Promises Made and Broken

Mike and Cheryl Ording had a leaky basement in their Milwaukee home. A salesman for Everdry Waterproofing offered to solve the problem. According to the Ordings, the salesman claimed they “would never have water in their basement again” if Everdry did the waterproofing. Reassured, the Ordings signed the contract. 

A few weeks after work was done, the Ordings noticed water in their basement. They called Everdry. Before Everdry showed up, a storm flooded the basement five feet deep. Everdry offered to lend the Ordings a pump but insisted that any damage was not their problem. The Ordings sued.

At trial, the jury awarded the Ordings $7,000 in damages. That was doubled to $14,000 under Wisconsin’s Home Improvement Practices Act. A violation of HIPA is also an unfair trade practice which allowed the Ordings to collect their attorney fees, $41,000 in this case. So the contractor was on the hook for $55,000. But that was only the beginning. Everdry’s attorney fees were $118,896. That made the salesman’s promise a very expensive mistake.

Now notice this. The award wasn’t for breach of warranty or breach of contract or negligence in doing the work. Instead, the jury found that Everdry made a false oral promise when selling the job – the Ordings “would never have water in their basement again.”

Protect Yourself

How many times have you made a promise when selling a job? There’s risk every time you forecast results such as durability, matching colors or textures, performance, a completion date – anything that raises expectations or could be misinterpreted. Let the contract, the plans and the specs describe your task. That’s step one.

Step two is known as a contract integration clause. Here’s a sample taken word-for-word from Craftsman's Construction Contract Writer:

This contract is the entire agreement and constitutes a complete integration of all understandings between Contractor and Owner on the subject of the Project. This Contract supersedes all prior negotiations, representations and agreements, whether written or oral. 

An integration clause makes good sense on two levels. First, integration voids statements made before the contract was signed. Those statements aren't part of the deal. Second, courts like integration. Interpreting any agreement is easier when there’s just one contract, not a list of oral promises and side agreements.  

Would the jury’s decision have been different if the Everdry contract had an integration clause? I think we know the answer to that question. The Everdry contract did have an integration clause. Unfortunately for Everdry, their counsel didn’t raise the issue until after the jury verdict – too late in the opinion of the appellate court (2015 Wisc. App. LEXIS 275, April 14, 2015).

A Simple Suggestion

Are your contracts as good as your work on site? It’s easy to write iron-clad contracts fully enforceable under the law of your state. Get Construction Contract Writer. The trial version is free.

Wisconsin’s Home Improvement Surprise

A fire on September 7, 2009 did serious damage to the home of David and Carol Butler. The Butlers selected Purofirst of Milwaukee to do the repair work and signed an "Authorization" form provided by Purofirst. The Butlers moved out and Purofirst went to work. 

Six months later, work was done and the Butlers moved back in. Purofirst suggested writing up a punch list of any defects the Butlers found. Purofirst fixed some items on the Butlers' punch list but insisted others were not their problem. The Butlers didn’t like that. They refused to make the final payment. Purofirst filed suit to collect.

Does this sound familiar? If you’re going to have a collection problem, it’s most likely over final payment. Until that time, the owner is eager to keep the job moving. Any delay in payment would delay completion and the owner’s use of the property. But when the job is done, the owner holds all the cards.

So the dispute over the Butler job landed on desks at two law firms. When that happens, focus will always be on the contract. What does the contract say? Does it comply with the law? This is no time for a surprise, which is exactly what Purofirst had coming.

Law in nearly all states sets standards for residential construction contracts, especially home improvement contracts. What’s required and the penalties imposed vary by state. In Wisconsin, the law is the Home Improvement Practices Act, Wisconsin Administrative Code ATCP (Agriculture Trade and Consumer Protection) § 110.01 to § 110.08. A home improvement contract has to be in writing and has to cover eight specific points, including a full description of the work. Doing work on an illegal home improvement contract in Wisconsin can earn the contractor a fine of up to $5,000 and as much as a year in jail. Violation also gives an owner the right to recover twice the amount of the loss plus reasonable attorney fees. And that’s what the Butlers wanted; twice their loss plus attorney fees.

The trial court found Purofirst had violated ATCP § 110.05 by failing to put all contract terms in writing. That opened the door for the Butlers. Purofirst didn’t collect anything in their suit. Instead, the trial court awarded the Butlers $29,407. Then the trial court doubled the award under Wisconsin Statutes § 100.20(5) and added attorney fees. That wasn’t exactly what Purofirst expected when they filed suit to collect for work completed.

Purofirst appealed the trial court judgment. Last month, a Wisconsin Court of Appeals gave Purofirst some relief (2015 Wisc. App. LEXIS 117). On technical grounds, the appellate court reversed the trial court's grant of attorney's fees and the doubling of damages. But the award of $29,407 stands.

Avoid The Purofirst Surprise

There was a time when builders could do residential work on a generic contract form -- or even on handshake. No longer. Like Purofirst, you’ve got a surprise in store if your contracts don’t comply with state and federal law. Fortunately, it’s easy to write perfectly legal construction contracts for any state. Get ConstructionContract Writer. The trial version is free. 

Pay-If-Paid in 50 States

Subs and suppliers expect to be paid on time. That’s a problem when an owner is slow to pay the prime contractor. So what are you supposed to do about slow-pay? The obvious answer is a “pay-if-paid” clause in your subcontracts. With “pay-if-paid,” a prime contractor doesn’t have to pay subs until paid by the owner. That’s legal in about half of all states. If you’ve never used a “pay-if-paid” contract clause, keep reading. There’s a lot to learn.

True “Pay-If-Paid”

“Pay-if-paid” comes in two flavors. True “pay-if-paid” means the prime contractor never has to pay a sub if the owner never pays the prime. Of course, subs and suppliers can still use the lien law to collect from the owner. But the prime contractor has no obligation to pay subs until the owner pays. That works in 24 states: AL, AR, AZ, CO, CT, DC, FL, GA, ID, KS, LA, MD, MI, MO, NE, NH, NJ, OH, OR, PA, RI, TX, VA, and WV. True “pay-if-paid” requires very specific contract language, such as:

Contractor may withhold payment for work done by Subcontractor (including retainage) until Contractor has been paid for that work by Owner. Payment by Owner is a condition precedent to payment of Subcontractor for work completed. Subcontractor acknowledges reliance on the credit of Owner for payment, not the credit of Contractor.

In those 24 states, a true “pay-if-paid” contract usually won’t affect lien rights. Subs can still file a lien and collect in full from the owner. If the job is covered by a payment bond, a “pay-if-paid” contract may relieve the surety from liability on the bond. But be careful. A prime contractor who settles with an owner by compromising the claim of a subcontractor may have to pay the sub in full in spite of the “pay-if-paid” agreement.

“Pay-When-Paid”

When a “pay-if-paid” clause isn’t absolutely clear about the owner’s payment being a condition precedent, courts in those 24 states will consider it a “pay-when-paid” contract. That’s the second flavor. “Pay-when-paid” means the prime contractor still has an obligation to pay subs – eventually. As long as the prime contractor is trying to collect, the subs have to wait. But the prime remains liable to subs for what’s due.

Seven states void “pay-if-pay” agreements but permit “pay-when-paid” contracts: DE, IL, IN, KY, MA, SC, WI. If you like “pay-when-paid,” here’s a typical contract clause:

Contractor will not unreasonably withhold payment to Subcontractor for Work done by Subcontractor once Contractor has been paid by Owner for that Work.

Both “pay-if-paid” and “pay-when-paid” clauses are void in four states: CA, NC, NV, and NY. In those states, the prime contractor has to pay subs when due, even if not yet paid by the owner.

And the other 16 states? It’s too soon to be sure. No court in those states has been asked to decide the issue and the state legislatures have not spoken. 

Caution. This is a capsule summary. There are exceptions. For example, rules for payment can vary with the type of construction (res or non-res), the owner (public or private) and the value of the work. My suggestion: Be sure your contracts are going to work the way you expect. Construction Contract Writer makes that easy, no matter where you live and work. The trial version is free.

Changes in the Law for 2015

Seventeen states have made changes to their construction contract law in the last few months. My partial list is below. Some of these changes are trivial. Others will affect contractors throughout the state. Don’t expect to find much on this list that makes your life easier. That’s not how it works. Most changes in the law make it harder for contractors to earn a living. 

Colorado Revised Statutes § 24-91-103 reduces the maximum retainage allowed on most public works projects from 10% to 5% on the first half of the project. Thereafter, no retainage is allowed. Prime contractors must distribute funds to subcontractors within 7 days of receipt of payment. Effective June 4, 2014.

Delaware Code Title 10 § 8106(c). A written contract for at least $100,000 can allow suit on the agreement for up to 20 years. Formerly, suit had to be filed in 3 years. Effective August 1, 2014.

Illinois Compiled Statutes § 770-60/21(b) reaffirms the option contractors and bonding companies have to deny payment to subs until the owner pays the contractor. Effective July 16, 2014.

Kentucky Revised Statutes § 413.160 shortens from 15 years to 10 years the deadline for making claims under a contract. Effective July 15, 2014.

Louisiana Revised Statutes Title 14, § 202.1 creates the crime of Residential Contractor Fraud. Criminal conduct includes leaving the job idle for 45 days, a false representation in any application for a permit, not having the required contractor’s license or giving work to an unlicensed subcontractor. Penalties range up to 10 years at hard labor and a $3,000 fine. Louisiana Revised Statutes Title 14, § 202.2 makes it tax fraud to fail to complete installation of a solar energy system or to fail to maintain a solar energy system as required by contract. Effective June 23, 2014.

Mississippi Code Annotated. § 75-24-301 to 311 gives residential property owners the right to cancel a roofing repair contract if an insurance company denies any part of the claim. Effective July 1, 2014.

Missouri Revised Statutes § 407.725 is expanded to give all property owners (not just residential property owners) the right to cancel a repair contract if an insurance company denies any part of the claim. Missouri Revised Statutes § 34.057(1)(1) reduces retainage on bonded public works contracts and subcontracts from 10% to 5%. Effective August 28, 2014.

New Jersey Statutes § 52:27D-123.16, § 56:8-138.2 and § 56:8-142 define home elevation as a form of home improvement and requires that home elevation contractors be licensed and insured. Effective October 1, 2014.

Pennsylvania Statutes Title 73 § 517.7(a)(8) permits time and material home improvement contracts but with very strict limits. See my blog post for details. Effective October 22, 2014.

Rhode Island General Laws § 6-38-2 revises the contract disclosures required any time insulation is installed in an existing building. Effective December 31, 2014.

Texas courts may award damages to a contractor for delay by the owner even if the contract prohibits damages for delay. Zachry Constr. Corp. v. Port of Houston Auth., 57 Tex. Sup. J. 1378. Decided August 29, 2014.

It’s easy to be sure your contracts comply with these and other changes in state and federal law. Get Construction Contract Writer. The trial version is free. If you’re already using Construction Contract Writer, you’ll get a notice when changes in the law affect your contracts.

Get Results with Arbitration

I like arbitration. Contractors tend to get a fair shake when they arbitrate disputes. 

Arbitration is usually faster and cheaper than a lawsuit. Another advantage: Most construction disputes are questions of fact, not law. You need an arbitrator with common sense, not a judge and two attorneys with law degrees. Maybe the best reason to arbitrate: It puts the owner’s attorney at a disadvantage: Your dispute isn’t going to court. Threatening to sue is pure hot air. If your construction contract requires arbitration, no court will hear the dispute.

What Can Go Wrong?

Arbitration isn’t automatic. Your contract has to touch all the bases. Use this checklist to be sure your disputes get into arbitration – and stay out of court.

• Your contract has to make it clear, “owner and contractor will submit all disputes related to this job to binding arbitration.”
•  Identify the arbitrator. American Arbitration Association (AAA), Construction Dispute Resolution Services (CDRS) and JAMS (Engineering and Construction Arbitration) 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. Ask about fees. Explain you’re looking for an arbitrator to name in your construction contracts.
•  Identify the arbitration rules. AAA, CDRS and JAMS rules are recognized as both fair and comprehensive. Selecting AAA, CDRS or JAMS rules does not mean you have to use an arbitrator recommended by AAA, CDRS or JAMS. Ask the arbitrator you selected about the arbitration 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.”
•  Decide on allocation of fees. If you want, give the arbitrator authority to award arbitration fees to the prevailing party.
•  Important! Eleven states void arbitration agreements for residential work if the contract omits special disclosures: CA, IL, MD, MA, MO, NE, OR, PA, SC, TX and VT. See my blog post of December 31, 2011.

 What Can Go Right?

A case decided in Connecticut last month (Ippolito v. Olympic Construction) answers the question. A storm damaged Paul Ippolito’s home in New Canaan. He selected Olympic Construction to make the repairs. Their agreement (AIA Form A133-2009) included an arbitration clause. Arbitration was a good choice. I can’t say the same for using an AIA contract. See my blog post of September 7, 2010.

Anyhow, before Olympic could finish the work, another storm came along, doing more damage. Ippolito and Olympic couldn’t agree on who was responsible for the extra work. The dispute went into arbitration. The arbitrator decided in favor of the contractor, Olympic. At that point, Ippolito took the case to court, claiming the arbitrator’s decision was in clear violation of Connecticut’s Home Improvement Act. The AIA contract didn’t have a starting date, didn’t have a completion date, didn’t have a notice of cancellation and didn’t have the signatures of both owners. All are required by Connecticut law.

Would the contractor have lost in court? We'll never know. The court affirmed the arbitrator’s decision, citing the rule, “the arbitrators' decision is considered final and binding; thus the courts will not review the evidence considered by the arbitrators nor will they review the award for errors of law or fact.”

My point is that a well-drafted arbitration clause can turn a job that’s becoming a sow’s ear into a silk purse. To get the benefit of arbitration in your contracts, consider Construction Contract Writer. The trial version is free.

Muddy Water in Pennsylvania

Home improvement projects in Pennsylvania got more complex last month. I’ll explain what changed. But first, a little background.

Pennsylvania’s Home Improvement Consumer Protection Act (HICPA) became law on July 1, 2009. The law had teeth. Home improvement contractors had to register with the Attorney General. Every job over $500 required a detailed written contract with 13 notices and disclosures. Time and material contracts were illegal. A contract that didn’t comply with HICPA was “void and unenforceable against the owner.” That means contractors had no right to collect. Violation of the Act was consumer fraud and carried heavy penalties.

That was 2009. Next came the changes.

July 7, 2011. Big box retailers balked at writing HICPA contracts with all those notices and disclosures. So they leaned on the legislature and got an exception to the Act.

January 18, 2012. A Pennsylvania district court was the first to interpret the Act. The ruling: An oral time and materials home improvement contract was not enforceable against the owner. The contractor’s claim for payment on a room addition job was dismissed. Gelacek v. Lunz Construction.

August 28, 2012. A Pennsylvania superior court saw it a different way. True, a home improvement contractor with a defective contract can’t collect the contract price. But that contractor can collect the value of work completed – time and materials. Durst v. Milroy General Contracting.

July 21, 2014. Pennsylvania’s Supreme Court agreed with the Durst v. Milroy court. A defective home improvement contract is no defense when a contractor sues to collect for work completed -- the value of time and materials. Shafer Elec. & Constr. v. Mantia.

So is there any advantage in writing home improvement contracts that comply with HICPA? Clearly, yes. It’s much easier to prove the amount due on a contract than to prove the value of work completed. And collecting overhead and profit or for breach of contract may be impossible with no valid agreement.

October 22, 2014. Another amendment to HICPA. From now on, time and material (cost-plus) contracts are OK – sort of. And this is where it gets a little complex. To be valid, the time and material contract has to include:

• An initial cost estimate in dollars and cents.
• A statement that the actual cost can’t exceed 10% more than the initial estimate.
• The maximum cost in dollars including the 10%.
• A statement that the cost won’t exceed the maximum without a written change order.
• A statement that costs will be based on “the actual cost of labor at a specified hourly rate and the actual costs of materials and use of equipment, plus an agreed-upon percentage of the total actual costs or a fixed amount, over and above the actual costs, to cover the contractor's fee and overhead.”

A Better Way

In my opinion, the October 22 amendment makes complex what should be simple. Skip the initial estimate. Skip the 10%. Don’t muddy the water with extra statements. Time and material home improvement contracts are perfectly legal for home improvement work in Pennsylvania and every other state if the agreement includes a guaranteed maximum price (GMP). To see how GMP time and material contracts can work on your projects, have a look at Construction Contract Writer. The trial version is free.

Get Paid for Surprises on the Job

When was the last time you had a pleasant surprise on a construction project – something that cost less than estimated or was easier than expected? It’s probably been a while. Most surprises are bad news – extra work and higher cost.

If you know a way to eliminate surprises, congratulations. You’ve got a rare gift. The rest of us have to deal with the unexpected. And that’s what I’m going to explain.

First, understand that construction companies are not insurance companies. Nothing in the law requires contractors to absorb the loss when there’s a surprise on the job. An example will make this clear.

Yesterday I took a question from a solar contractor. He bid a roof-top PV solar system for a church and got the job. So far, so good. Then came the surprise. On closer inspection, the existing roof was fragile mission tile -- pans and caps, not sturdy s-shaped Spanish tile. The salesman didn’t notice that when selling the job. After closer inspection, the contractor called the owner and explained the problem. Installing solar panels was going to break a lot of those fragile tile. The roof would probably leak. Better to re-roof the affected area with sturdy Spanish tile before installing the collector panels. The extra cost for re-roofing would be something north of $10,000.

Oops! The owner wouldn’t budge. He insisted that the contract was valid and enforceable as written. He was going to sue if work wasn’t done at the contract price.

What would you do? Re-roof and eat the $10,000? Install over mission tile and hope for the best? Walk away and let the lawyers slug it out?

I’m going to leave the answer to your best judgment. But I’m going to explain how to avoid losses and acrimony like this when there’s a surprise.

Differing Site Conditions

Just about every contract for public works construction includes a “differing site conditions” clause. If site conditions (such as the roof surface or substrate) aren’t as expected, the contractor gets a change order and an equitable adjustment in the contract price. A differing site conditions clause is considered a benefit to both the owner and the contractor. Contractors can bid based on what’s most likely, not the worst case. Government agencies get more competitive bids.

What’s good for public works projects is perfect for renovation, repair and improvement jobs. Expect surprises. Explain in your bid exactly what you expect on the job – in this case, installation over Spanish tile supported by a suitable substrate. Then be sure your contract has a differing site conditions clause. That settles it. No dispute. No lawyers needed. A satisfied customer.

A contract for renovation, repair or improvement work that doesn’t include a differing site conditions clause is an accident waiting to happen. Don’t get caught when there's a surprise. Construction Contract Writer has a good selection of differing site conditions clauses. Select the contract language that offers the best protection on your jobs. The trial version is free.