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.

Illegal Construction Contracts

All states set standards for construction contracts. The notices and disclosures required by state law vary with the size of the job, type of work, materials used, who signs the agreement and even where the contract is signed. 

Some of what states require in construction contracts is pretty trivial stuff. For example, a contract may not be legal if a notice is in less than 12 point bold type or is printed someplace other than just above the signature line. Or, failure to specify when payments are due and the amount due may make a contract illegal. It’s easy to make a mistake. What happens then? If the contract is illegal, does the contractor lose the right to collect?

Two Connecticut cases shed some light on that question. Both cases were decided on the same day, January 19, 2012. Both jobs were done under Connecticut’s Home Improvement Act. In both cases, the owner wasn’t satisfied with the work and refused to make final payment. In both cases, the owner raised the issue of an illegal contract when the contractor filed a lien to collect the full price. The contractor won the first case. The owner won the second. Here are the details.

Zunda v. Hess Construction (2012 Conn. Super. LEXIS 198) involved a $700,000+ job and was heard by a court in Stamford. The contract omitted the transaction date, the commencement date and a notice of cancellation. All are required by Connecticut law. Plus, the contract wasn’t signed by the owner’s spouse.

Currier v. McCue (2012 Conn. Super. LEXIS 169) was heard by a court in New Haven and involved a job with $51,845.45 in financing. The signed "Homeowner/Contractor Agreement" didn’t describe the work to be done. Again, that’s required by Connecticut law.

Both courts found the contracts to be defective -- not in compliance with Connecticut law. But that’s where the similarities end. The New Haven court ruled that the contract was void. The lien was discharged. The contractor was out the final payment due under the agreement. The court in Stamford found defects in the contract to be “technical.” Hess Construction could collect the full amount due.

What’s the difference?

The New Haven court simply applied the law as written. Period. “No home improvement contract shall be valid or enforceable against an owner unless . . .”

The Stamford court found that substantial compliance with Connecticut law was enough. “The legislature intended the Act to protect homeowners from unscrupulous contractors not to lead to unworkable and unjust results. . . The homeowners here were not prejudiced in any way by the Contractor's failure to comply technically with the Act.”

My point here is that no contractor should have to depend on a judge’s decision to collect what’s owed. You won’t make a dime on a job if collection requires two years of litigation. Whether you’re building in Stamford or New Haven or anywhere else, don’t give an owner excuses to withhold final payment. Use contract forms as complete and professional as your work on the job.

Fortunately, that’s easy: Construction Contract Writer drafts construction contracts that comply with your state law. The trial version is free.