Non-disparagement Construction Contracts

 Owners start most residential jobs with a Web search. Yelp and Angi and Thumbtack and a few others offer lists of local contractors categorized by construction specialty. Some include reviews volunteered by owners claiming to be former clients. Contractors can buy good placement and solicit kind words on these bulletin boards. That’s not cheap or easy and there’s plenty of competition.

Still, good reviews are like a magnet. They attract potential clients. But one angry customer with access to the Web can do plenty of damage to your reputation. A single one-star review carries more weight than a half-dozen five-star reviews. And getting bad reviews deleted, even fake bad reviews, takes time and effort – even when possible.

Unfavorable comments are called disparagement. They’re perfectly legal. Defamation is different and isn’t legal. Defamation is saying or writing something false with intent to do damage. So, what can you do to keep negative comments off the Web?

Non-disparagement contracts are common in many business situations. Most agreements that settle a lawsuit include a non-disparagement clause. Major employers commonly require a non-disparagement agreement before cutting an employee’s severance check.

In construction, disparagement wasn’t a high-profile issue until recently. The Web has changed that. Contractors who live off favorable Web listings recognize the importance of five-star ratings. When a job runs off the rails, dissatisfaction can run deep. That’s when disparagement becomes a hot topic.

Any time a business relationship ends on other than favorable terms, it’s best to have a non-disparagement agreement. Of course, the easiest time to get that agreement is before work starts. In construction, that’s when the owner signs the contract. For example:

Owner agrees not to disparage contractor by making any statement that would impugn the character, integrity, reputation or professionalism of contractor. Any evaluation of contractor provided by owner for distribution on public media will give contractor a neutral or better rating. Nothing in this agreement prevents owner from making truthful statements reasonably necessary to comply with law or regulation.

Notice that the sample clause above is unilateral. Only the owner is restricted. The clause works about as well if it were mutual. Both owner and contractor could agree not to make disparaging comments. Little harm in that. I don’t know any contractor who tried to destroy an owner’s business reputation.

Can You Enforce Non-disparagement?

It depends. First, understand that every negative comment isn’t disparagement. Suppose an owner posted on some Web site:

Case 1. “Their work was terrible. I’ll never call them again.”

Case 2: “They left the gate open and the dog got out.”

Both statements could be true. And both are likely to discourage potential clients. But the first is a hatchet job based on impressions. The second is not an attack on the contractor’s character, integrity, reputation or professionalism. It’s a legitimate caution. Anyone with a dog in the back yard might want to know.

Second, nothing can prevent an owner from responding truthfully to an inquiry from government (such as a building inspector) or legal process (such as a deposition).

If you have a non-disparagement contract and true disparagement (such as Case 1 above), the remedy is money damages, the value of your lost reputation. Proving that is mostly smoke and mirrors. But collecting money damages isn’t the purpose of non-disparagement clauses. Instead, non-disparagement forces an owner to think twice before making careless accusations.

Construction Contract Writer makes it easy to include non-disparagement in your agreements. The trial version is free.

Changes in Indiana Contract Law

Residential contractors in Indiana can trash their old contracts effective June 30, 2017. On July 1, Indiana’s old Home Improvement Act is replaced by Indiana’s Real Property Improvement Act (Indiana Code Annotated § 24-5-11-1 to § 24-5-11-14) To have a legal agreement after 7/1/17, residential contractors in Indiana have to make some changes:

1. Work formerly classified as home improvement is now real property improvement.
2. A written contract is now required for every interior or exterior improvement on residences with four units or less: new construction, alteration, replacement, reconstruction or repair, including work done to a basement.
3. The 3-day cancellation notice has to change. Owners now have three days to cancel after the later of either (A) both the owner and the contractor signing the agreement or (B) a final written determination of insurance coverage for any claim of loss.
4. Use of Email: The contract must include the email address of both the contractor and someone who will respond to inquiries from the owner. An owner can cancel the job by email.

Several new statements are now required in the contract:

• The contractor, subs and suppliers are prohibited from making a claim against the owner’s insurance company.
• The contract is conditional until all licenses and permits have been granted.
• Disclosure that the project will require labor, materials or equipment from third-party subs or suppliers.
• The full contract price (less any discounts offered) has to appear in the agreement.

How important are these changes? You decide. An agreement that violates the new Real Property Improvement Contracts Act gives an owner the right to collect damages up to $500. For a willful deceptive act, an Indiana court can award an owner three times actual damages or $1,000, whichever is greater, plus attorney fees.

Why all these changes?

The answer begins with a November 2010 audit of sales tax collected by Lowes Home Centers. The Indiana Dept. of State Revenue discovered that Lowes was charging sales tax on their home improvement contracts based on the wholesale cost of materials to Lowes, not the retail price of materials sold at Lowes outlets.

The Indiana Dept. of State Revenue objected and issued an assessment against Lowes. Lowes appealed that assessment and won in the Indiana Tax Court. The court’s December 2014 decision: Indiana’s Dept. of State Revenue didn’t have authority to equate Lowes time and material home improvement contracts with lump sum real property improvement contracts on which sales tax was due on the full retail cost of materials. That decision gave Lowes an advantage over residential contractors across the state. Lowes could charge their customers less sales tax! As you might expect, the advantage didn’t last long.

Indiana Senate Bill 353, signed by Governor Holcomb on April 25, 2017, re-set the balance. Under the new Real Property Improvement Act, Lowes and every residential contractor in the state is labeled a real property improvement supplier. That part of the Act was made retroactive back to 2010. All have to pay sales tax on the retail price of materials -- a clear victory for the Indiana Dept. of State Revenue. But other parts of the Act make obsolete nearly every residential agreement used by Indiana contractors.

If you need contracts that comply with Indiana’s new Real Property Improvement Act, have a look at Construction ContractWriter. The trial version is free.