Bad Faith Contracting

Nearly every state requires notices and disclosures in construction contracts, especially residential contracts. What’s required varies from state to state. But most states require at least several of the following:

• A signed and dated written contract
• Contractor license or registration number
• Date when work will start and be finished
• Payment schedule
• Mechanics’ lien warning
• A statement about insurance or bonding
• Three-day right to cancel

What happens if your contract omits one of these notices and disclosures? In most states, that’s an invalid contract. It’s enforceable against the contractor but almost certainly not binding on the owner. A recent Connecticut court decision makes the point: Aqua-Scapes sued Mason to collect final payment on a pool job. Mason refused to pay, claiming the contract didn’t comply with Connecticut law. The court (2014 Conn. Super. LEXIS 3819) ruled for Mason:

"There is nothing dishonest or sinister about homeowners proceeding on the assumption that there is a valid contract, enforcing its provisions, and later, in defense to a suit by the contractor, in learning that the contract is invalid, then exercising their right to repudiate it."

It’s easy to make Aqua-Scapes’ mistake in a construction contract. What’s required by state law can vary with the contract price, the type of work (residential, commercial or insured loss), where the contract was signed (on site or in an office), the number of payments, when payments are due and even the age of the owner. In the Aqua-Scapes case, the contract was void because it:

• Omitted the contractor’s registration number
• Wasn’t signed by the owner. The owner gave his OK by email.
• Didn’t include starting and completion dates
• Omitted a notice of the owner’s right to cancel

Take this as black letter law: If your contract is a dud, the owner wins every dispute. In most states, you’ll have to jump through legal hoops to collect anything the owner doesn’t want to pay.

Bad Faith Contracts

Now go one step further. Suppose the owner spots a defect in your contract right from the start. Something required by state law simply isn’t there. The owner knows you’ll have no right to collect if there’s a dispute. But the owner signs anyhow, saying nothing about the defect – in effect, laying a trap. Heads, the owner wins. Tails, you flip again.

Oops! That owner has given the contractor what’s called a bad faith defense. The owner knew the contractor had no right to collect and went ahead anyhow. That’s bad faith. But proving it won’t be easy. As quoted in the Aqua-Scapes decision:

“Bad faith of a nature to preclude enforcement of [The Home Improvement Act] must involve ‘actual or constructive fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfill some duty or contractual obligation, not prompted by an honest mistake as to one's rights or duties, but by some interested or sinister motive’.”

Aqual-Scapes couldn’t meet that challenge. You shouldn’t have to. There’s a better way. Use contracts that comply precisely with the law in your state, no matter the type of job. The best way to protect yourself is with Construction Contract Writer. The trial version is free.

Getting Technical in Connecticut

In spring of 2007 William and Kristen Bachman decided to remodel their home in North Haven, CT. East Coast Custom Builders got the job for $77,244.50, including a $25,748 deposit. But when East Coast came by the Bachmans’ home to get a signature on the contract, there was a problem. Kristen didn’t have the $25 thousand ready. That was June. Six weeks later, the Bachmans had the money, signed the June contract, wrote a check and East Coast started work. So far, so good. At least so it seemed.

Unfortunately, the job didn’t go as planned. There was a dispute. Bill Bachman insisted the framing required hurricane ties and accused East Coast of damaging the septic system with a tractor. Tempers flared. Bachman ordered East Coast’s crew off the site and stopped payment on checks totaling $29,000. That put the job on the desk of two attorneys. East Coast’s opening salvo was a suit for breach of contract and foreclosure on their mechanics’ lien.

I’ve said it before. But it bears repeating. When a job goes bad, you better have a good contract.

The Bachman’s attorney reviewed East Coast’s contract and found two problems.

First, both Connecticut law and Federal law give a home owner three days to cancel a home improvement contract. The contract has to identify when those three days begin and end. The June contract had June dates for both beginning work and expiration of the three day right to cancel. The Bachmans didn’t sign the contract until July. So dates in the contract signed by the Bachmans didn’t work.

The court agreed: East Coast Custom Builders, LLC v. Bachman, 2011 Conn. Super. LEXIS 765. March 2011. Failure to identify the beginning date and end date for the three-day right to cancel made the contract unenforceable. East Coast lost on the claim for breach of contract.

But could East Coast collect on their mechanics’ lien? Every state gives contractors a claim for labor and materials used to improve property. Sorry, said the court. Connecticut’s Home Improvement Act voids lien rights when a contract is defective.

Bad news for East Coast. But it got worse. That was the second problem.

The contract gave attorney fees to East Coast if suit was necessary to collect. That must have been reassuring to East Coast. But Connecticut law makes the right to collect attorney fees reciprocal when a company sues a consumer. That means East Coast would have to pay the Backmans’ attorney fees if the Bachmans won in court. And that was Judge Markle’s ruling. East Coast was liable to the Bachmans for $13, 875 in attorney fees.

It’s easy to criticize the court’s decision. The Bachmans had 6 weeks to cancel the deal and didn’t. East Coast lost on a technicality. That should be a lesson for every contractor. Pay attention to what’s in your agreements. Courts take contracts very seriously. You should too.

If you’re serious about using good contracts, have a look at Construction Contract Writer. The trial version is free.