Bad Contract, Good Result

Frank Salame owns a home in Pomona, California. Eleven months out of the year, Frank works in Lebanon as an engineer on building projects. When no one is home in Pomona, Frank has a friend, Antoinette Auon, look after his house.

While Frank was in Lebanon, neighbors noticed a liquid leaking from under the garage door. Turns out, a water filter under the kitchen sink had sprung a leak. By the time Frank got word of what had happened, water had seeped into kitchen cabinets, flooring, down walls and into the ceiling of the garage below. Mold was blooming everywhere.

Because he was in Lebanon, Frank asked his friend, Antoinette, to "take care of" the problem. She did, signing contracts with Star Restoration to put Frank’s home back in livable condition.

Star Restoration got to work. A plumber removed the leaking water filter. A mold expert assessed what had to go. When contaminated materials had been removed, restoration started: framing, sheetrock, plaster, painting, tile floor in the kitchen, kitchen cabinets, new countertop and sink.

Meanwhile, Frank filed a claim with his insurance carrier, giving Antoinette "full power of attorney to handle" his claim. Frank collected $28,000 from the insurance company. But when Star Restoration sent their invoice for $42,360, Frank refused to pay. Instead, he offered to settle for $28,000. Star refused the offer and filed suit.

You decide. Did Frank owe the full $42,360?

At trial, Star Restoration had some problems.

Frank Never Signed the Contract

But the court decided Antoinette was acting as Frank’s agent when she signed. Remember that Frank had given Antoinette “full power of attorney” to handle his claim with the insurance carrier. Plus, at one point, Frank gave Star instructions to "finish the job". The court concluded Antoinette had signed with Frank’s consent.

The Star Restoration Contract Was Lame

To be valid, California home improvement contracts need 18 distinct notices and disclosures: start date, end date, the contract price in dollars and cents, a description of the work and so on. Star Restoration’s contract had none of that. Contracts that don’t comply with state law are presumed void. That’s true anywhere you do business.

If the contract was void, Frank owed Star Renovation nothing.

The court had a different view. Where the contract is not otherwise illegal, courts can enforce a bad contract if:

(1) the owner is not in the class the statute was enacted to protect, and

(2) the owner would be unjustly enriched if the contract were voided.

Here, both (1) and (2) apply. Frank is an engineer with years of construction experience, not an unsophisticated consumer likely to be swindled. Second, Frank would be unjustly enriched if he kept the $28,000 and got his home renovated at zero cost.

But Star Restoration’s contract wasn’t a complete bust. The agreement gave Star 1.5% per month interest on any unpaid balance plus attorney fees if suit was necessary to collect.

The trial court entered judgment for Star totaling $212,504.09: $35,360.62 in damages, $36,375.91 in prejudgment interest, $5,926.49 in costs and $132,290 in attorney fees. Last month, an appellate court affirmed the trial court judgment.

Star Restoration also got a warning from the state license board: From now on, use only contracts that comply with state law. The best way to do that is with Construction Contract Writer. The trial version is free.

Robbing Peter to Pay Paul

Every contractor knows the temptation: use cash from job A to cover expenses on job B. That’s called diversion of funds. It’s perfectly legal in some states and a crime in others. But it’s not good business in any state. The Massachusetts case of Damian Anketell illustrates my point.

Damian Anketell was a licensed Massachusetts home improvement contractor, doing business as Ground Up Construction. Not long ago, he signed a contract to remodel the attic of a Massachusetts home – adding an office, bedroom, bathroom and play area, replacing the roof and building a staircase. The contract price was $111,293. Payments were (1) $38,952 as a deposit; (2) $27,823 on the first day of demolition; (3) $27,823 on completion of rough construction and framing; and (4) $16,695 when done. Nothing in the contract required Damian to use payments on the attic job exclusively for that project.

Damian had a second company, Castle Hill Properties. Castle Hill bought, renovated, and sold properties. When Castle Hill needed cash, Damian dipped into the Ground Up account. You can guess what happened next.

Before the third installment on the attic job was due, Damian came up short of cash. He asked for and got another advance on the attic job, $11,130. At that point, Damien had been paid $77,814 for the attic job, nearly 70% of the contract price. But Ground Up had completed less than twenty-five percent of the project. Framing wasn’t complete. The roof was off. Exposed areas were covered only by a tarp. The HVAC system had been disconnected. But it got worse.

About that time, one of Damien’s subs asked for a meeting with the owners. The sub said he and other subcontractors on the job were not being paid. He had seen Damien’s bank statements. Advances for the attic job had been diverted to Damien personally: cash withdrawals with no explanation, checks payable to "cash" or to Damien personally. There was no record of where most advances on the attic job had gone. And Ground Up's checking account had a negative balance.

When the owners refused to advance more cash, Damien walked off the job. Now what?

The homeowners filed suit against Damien, Ground Up, and Castle Hill. Two days later, Damien and Ground Up filed for bankruptcy. The bankruptcy court ruled debts on the attic job non-dischargeable due to fraud and misrepresentation. The homeowners were due a refund. But that wasn’t all.

The homeowners also filed a complaint with the Massachusetts Office of Consumer Affairs and Business Regulation. The OCABR hearing officer found that

1. Damien went through close to $50,000 from his advances on the attic job before construction started.
2. Some of that $50,000 was diverted to Castle Hill.
3. Failure to disclose that advances on the attic job would go into a general business fund was a material misrepresentation under Massachusetts law.

Diversion in Other States

Fifteen states impose restrictions on use of construction funds. Most of these states make the contractor a trustee of funds that will become due tradespeople, suppliers and subs. The contractor is liable for diversion of construction funds the same as any trustee would be liable for misuse of funds. California goes one step further. Penal Code Section 484(b) imposes a fine of up to $10,000 and jail time of up to a year for misapplication of construction funds.

Massachusetts isn’t one of the 15 states that make contractors trustees. But last week the Massachusetts Appellate Court in Damien Anketell v. Office of Consumer Affairs found another way to discourage diversion of construction funds. Massachusetts General Laws 142A, § 17(2) requires a list of disclosures in home improvement contracts. Damien never mentioned that advances on the attic job would be deposited in an account used to bankroll Castle Hill jobs. The court considered that omission a material misrepresentation under Massachusetts law. Damien got hit with a $4,700 administrative penalty and had his contractor registration suspended for ten months.

What should your contracts say about diversion of construction funds? No need to guess. Construction Contract Writer drafts letter-perfect contracts for any job and for any state. The trial version is free.

Collect Interest on Past Due Accounts

What does your standard contract say about interest on late payments? If little or nothing, you may be making an expensive mistake. Here’s an example.

In fall of 2016, a hailstorm damaged Alex Bixby’s Iowa home. JL Construction Services gave Bixby a written bid for repairs, $8,050 for the roofing and $1,735 for new window wraps. Bixby authorized JL to start work. There was no written contract.

By August 2017, JL had completed their work on the roof. JL gave Bixby a bill for that portion of the job, $8,050. Bixby didn’t pay. His understanding was that payment was due when both roof repair and window wrap was complete. The window part of the job hadn’t started yet.

By December 2017, Bixby had a complaint. His roof was leaking, probably due to a torn rubber boot JL had installed around a vent pipe.

By January 2018, JL still had not been paid. JL offered to complete the job – the window wraps. Bixby explained that another company was finishing the job. Plus, Bixby claimed a credit for damage from the leaking rubber boot. And that’s where the job stood for nearly a year.

On November 28, 2018, JL’s attorney sent a demand for $8,933.83, including interest at 1.5% a month (18% per annum) from the date of completion. Bixby still refused to pay.

On July 1, 2020, JL sued Bixby, claiming $8,050 for the roofing work plus $3,800 in interest.

Nothing in the oral contract required payment of interest on any amount due. Nothing in JL’s statements complied with Iowa law on interest. That left the court no grounds to award interest as part of JL's damages.

Earlier this month, the Court of Appeals of Iowa affirmed the trial court decision. Too bad. JL waited nearly three years to get paid and lost their claim for $3,800 in interest.

How to Collect Interest

First, understand that your contracts should set an interest rate for late payments. That lays the foundation for an award of interest if you have to sue. This late payment fee is not a finance charge. You expect to be paid in full when each phase of the work is complete. Interest is due only if payment is delayed.

Second, understand another advantage of setting an interest rate in the contract. It’s just common sense. If you’re not paid on time, remind the owner that interest is accruing at the agreed rate. Worst case, you’ll waive the interest charge in exchange for prompt payment.

Third, understand that the law on interest rates is different in every state. Many states have prompt payment statutes for construction. Some of these laws apply only to subcontracts or only to public works construction or only to commercial (non-residential) projects. Others apply on all projects, including residential work. Some prompt payment statutes set a maximum (or minimum) interest charge for late payments. Others allow higher or lower rates if specified in the contract. Usury laws in some states set a maximum interest rate for delinquent accounts.

So what should you do? The answer is simple. Let Construction Contract Writer be your guide – no matter the state and no matter the type of project. With Construction Contract Writer, you see the interest rate options that apply on your job. That makes setting the interest rate an easy choice – and could save or make your thousands. The trial version is free.

 

Insurance Work in Indiana

Storm damage repair can be good business for home improvement contractors. Two reasons: (1) It’s easy to find homes that need repair after a storm. (2) Owners with insurance coverage are a good credit risk. That makes the industry ripe for abuse. If you do work in Tornado Alley, you’ve heard the stories.

In response, twenty states have enacted laws that regulate casualty loss repair. AL, AZ, GA, IL, IN, KY, LA, MI, MO, MS, NE, NY, OK, SC, SD, TN, TX, UT, WI, WV. All of these storm damage repair laws are similar: Any contract for an insured loss must include specific disclosures, including a statement that the owner can cancel if the insurance claim is denied, either in whole or in part.

Fine. Laws like that put an end to the worst abuses. Storm damage specialists have to write bullet-proof contracts and be especially careful when developing the scope of loss. But contractors aren’t the only problem. This street runs two ways. The Indiana case of Hoosier Contractors v. Sean Gardner offers an example.

Damage to Gardner’s Indianapolis home was covered by a Cincinnati Insurance Company policy. Gardner had Hoosier Contractors inspect the roof and write an estimate for repairs. Before doing the inspection, Hoosier required Gardner to sign a contract titled "Replacement Work Agreement." The contract included the language required by Indiana storm repair law. If Gardner’s insurance company didn’t agree to pay, the contract would be "null and void." Hoosier inspected the roof and wrote an estimate of loss – $50,619.46 (later adjusted to $59,489.78).

Gardner submitted his claim to Cincinnati Insurance. Cincinnati issued a "Scope of Work" to both Hoosier and Gardner, listing the work Hoosier would perform and the estimated cost for each item. Cincinnati settled the claim, paying Gardner in several installments. So far, so good. But this is where traffic started to run in the other direction.

With proceeds of the claim in hand, Gardner paid another company approximately $18,000 to repair his roof. Hoosier was left out in the cold. They had estimated the job, advanced several thousand dollars to a claim service to negotiate with the insurance carrier – and had nothing to show for it – except a signed contract. Hoosier did the only thing they could, file suit for breach of contract.

Gardner’s attorney insisted the contract violated Indiana’s Home Improvement Contractors Act and was a "scheme, artifice, or device . . intended to mislead Indiana residents into executing home improvement contracts.” That would be a violation of Indiana’s Deceptive Consumer's Sales Act (DCSA) and entitle Gardner to three times actual damages plus attorney fees.  Gardner’s attorney moved to certify a class action on behalf of:

All persons who entered into a Home Improvement Contract with Hoosier Contractors, LLC from February 12, 2014 until such time that Hoosier stopped utilizing said Contract(s) and began utilizing a Home Improvement Contract that was in compliance with the [HICA].

Obviously, the fat was in the fire.

By any account, Hoosier’s contract with Gardner had problems. There was no price and no description of the work. Both are required under Indiana’s Home Improvement Contracts Act (HICA).

This case is still in the courts. Issues yet to be decided:

• Does Hoosier’s contract violate Indiana’s HICA?
• If so, is that violation an incurable deceptive act under the DCSA?
• Is the Gardner contract null and void because Cincinnati didn’t approve the full scope of work?
• Did Gardner breach the contract when he gave the work to another contractor?

For Hoosier Contractors, the Gardner job was a financial black hole. But it’s easy to imagine another result. Suppose the Gardner contract had complied in every respect with Indiana law. Hoosier Contracting would have escaped years of litigation and mounting legal bills.

Don’t make Hoosier’s mistake. Construction Contract Writer drafts letter-perfect construction contracts for any type of construction and for any job site. The trial version is free.

 

Making a Mountain Out of a Molehill

Most of my blog posts are about missed opportunities -- how a good contract could have avoided a costly mistake. But occasionally, a contractor does it right – and saves thousands. Consider a case decided last week by a Ventura, CA court. Plyley v. Renovating Specialist, Inc. (RSI). Here’s a summary.

The job was simple. Replace two oak doors with two sliding glass doors. Plyley agreed to pay $3,885. RSI wrote the contract, got it signed and did the work. The new doors passed inspection. Plyley rated the work as “Excellent” on RSI’s job completion certificate. But satisfaction didn’t last. A dispute followed. Eventually, Plyley filed a 42-page complaint, insisting the new doors didn’t meet contract specs and didn’t comply with the building code.

Essence of the dispute was height of the door sill. The sill on the old doors was nearly flush with the interior floor level. The new doors slid in the old frame, making the height of the new sill almost two inches above the interior floor level. Even worse, the drop from the new sill to the exterior patio was now 9 inches. The building code limits step height to 7-3/4 inches.

Sliding a replacement door into an existing frame is called retrofit construction. As anyone doing window and door replacement knows, there’s another choice. Remove and replace the entire frame: demo existing siding around the door perimeter, remove the old sill and frame, install a new door and frame, waterproof the opening and restore the siding. That’s like new construction. It’s also more work and more expense. But doing it that way would leave the height of the new door sill nearly the same as the old sill.

When Plyley sued, RSI was forced to defend both their work and their contract. The trial ran for 6 days. The trial court found no problem with either RSI’s work or their contract, awarding RSI costs of $1,223 plus $95,531 in attorney fees. Plyley appealed. Key points in that appeal: 

1. The contract violated California Business and Professions Code § 7159 which requires written contracts and written change orders.
   The appellate court found no violation of § 7159 in the RSI contract. A contract doesn’t have to list all job specs.
2. RSI had agreed to perform new construction, not retrofit construction.
   The appellate court allowed RSI’s salesman to testify about what he told Plyley. Retrofit replacement and new construction are different. In retrofit, the sill was going to be higher. Plyley insisted on retrofit.
3. The contract was unconscionable, allowing RSI to install the unsafe doors in violation of the building code.
   The appellate court didn’t agree. “Appellant cites no authority to the effect that building codes are implied terms of all home improvement contracts and that the contractor must comply with them at his own expense despite the homeowner's insistence that he not comply.”
4. RSI violated Business and Professions Code §7160. Their contract included 'false or fraudulent representation or false statements knowingly made'.
   The trial court found no false or misleading statements in the contract. The appellate court agreed.
5. Because RSI’s contract required the losing party to pay attorney fees of the winning party, the appellate court affirmed an award of $95,531 to RSI.

The appellate court’s conclusion: Plyley's complaint was “making a mountain out of a molehill”. Chalk one up for good contracts.

If you want to draft nothing but good contracts, regardless of the type of project or the state where you work, have a look at Construction Contract Writer. The trial version is free.

Powerful Words in Any Contract

Disputes are common on construction sites. Every contractor knows that. And any dispute can derail a project – turn a potential money-maker into a money pit. Many disputes profiled on these pages became epic legal struggles lasting years. A few of those cases ran up legal fees more than the cost of construction.

My advice: Stick to building. Don’t get stuck in a legal quagmire.

The best way I know to stay out of court: Write contracts that require arbitration – alternative dispute resolution (ADR). Courts won’t touch a contract dispute that requires arbitration. Require ADR and there’s no right to sue. That’s a game changer when an owner or owner’s attorney threatens legal action.

Statistics show that sellers are more likely to win in arbitration. That makes arbitration a good choice for construction contractors.

If you write the contract, you decide how disputes will be settled. Your contract should:

• Make it clear, “owner and contractor will submit all disputes related to this job to binding arbitration.”
• Identify the arbitrator. AAA, CDRS and JAMS are common choices. But a Web search will turn up qualified independent arbitrators in your community. Consider a “mobile” neutral – someone willing to meet on the construction site.
• Identify the arbitration rules. The arbitrator you select will suggest rules he or she prefers.
• Make the arbitrator’s decision final. The words are, “Judgment on the award may be entered in any court having jurisdiction.”

On Residential Jobs

Eleven states (CA, IL, MD, MA, MO, NE, OR, PA, SC, TX, VT) void any residential arbitration agreement that omits disclosures required by state law. Requirements are different in each state. Sometimes specific words are required, or all upper case, or underlined, or initialed or placed above the signature line, etc. Without the precise disclosure required by state law, your agreement to arbitrate isn’t going to hold water – or worse, will require a court to decide if ADR is required.

A Louisiana case (S. LA Contractors v. Kraus Construction, May 5, 2022) illustrates what’s likely to happen with a broken ADR clause.

Kraus Construction was the general contractor on a school job in Longville, Louisiana. South LA was the site work subcontractor. When site work was finished, South LA claimed a balance due of $135,660 and filed suit to collect. Citing the ADR clause in their contract, Kraus asked the Louisiana court to delay action on the suit until arbitration was complete. South LA insisted their contract’s arbitration clause was defective. The agreement required ADR under "Arbitration Rules of Better Business Bureau". The BBB doesn’t have arbitration rules. Now what?

The trial court ruled that arbitration was required. South LA appealed. The appellate court affirmed the trail court’s decision. The ruling by Judge Perret: Louisiana law favors arbitration as a speedy way to resolve contract disputes. Any agreement to arbitrate is irrevocable and enforceable, assuming:

1. The contract is valid, and,
2. The dispute falls within the scope of the arbitration agreement.

OK. Kraus Construction got their arbitration hearing – after decisions by both a trial court and an appellate court. But isn’t this obvious? A few more seconds spent drafting the ADR clause would have saved hours (days?) in court.

Don’t make the same mistake. Construction Contract Writer drafts letter-perfect contracts (and arbitration clauses) no matter the state and no matter the type of project. The trial version is free.

 

A Busted NY Home Improvement Contract

Last month I explored what Pennsylvania courts allow contractors who use a bum contract. The rules in New York are different – and the difference is major. I’ll explain. 

Like Pennsylvania (and 30 other states), New York requires a written contract for residential construction work. Like Pennsylvania, New York contracts have to include a long list of notices and disclosures. But unlike Pennsylvania, New York courts are split on what happens when a contractor uses a defective agreement. Pennsylvania allows the contractor to sue for quantum meruit, Latin for "as much as deserved". That’s a clumsy tool, as explained last month. But at least the contractor collects something. New York may or may not allow as much. The New York case of Chapman v. Davis (decided March 22, 2022) illustrates the point.

Cheryl Davis wanted to convert the basement of her Pleasant Valley, NY, home into bedrooms for her two daughters. Chapman Construction offered to do the work and wrote up the agreement. 

When it came time to make the final payment, Chapman Construction got hung out to dry. Cheryl claimed egress windows in the basement didn’t comply with the code and had to be re-done. Cheryl refused to pay. Chapman sued.

As I’ve explained before, when the job goes bad, you better have a good contract. Chapman didn’t:

• The contract was signed by a friend, not Cheryl, the homeowner.
• Chapman Construction forgot to put their address on the contract.
• The estimated starting and ending date was nowhere to be found.
• A state notice warning about mechanics liens was omitted.
• The state notice on deposit of progress payments was absent.
• The required notice of 3-day right to cancel didn’t appear anywhere.

In short, Chapman Construction’s contract didn’t even come close to meeting requirements in New York General Business Law § 771. 

Now What?

What does a New York contractor recover on a bad home improvement contract? New York courts are split on the issue.

Appellate divisions in the Third and Fourth Judicial Departments rule that failure to comply with GBL § 771 renders the home improvement contract unenforceable and bars recovery for breach of contract.

In the Second Judicial Department, some courts have ruled that failure to comply with GBL § 771 does not make the contract unenforceable. Other courts in the same Judicial Department have come to the opposite conclusion: Failure to comply with GBL § 771 leaves the contract void and unenforceable.

Eventually, the New York State Court of Appeals will wade in with a decision that’s binding on all New York courts. Absent that decision, Judge Fairlie elected to treat the Davis contract as void and unenforceable. Chapman Construction got nothing for breach of contract.

But What About Quantum Meruit?

Couldn’t Chapman Construction at least recover part of what they were owed, "as much as deserved”? That’s what Pennsylvania courts allow.

Sorry. That doesn’t work in New York Justice Courts. Quantum meruit is an equitable remedy, New York Justice Courts lack equity jurisdiction. The result: Chapman’s claim was denied and dismissed.

Don’t make the same mistake. Construction Contract Writer drafts legally enforceable contracts and subcontracts for any state and for any type of project. The trial version is free.