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.

 

A Warning for New York Contractors

Write a bad contract for New York home improvement work and you may end up with less than nothing. The case of Goodspeed v. Aiello proves the point.

A leaky radiator damaged Maria Goodspeed’s New York home earlier this year. Wallboard and flooring had to be removed and replaced. Michael Aiello of A & B flooring agreed to do the work. Michael wrote up the contract on a small sheet of notebook paper:

I Michael Aiello agree to do all repairs caused by the radiator leaking. Work includes sheet rock, paint, flooring, demo & removal. A deposit of $6,200 will be recieved [sic] on 1-27-22. the balance of 2.800 is due upon completion. Any additional cost must be disgussed [sic] and agreed to by both parties.

The page was signed by both Maria and Michael. Maria paid A & B the $6,200 on February 15, 2022.

Two weeks later, work had not started. But Maria’s insurance carrier, Allstate, was now involved. Maria gave Allstate’s adjuster a statement:

On 3/1/22 an invoice was turned into Allstate as an additional expense to original job that was being done for Maria Goodspeed. Invoice was agreed to and approved by myself, homeowner and insurance company. The additional invoice was for a total of $8,050.00 The total amount owed to A & B Flooring to date is $11,000.

A & B scheduled work for the middle of March. By April 1, 2022, demolition was well under way. But Mike wanted another advance to continue work. Maria asked to see receipts for materials purchased for her job. When Mike wouldn’t provide those receipts, Maria gave up on A & B Flooring. She filed suit on April 7 to recover her $6,200 advance.

You decide.

1. What portion of the deposit was A & B Flooring entitled to keep for work on the Goodspeed job? They had done plenty. In Maria’s words, they ” gutted our house . . . "
2. Did either of the two written documents that describe the Goodspeed job qualify as a New York home improvement contract?

Judge Bannister at Little Falls (NY) City Court had no trouble with either question.

Payment for Partial Completion?

“The court will not allow the Defendant to draw the Claimant and the court into a controversy concerning the amount and value of the benefits received when the value of those services left her with a demolished home interior and a contractor asking for things outside the scope of their contract. The Claimant gave the Defendant $6,200 as an initial payment. This Court finds that she is entitled to a return of the initial payment.”

A Valid New York Contract?

The General Business Law section 771 requires notices and disclosures in home improvement contracts. The contract offered by A & B included none of these:

• Estimated dates when the work will begin and end, any contingencies that could change those dates, and whether a completion date is the essence of the contract.
• Description of the work to be performed, the materials to be provided to the owner . . . and the agreed upon consideration for the work and materials.
• Notice that subcontractors and suppliers have the right to claim a lien on the property.
• Notice that the contractor is required to either deposit all advances in an escrow account or post a bond.
• Schedule of progress payments showing the amount due at each stage of completion.
• Notice of the three-day right to cancel.
• Disclosure of the contractor’s property and casualty insurance coverage.

New York law imposes a civil penalty of up to $2,500 for writing a bad home improvement contract. Since this was a first offense, Judge Bannister didn’t impose the civil penalty, but with a warning. “However, if there are future sustained violations in the future, this Defendant is on notice that a civil penalty will be considered.”

It’s easy to draft letter-perfect construction contracts for any state and for any type of job. Get Construction Contract Writer. The trial version is free.

 

Checklist for New York Contractors

Staying legal in the New York construction contracting business begins with licensing.

New York State licenses only asbestos contractors. But that doesn't make licensing a trivial issue in New York. Cities and counties in New York are free to require a license for any type of construction activity. And many municipal governments do exactly that. For example, New York City licenses home improvement contractors. The site is here.

A word to the wise. Don't sign a contract or begin work without checking into license requirements. New York State may be a little casual about licensing of contractors. But New York courts are ruthless in enforcing licensing laws. Where a contracting license is required, unlicensed contractors may have no right to collect for work completed. Nassau County and Westchester County enforce their license laws by impounding construction vehicles.

But even if you don't need a license, New York State jumps with both feet into your construction contracts. You need to know about several statutes.

If the contract price is $150,000 or more for commercial work or if the job is a larger residential project, New York's Construction Contracts Act dictates many key terms: payment dates for both contractors and subcontractors, grounds for stopping work, termination of contract and arbitration (required). That's New York General Business Law § 756-a. But that's just the beginning. New York General Business Law Section 756-b sets penalties for violation of Albany's contract terms – maybe not what you wanted at all.

New York General Business Law, Section 771 is even more explicit on what has to be in residential construction, home improvement and home repair contracts.
(1) The name, address, telephone number and license number, if applicable, of the contractor.
(2) The dates when work will begin and be completed, including any contingencies that could delay completion.
(3) A description of the work including makes and model numbers
(4) A disclosure in bold type that subs and suppliers have lien rights.
(5) A notice that the contractor has to deposit payments in a trust account or supply other security for payment of subcontractors and suppliers.
(6) A progress payment schedule by job phase in dollars and cents.
(7) A 3-day right to cancel.
For technical violations, the penalty is $100. For substantial violations, the penalty is the greater of $250 or 5% of the contract price up to $2,500.

New York General Business Law, Section 771 also requires the same information in every amendment to a residential construction, home improvement or home repair contract. That makes for lengthy change orders.

New York General Obligations Law Section 5-322.2 requires that every construction contract for residential work of less than five units (1) identify who owns the property and (2) include a property address adequate for lien law purposes. Subcontracts have to include the same information.

If you have better ways to spend your time than deal with all this legal gibberish, I can recommend a couple of web sites.

Construction Contract Writer drafts letter-perfect New York construction contracts and subcontracts for residential and commercial work. The trial version is free.