: Ohio’s HCSSA is a consumer protection statute. Specific acts are defined as deceptive. Changes to the contract price have to meet reasonable standards. Owners are entitled to notices and disclosures. Anyone injured by deceptive acts has a statutory remedy. Last month, the Act finally got its first test in court.

It didn’t go well.

Ilia Beder and Raimonda Beder filed suit under HCSSA after their home remodeling project fell into acrimony. The Beders claimed their contractor, Cerha, unreasonably delayed the work, performed defective work, was abusive and was not registered with the city of Mentor. At trial, both the Beders and Cerha claimed breach of contract.

Major irony: The trial court ruled that Ohio’s HCSSA applied to the Beder job. So far, so good. And then the court awarded the contractor damages for breach of contract. The Beders got nothing. Scratch Ohio’s stab at protecting home owners. But keep reading. It gets worse.

Remodeling Isn’t Construction

The Beder’s job was remodeling. No doubt about that. According to Appellate Court Presiding Judge Eklund, HCSSA applies only to new construction, not remodeling. His decision hinged on the meaning of “construction”. Judge Eklund relied on a definition of “construction” adopted nearly 30 years ago by the Ohio Supreme Court. "Construction" is the creation of something new, as distinguished from the repair or improvement of something already existing.

That’s going to be news to thousands of Ohio home improvement specialists – men and women who considered themselves construction contractors. Not so, according to Judge Eklund. They’re not in the construction industry.

I prefer the dissenting opinion by Judge Westcott Rice. True, HCSSA does not define “construction”. But any modern understanding of “construction” in the residential context has to include home improvement. Moreover, part of the law is nonsense if remodeling isn’t considered construction. Section 4722.01(B) of the act makes HCSSA applicable to work on a single apartment even if the structure has many apartments. Work on that single unit is almost certainly remodeling. Under HCSSA, it's also construction.

Today, most new residential construction is managed by merchant builders or spec builders. Custom-built homes are the exception in most communities. Judge Eklund’s ruling would apply HCSSA exclusively to custom-built homes, a small and dwindling segment of the housing market.

Even more persuasive: Most states have adopted consumer protection statutes to help owners planning home improvements. In Ohio, that was HCSSA. The Beder decision leaves Ohio in the minority of states without a home improvement statute.

I don’t expect this situation to last for long. Someone in the Ohio legislature is reading the Beder decision right now and shaking their head in disbelief. Expect the Ohio legislature to clean up language in HCSSA at their next opportunity.