When a Job Goes Bad . . .

 

A case decided in Indianapolis last week makes the point once again: Any time there’s a dispute on a construction project, the contractor better have a good contract. Jim Dorey didn’t and paid the price. Here’s what happened.

 

A hail storm in December 2012 damaged the roof of Faye Warfield’s home. Liberty Mutual’s adjuster responded to the claim and asked a roofing contractor, Jim Dorey, to contact Warfield about repairs. Dorey made the sales call. He offered samples of shingles and Faye’s daughter signed Dorey’s roofing contract. At Warfield’s request, Dorey quoted a price for rebuilding Warfield's chimney before starting on the roof. 

Months later, while doing the shingle tear-off, Dorey discovered portions of the roof deck that had to be replaced. Liberty Mutual authorized Dorey to do that work too. Dorey added decking to the contract but didn’t ask Faye to sign a change order. The agreement for chimney work was entirely oral. 

When all work was done, Liberty Mutual paid with checks made out to Faye Warfield. Dorey expected those checks would be endorsed and turned over to him. Surprise! That’s not what happened. After several months, Dorey had to file suit to collect. An attorney for Warfield fired right back with counterclaims, alleging violations of Indiana law and claiming Dorey's lawsuit was frivolous.

 

Like nearly all states, Indiana sets standards for residential contracts. Dorey’s contract had problems: His delivery address was missing. There was no starting or completion date. The notice of right to cancel was omitted entirely. There was nothing in writing about the chimney. Faye didn’t actually sign the contract. Her daughter did. Worse, Dorey didn’t have a contracting license when the agreement was signed and didn’t pull a permit for replacing roof deck. Warfield’s attorney insisted the contract was void. Dorey had committed a deceptive act under Indiana’s Home Improvement Contracts Act (HICA) and had no right to collect the $13,925.78.

 

Notice this: Warfield had no complaint about Dorey’s work. Her complaint was about Dorey’s contract.

 

The trial court decided Dorey lame contract was good enough. Warfield wasn't damaged by any failure of Dorey to comply with Indiana’s HICA. Warfield appealed. The appellate court awarded Dorey his $13,925.78 under the theory of quantum meruit, the “amount deserved.” After all, it would be unjust for Warfield to benefit from Dorey’s work without paying for it. But the appellate court also found Dorey's contract to be void.

 

So Dorey Came Out OK?

Not quite. Notice the date December 2012. It took Dorey nearly four years in court to get a judgment against Warfield. That cost plenty. And because his contract was void under Indiana law, Dorey lost out on collecting attorney fees. My guess is that his attorney fees were several times the $13,925.78 award. A void contract left Dorey with none of the advantages contractors are welcome to write into their agreements:

• Contractor collects attorney fees if suit is needed to collect.
• Monthly interest is due on late payments.
• Anything not in the contract is at extra charge.
• Changes required by law are extra work.
• Changes are done at the normal selling price of contractor.
• Contractor provides no warranty other than required by law.
• Disputes have to be resolved by arbitration, not litigation.
• Full payment is due when work is done.
• The insurance carrier is authorized to pay the contractor directly..

Moral to the story: No contractor has to use a lame contract. Drafting a letter-perfect agreement is easy, no matter the state or type of job. Construction Contract Writer handles all the details. Just check a box to put any of these advantages in your agreement. The trial version is free.

 

An Enigma for Maryland Contractors

This blog is about consumer protection law – what contractors must do to stay legal in their state. It’s a big topic and grows every year. State legislators like piling the protection deeper and deeper – usually in the form of notices and disclosures that have to be inserted in construction contracts. 

Without the right words in your contract, you may have no right to collect. Or you could be fined or disciplined by the state board. Or you could face jail time.

Most consumer protection laws make sense – at least to the lawmakers. But every once in a while, a new law comes along that makes very little sense at all. Maryland Commercial Law Code § 14-302.1 fits that category. 

The law, passed as Maryland House Bill 439, becomes effective on June 1, 2016. If the law applies, home improvement contracts have to include a paragraph explaining the buyer’s right to cancel – five days for those under 65 and seven days for those 65 and older. For the contract to be legal, the buyer has to sign a statement acknowledging receipt of an oral explanation of the right to cancel. The signed statement has to be on a sheet separate from the contract and has to show the date when the right to cancel expires.

Make a mistake on any of this and you’ve committed an “unfair or deceptive trade practice” under Maryland law. Expect a $1,000 fine (first offense) or both fine and a year in jail (repeat offenses).

The new Maryland law is pretty routine stuff. Many states (CA, CT, DC, FL, GA, HI, IN, KY, LA, MI, MO, MS, ND, NH, NJ, NY, OK, RI, TX, VT, WA, WV, and WY) have similar statutes.

What makes the new Maryland law so peculiar is the exceptions. Section 14-302.1 goes on and on about what has to be in a home improvement contract. And then exceptions swallow the rule. I’ll explain.

The Rule Gets Swallowed

Exception 1: The new law doesn’t apply if the buyer has the 3-day right to cancel under federal law. That’s in § 14-301(d)(2)(ii). Any time you do work on the primary residence of the owner, the owner has the 3-day right to cancel.

Exception 2: The new law doesn’t apply to rental property because contracts for improvement of rental property are not for personal, family or household purposes of the owner. That’s in § 14-301(c)(1).

So if the owner lives in the house being improved, the new law doesn’t apply. If the owner doesn’t live in the house being improved, the new law doesn’t apply. There’s not much left.

So why the new home improvement disclosure statute? Like I said, legislators earn credit by piling on consumer protection law. But in this case, I believe it’s a simple mistake. The bill was sponsored by delegates Kramer and Fraser-Hidalgo. Did they get bad legal advice? Or maybe they didn’t read or understand their new law. We’ll see what happens in the next MD legislative session.

No matter how deep your state piles consumer protection law, Construction Contract Writer will make sure your agreements are letter perfect. The trial version is free.

 

What Warranty Do I Have to Offer?

Last week I got a question from a contractor who had read the June 2016 Consumer Reports article on home improvement. He told me that nine out of 10 contractors in the CU article claim to offer a written guarantee of their work. He wanted advice on the guarantee he should offer. My answer: “Fine. We can work up a written warranty. But understand that all your jobs come with a warranty already – even if you never breathe a word about it in the contract.”

Here’s why that’s a true statement. Forty-six states and the District of Columbia impose an “implied” warranty on contractors on nearly every construction project. Just by taking a job, you guarantee work will be done using customary skill and care, will comply with accepted standards and the finished project will be reasonably fit for the intended use.

Who enforces that warranty? Courts in every state decide construction warranty claims on a case-by-case basis. Exactly what meets state standards and how long the warranty lasts are a question for the judge and jury. Some states (AZ, CA, RI, SC) publish a list of construction standards – defining what constitutes a construction defect. Other states (DE, KY, LA) consider anything that doesn’t comply with the building code to be a defect.

Is there any way to avoid this implied warranty? Yes. That’s called a “disclaimer” of warranty. A carefully worded disclaimer will be enforced in most states if clear and conspicuous (bold type, upper case, “as is,” etc.), especially if the defect in question is part of the negotiations and will be obvious to the buyer. But don’t try to include a disclaimer in every construction contract. That won’t work.

Four states don’t imply any warrant. Instead, GA, ME, MN and NJ require contractors to give an express (written) warranty: Georgia requires a written warranty on single-family and duplex dwellings. See my blog post of March 31, 2009 for details. Maine requires a written warranty for residential jobs over $3,000. Minnesota requires a guarantee on materials and workmanship for one year, plumbing, electrical and HVAC for two years and structural components for 10 years. New Jersey contractors have to include a written guarantee with each bid.

What About an Express Warranty?

All states permit express written warranties in addition to the warranty required by state law. Here are the options if you want to offer more than the minimum warranty. These are listed in order of the least risk to the most risk to the contractor:

• When you install materials, equipment or appliances that come with a written manufacturer’s warranty, pass warranty documents to the owner.
• Offer a warranty on named components. For example, the roof won’t leak for five years or cabinet doors won’t sag for 10 years. Construction Contract Writer offers a good choice of warranties for 40 construction trades – everything from asphalt paving to windows and for any period you select.
• Offer a warranty on all material and workmanship. For example, “Contractor warrants that the work shall be free of defects due to faulty material or workmanship for the period specified in this agreement.”
• Offer a broad form warranty. This is the warranty usually required on public works projects: “Contractor warrants that work performed under this contract shall conform to the contract documents and be free of defects in material, design furnished and workmanship performed by contractor or any subcontractor or material supplier for the period specified in this agreement.”

If you use Construction Contract Writer, the choice is yours. Just check a box to offer the warranty you prefer.

Breach of Construction Contract

Most construction disputes begin with a surprise. And no job can astonish better than rehab work. So how do you stay out of disputes on repair jobs? Maybe you can’t. But a case decided earlier this month in Maine may be a good model for contractors on residential and light commercial repair jobs.

Chris Bond agreed to have Riley Woodwork remodel the Sebego Lake Rowing and Sailing Club in Standish, Maine. Before taking the job, Riley warned that the clubhouse was an old building – rotted floor joists and subfloor and outdated electrical system. Riley wrote what he called a “baseline” bid and added a caution about unforeseen problems. The job scope might change once work started. Riley estimated the baseline cost at $26,781. Bond signed a written agreement to pay more for approved extras.

That was a good beginning but not the end. Bond had another project for Riley, renovation of a condominium in South Portland. While work on the Sebego Club was still in progress, Bond had Riley start on the condo job – and even asked Riley to make that a top priority.

Two months later, Riley was about done with the condo. He requested final payment of $6,674. Bond admitted he owed the money but refused to pay until some additional work was done, about a day’s work, according to the trial transcript. Riley wanted to be paid first. Bond wouldn’t do it. The result was a general falling out between Bond and Riley.

Bond ordered Riley to stop work on both jobs. In Judge Walker’s words, “This refusal was the catalyst, along with a general pastiche of conflicting personality types.   . .” Riley pulled off both jobs and sent final bills. Bond refused to pay another dime. Riley recorded liens on both properties and filed suit to collect. Bond counter-sued, claiming faulty workmanship, late completion and violation of Maine’s Home Construction Contract Act.

At trial, the question was, “Who breached the contract, Riley or Bond?” The first to commit a material breach of contract is liable for damages. A material breach of contract is any "non-performance of a duty that is so material and important as to justify the injured party in regarding the whole transaction as at an end." Judge Walker concluded that Bond's failure to pay any amount on the final condo invoice was a material breach of contract. The only other issue was the amount to be awarded Riley in damages.

Riley was ready. He had the contracts, estimates, material receipts and time cards. Bond claimed Riley’s bills were inflated. The court found otherwise. Riley’s charges were “reasonable, necessary and customary” and supported by testimony at trial. The court awarded Riley $10,690.98 for Sebago, $8,062 for the condo plus interest and attorney fees, but less $300 for the last day of work on the condo.

Take-Aways from Riley v. Bond

Disputes are inevitable, especially on work in older buildings. So make a few precautions part of your business practice. It paid off for Riley and could for you too:

1. Caution that there could be extras.
2. Include payment for extras in your contract.
3. Keep good job records.
4. Be ready to sue when nothing else works.

The best way to vet potential disputes is with a good construction contract. You won’t find a better tool for drafting iron-clad agreements than Construction Contract Writer. The trial version is free.

Changes: Here Comes the Judge

Tom and Denise Ambrose wanted to add a pool to their home in Carmel, Indiana. They selected Dalton Construction to do the work. Dalton’s plot plan for the pool was approved by the city. Just to be sure, Dalton laid out the pool outline on the ground using metal stakes, string and orange paint.

When Dalton’s excavation crew arrived on site to begin work, Denise had a problem. The pool layout was wrong. Dalton re-staked the pool where Denise wanted it. And that’s where the pool was built. Tom and Denise monitored the work almost every day and never said anything more about location of the pool. But when a subcontractor began making stress cuts in the freshly poured concrete deck, Denise turned irate. The cuts were not like a neighbor's pool deck! And the concrete was the wrong color. Denise told the subcontractor to stop work.

Dalton Construction met with Tom Ambrose a few days later to get the job back on track. It wasn’t going to happen. Ambrose demanded that Dalton demolish the pool and replace it with a pool with squared corners. Ambrose refused to pay the $21,775 still due until the pool was replaced and refused to let Dalton finish the work or call for final inspection. Dalton filed a mechanic's lien against the property and won a judgment at the trial court for the $21,775 plus $42,525 in costs and attorney's fees.

Ambrose appealed, claiming the trial court’s decision was contrary to Indiana Law. He had some good points. The pool was built in the wrong place. True, Denise asked for that change. But any oral modification of their contract was invalid for two reasons. First, the contract prohibited oral changes. Second, Indiana Code § 24-5-11-10(d) prohibits enforcing oral changes: "modification to a home improvement contract is not enforceable against a consumer unless the modification is stated in a writing that is signed by the consumer." There was no written change order.

What Would You Decide?

Is Dalton out the $21,775 plus $42,525 in costs and attorney's fees for agreeing to an oral modification of contract?

Earlier this month, the Court of Appeals of Indiana sided with Dalton (2016 Ind. App. LEXIS 35), mostly on technical grounds: First, the location of the pool was not in the contract. So there was no oral modification. Second, Ambrose didn’t raise the argument about Section 24-5-11-10 during trial. In the opinion of the court, arguing that point on appeal was too late.

What can you learn from Ambrose v. Dalton Construction? That’s easy. Oral changes are toxic. Get every change in writing. A written change order could have saved Dalton Construction five years of legal wrangling. 

If you use Construction Contract Writer, simply click a box to put a blank change order form in your contract – what’s included in the change, what’s excluded, the cost, the new contract price, and an agreement to pay in full for extra work when the extra work is done. Any time you agree to make a change, whip out that form and start writing.

Changes in Construction Law for 2016

Nineteen states have changed their construction contract law in the last few months. Some of these changes are trivial. Others will affect contractors throughout the state. In several cases, legislatures are simply falling in line, writing new statutes to mirror law adopted recently in other states. Highlights are below.

Florida’s Notice and Right to Cure Act was revised effective October 1, 2015 to clarify the date of completion, impose additional requirements on the notice of claim, revise the content of the response and identify records to be produced when a homeowner has a complaint about the work. Owners can still opt-out of the act by signing a statutory waiver. Florida Statutes §§ 558.001 to 558.004.

Minnesota was the first state to give owners the right to cancel a contract for storm damage repair if the owner’s insurance carrier denied any part of the claim. That law went into effect in May of 2011. The original law applied only to roofing and siding repairs. On May 19, 2015, Minnesota Statutes § 326B.811 was revised to give owners the right to cancel a contract for any type of storm damage repair (not just roofing and siding) if any part of the insurance claim was denied.

Nevada Statutes § 624.609 was revised to limit subcontractor retainage on commercial jobs to 5%. Before January 1, 2016, prime contractors on commercial jobs could retain 10% of the amount due their subs.

New Jersey Administrative Code § 13:45A-17.3 was amended on April 21, 2015 to allow licensed home elevation contractors to do home improvement work.

Rhode Island now requires a written contract showing the contractor’s registration number on all jobs valued at $1,000 or more. Code of Rules § 01-030-001 Division 3.1.5 (1 & 2) was revised on May 14, 2015.

Virginia had allowed subcontractors and suppliers to waive their lien rights before work was done. For example, an agreement offered to a subcontractor could include a blanket lien waiver. For subs, that took the teeth out of Virginia’s mechanics’ lien law. Virginia Code Annotated Section 43-3-C was changed on April 15, 2015 to void any attempt to require subs or suppliers to waive lien rights before work is done or supplies delivered.

West Virginia became the 18^th state to give an owner the right to void a storm damage repair contract if the insurance carrier denied any part of a roofing repair claim. West Virginia Code §§ 46A-6M-1 to 46A-6M-6 were changed on July 15, 2015 to require both a statement in the contract explaining the right to cancel and a detachable cancellation form in duplicate. After denial of any part of the insurance claim, the owner has five days to cancel the work. The other 17 states requiring storm damage repair contracts: AL, AZ, GA, IL, IN, KY, LA, MN, MO, MS, NE, OK, SC, SD, TN, UT and WI.

It’s easy to be sure your contracts comply with these and other changes in state and federal law. Get Construction Contract Writer. The trial version is free. If you’re already using Construction Contract Writer, your program will update automatically when changes in the law affect your jobs.

How Much is This Going to Cost?

Nearly everything you buy at a store or online is made before it’s sold. Construction is different. The job gets sold before work starts. That’s why an owner’s first question is likely to be about price. Experienced contractors anticipate the cost question and are ready with an answer that helps sell the job.

There’s no single best answer to the cost question. But quoting a price off the top of your head is a mistake. Even if you have a ballpark figure in mind, keep that number under your hat. Better answers include: 

•          “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. It depends on finish materials and when you want to get started. Say the word and I’ll write up a detailed estimate.”
•          “I don’t want to quote a number on the fly. I’ll work up some numbers and get back to you tomorrow.”

What’s the worst answer to the cost question?

That’s easy: Starting work without quoting any price at all. A recent Indiana case makes the point. A sump pump failed at the home of Vincent Cullers, flooding his basement. Carpet was wet, wood flooring had buckled, doors had warped, etc. First Response Services, a dryout contractor, got the call. After work started, Cullers signed a "Third Party Work Authorization" giving his insurance carrier, State Farm, authority to pay First Response. The work authorization included the following statements:

Therefore, I understand it is impractical to give an accurate quote for services before completion. I have been supplied with First Response Services' standard price list and agree to pay the prices listed.

In the event any legal proceedings must be instituted First Response shall be entitled to recover the cost of collection including reasonable attorney's fees.

When work was done, First Response sent a bill for $7,722.43. That’s when problems started. State Farm denied the claim. Cullers refused to pay the bill, insisting (correctly) that he never agreed to pay that amount. First Response filed suit for $7,722.43 plus their legal fees.

Cullers' attorney claimed the Work Authorization didn’t comply with Indiana’s Home Improvement Contract Act (HICA). The act requires a detailed description of the work and an agreed price. The contract First Response used didn’t even come close to that standard.

The trial court cut the claim in half, awarding First Response $3,780.38 and no attorney fees, reasoning that suit would not have been needed if First Response had complied with Indiana’s HICA. First Response appealed the judgment and lost again in the appellate court. First Response was out nearly $4,000 on the job plus many thousands more in legal fees.

Don’t make the First Response mistake. Use contracts that comply with state law. Construction Contract Writer does that for every state and for every type of work. The trial version is free.