Changes in Construction Contract Law for 2018

Eighteen states have made changes to construction contract law in the last few months. Some of these changes are trivial. A few will affect nearly every contractor in the state. Here’s a state-by-state summary of the highlights:

Arizona: Pool and spa work has to follow a new payment schedule if there’s no bond on the project. Payments can’t exceed 15% down, 25% more on completion of excavation, another 25% after installation of the pool or spa shell, 25% more after installation of the deck, and final payment just prior to application of finishing materials. Arizona Revised Statutes § 32-1158.01

Arkansas: Most residential contractors will have to show proof of current workers' compensation coverage before taking out or renewing a license. Arkansas Code Annotated § 17-25-514

California Labor Code Section 218.7(a) makes prime contractors liable if a sub at any level fails to pay wages or make benefit contributions. To protect yourself, write into subcontracts the right to review the sub’s payroll records. Then be sure subcontracts include the right to charge the sub if the contractor has to pay twice.

Connecticut General Statutes § 42-158k requires that retainage be released no later than 30 days after completion.

Kentucky’s Insured Roof Repair Act (§367.628) prohibits damaging a roof to increase the scope of work. Any violation entitles the owner to recover two times the amount of any damages.

Louisiana contracts for home improvement work offered by registered or licensed contractors have to include proof of liability and workers’ compensation insurance. Louisiana Revised Statutes § 37:2175.2. Penalties for residential contracting fraud have been increased (§ 202.1) to as much as twenty years at hard labor and a fifty thousand dollar fine or both.

Maine Revised Statutes Annotated Title 17 § 908 makes it a criminal act to write a residential construction or repair contract that: (1) Includes misrepresentations or (2) Gives a false impression, or (3) Makes false promises, or (4) Is intentionally deceptive, or (5) Is for repair of damage done by the contractor.

Montana Code § 28-3-704 makes the right to collect attorney fees reciprocal. If your contract includes the right to collect attorney fees if you win in court, you’ll have to pay attorney fees if you lose.

Rhode Island General Laws § 5-65-27 requires a special 3-day cancellation notice in home improvement contracts if one or more of the owners is age 60 or more.

Tennessee Code Annotated § 39-14-154(b) makes it a crime for a new home builder or home improvement contractor to either: (1) Refuse to make a refund when due or (2) Deviate from the approved plans and specs.

Vermont’s Home Improvement Contracts Act (Title 9, § 4010) requires that the following appear in any agreement: (1) Either the maximum price or, if time and materials, a statement that there is no maximum price, (2) A start date and a completion date, (3) Scope of the work including materials to be used, (4) A specific warranty, (5) A specific statement on change orders, (6) A maximum down payment of one-third of the contract price or the price of materials, whichever is greater. A contract that does not cover each of these points is unenforceable against an owner.

You won’t find good news for contractors on this list. Contract requirements for 2018 are stiffer. The penalties are greater. But there’s an easy way to keep your contracts legal, no matter the state. Construction Contract Writer will draft letter-perfect contracts no matter how the law changes. 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.

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.

I Just Don’t Get It

Why do so many construction contractors use lame contracts?

Builders who know better continue to use agreements that don’t comply with the law. That’s no way to run a business. And I think the day of reckoning is not too far off.

If not renewed, the 30% solar tax credit expires on December 31, 2016. Solar leases will be out. Solar loans will be in. Right now, the major residential photovoltaic leasing companies are ramping up loan programs to replace their lease deals. A solar contractor I know predicted what’s going to happen when installations start under these new loan programs. I’ll let him explain.

“I have yet to see a fully legal contract from another solar contractor. Not too long ago, I reviewed contracts offered by two major solar finance companies. Both contracts had obvious errors – mistakes in the notices and disclosures required by state law. A home improvement contract that doesn’t comply with state law can be void. A homeowner not completely satisfied can sue to recover the full contract price. But that’s just the beginning.

“Deep-pocket lenders are the real targets. Courts are going to rule that installing contractors were acting as agents for their finance companies. That makes finance companies liable for these refunds. It’s just a matter of time until class action attorneys and state attorneys general discover all these bogus solar contracts. They’ll claim widespread abuse in the solar home improvement business. Reputations and political careers are going to be built pummeling solar contractors and their finance companies. It’s going to be ugly. And when the installing contractors go broke, the finance companies will be sucked in to make up the difference. That’s going to be a wake-up call for heavy-hitters in the solar home improvement finance industry.

“I saw the same thing happen in auto finance. Class action attorneys go after the deep pockets. The settlement in Coleman v GMAC is typical. GMAC settled for just over $10,000,000.

• $9,000,000 plus an extra $600,000 for expenses went to plaintiff’s counsel.
• $1,600,000 went to consumer education programs.
• $0 went to the borrowers.

 “In another case, the only mistake was a technical violation. A clerk changed a legal notice from bold to italic because she thought it would be more effective. That one cost over $8 million!

“Starting next year, solar finance companies will be risking similar treatment if their independent installers continue using these lame contracts.

1. The class action attorneys and attorneys general will go after the Deep Pockets, not the individual contractors.
2. The Deep Pockets will then go after the contractors who did not have compliant contracts.
3. The Deep Pockets will demand the originating contractor reimburse losses or buy back noncompliant contracts. Most contractors will go bankrupt if they have to make three years of refunds on defective contracts.
4. Class action attorneys look for three things: (a) A contract defect. (b) Three people who are dissatisfied. (c) A Deep Pocket.

 “My solar company is committed to keeping it clean. We don’t want to be a target. Too many others are inviting trouble. My advice: Either learn to comply with the law or be ready to pay the price.”

Well said. And I agree 100%. Protect yourself. It’s easy. Construction Contract Writer will draft agreements that are perfectly legal, no matter the state and no matter the type of work. The trial version is free.

Rocket Lawyer: Caveat Emptor

Search for “free construction contract” on the Web and you’ll find Rocket Lawyer near the top of the paid ads. You’ll probably see claims in that ad: “100% free” and “binding in each state.” What could be wrong with that?

I’ll count the ways.

“Free” is a stretch. Rocket Lawyer is a relationship marketing company. They monetize relationships – including any relationship they can develop with you. To see their “free” contract, you have to surrender an email address and your credit card number. That begins your free trial – which turns into a paid $39.95/month subscription if you fail to cancel during the first week. Is that “free”? I’ll let you decide.

“Binding in each state” isn’t a matter of opinion. It’s a matter of law. If you’re a contractor, Rocket Lawyer misses by a wide margin. I’ll explain.

Nearly every state requires specific notices and disclosures in construction contracts – especially on residential and small commercial jobs. These notices are different in every state and vary with size of the job, type of work, materials used, who signs the agreement and even where the contract is signed. Any contract that omits a required notice is likely to (1) be unenforceable by the contractor, and/or (2) expose the contractor to a fine, and/or (3) result in discipline by the license board. In some states, omitting a required notice is punishable by jail time.

So, how does Rocket Lawyer deal with special notices and disclosures required by state and federal law? It doesn’t. Rocket Lawyer’s construction contracts ignore important state and federal disclosure laws. I think that’s irresponsible, especially considering the claim that Rocket Lawyer contracts are “binding in each state.”

Some Examples

Rocket Lawyer contracts omit key notices required by state home improvement contract acts. A contractor using a Rocket Lawyer contract could face:
California – Discipline by the CSLB, including revocation of a license.
Connecticut – A $1,000 fine or 6 months in prison or both.
District of Columbia – A fine of up to $300 and 90 days in jail.
Florida – A $500 fine for omitting the Recovery Fund notice.
Hawaii – Both the contract and the contractor’s statutory lien rights are void.
Massachusetts – Suspension of registration, fines up to $2,000 and a year in jail.
Maryland – A fine of $1,000 and 6 months in jail.
Maine – A fine of between $100 and $1,000 for each violation.
New Jersey – A refund of all money collected or treble damages plus legal fees.
New York – The contractor can’t sue to collect on the contract.
Oregon – A civil penalty of up to $5,000 for each offense.
Pennsylvania – Paying the owner three times actual damages plus attorney fees.
Texas – Paying the owner a $500 penalty.

Thirteen states require special contract notices when the cost of a job is at least partially covered by property insurance. Heavy penalties apply if a contractor ignores the law. Rocket Lawyer doesn’t even consider the issue.

Many states require special disclosures when an agreement is negotiated on the job site. And federal law requires a three-day right to cancel every time you work on the primary residence of the owner. Again, Rocket Lawyer offers no help.

My advice on Rocket Lawyer construction contracts: caveat emptor (buyer beware).

Instead, consider Construction Contract Writer. You'll draft perfectly legal agreements for nearly any type of construction project in any state. The trial version is free – no strings attached.

A.I.A. Construction Contracts: Beware

What’s wrong with A.I.A. contracts? Nothing, unless you’re a construction contractor. I’ll explain.

The A.I.A. published their first “standard” construction contract in 1888. As a construction contractor, you’ve probably seen several A.I.A. contracts. Go to the A.I.A. site and you’ll discover that A.I.A. contracts are “accepted, reliable, fair and flexible.” Fine. But here’s what the A.I.A. doesn’t explain. A.I.A. construction contracts don’t comply with either state or federal disclosure law. In most states and for most jobs, a contractor who works under an A.I.A. contract risks serious legal trouble.

Here’s why. Over the last 20+ years, nearly every state has enacted legislation that requires specific notices and disclosures in construction contracts – especially on residential and small commercial jobs. These notices are different in every state and vary with size of the job, type of work, materials used, who signs the agreement and even where the contract is signed.

Every contractor has seen these notices and disclosures: The 3-day right to cancel, lien law notices, checklists, limits on warranty claims, licensing requirements, contact numbers for the license board, bonding requirements, payment standards, arbitration disclosures, etc. The list goes on and on.

It varies by state, of course, but any contract that omits a required notice is likely to (1) be unenforceable by the contractor, (2) expose the contractor to a fine, (3) result in discipline by the license board or the attorney general, and (4) permit a court to award attorney fees if litigation is necessary. In some states, omitting a required notice is punishable by jail time. 

Now, how does the A.I.A. deal with these state requirements? It doesn’t. A.I.A. construction contracts ignore state and federal disclosure law. That’s your problem, at least in the eyes of the A.I.A. contracts committee. I think that’s irresponsible. Can you name a reputable vendor in a heavily regulated industry that ignores state and federal law as a matter of policy? I can’t.

Why don’t A.I.A. construction contracts comply with state and federal disclosure law? I can think of three possible reasons.

(1) The A.I.A. came first. Back in 1888, there wasn’t any consumer protection law. Every construction contract was legal under state law. A hundred years later, when states started legislating contract terms, the A.I.A. simply went on selling their contracts as though nothing had happened. That was a bad choice, in my opinion.

(2) One size fits all. The A.I.A. sells boilerplate contracts. Adapting any construction contract to the type, size and location of the work and materials used is a complex problem. The A.I.A. contracts committee elected not to get involved, probably because of my next point.

(3) The A.I.A. (American Institute of Architects) serves the interest of architects, not contractors. Neither architects nor owners have any risk from a defective contract. Only contractors suffer if an agreement fails to comply with state law.

So what should the A.I.A. do? It’s not my place to counsel the A.I.A. But I know exactly what contractors need to understand: A.I.A. construction contracts omit the notices and disclosures required on most jobs in nearly all states. Using an A.I.A. form without the right notices can make a contract unenforceable – and could even land a contractor in prison.

In short, “accepted, reliable, fair and flexible” isn’t enough. You need contracts legal for the state where you do business and for the types of work you handle. If you agree, have a look at Construction Contract Writer. The trial version is free..